UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from to .
Commission file number 0-15374
PENTECH INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2259391
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
195 Carter Drive, Edison, New Jersey 08817
(Address of principal executive offices) (Zip Code)
(908) 287-6640
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities and Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [x] Yes [ ] No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Outstanding at
Class of Common Stock June 30, 1997
- --------------------- -----------------
$.01 par value 12,496,758 shares
Page 1 of 17. There is no Exhibit Index.
INDEX
Part I. Financial Information:
Item 1. Financial Statements (unaudited) Page
----
Condensed Consolidated Balance Sheets as of
June 30, 1997 and September 30, 1996. . . . . . . . . . .3-4
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 1997 and 1996. . . . .5
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 1997 and 1996. . . . .6-7
Notes to Condensed Consolidated Financial Statements. . 8-13
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operation. . . . . . . . . . .14-16
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 16
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
<PAGE>
PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
June 30, 1997 September 30, 1996
-------------- ------------------
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 43 $ 7,064
Accounts receivable, net of
allowances for doubtful
accounts of $15 at
June 30, 1997 and
$403 at September 30,
1996 19,020 14,538
Inventories (Note 1) 18,928 18,728
Income taxes receivable 471 1,146
Prepaid expenses and other 1,689 1,042
Deferred tax asset (Note 4) 535 619
------ ------
Total current assets 40,686 43,137
------ ------
Furniture and equipment (Note 1) 8,606 8,030
Less accumulated depreciation 4,669 3,662
------ ------
3,937 4,368
------ ------
Other assets:
Deferred tax assets, long-term
(Note 4) - 306
Trademarks, net of amortization
(Note 1) 273 268
Due from officer 142 110
------ -----
415 684
------ -----
$ 45,038 $48,189
====== ======
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
June 30, 1997 September 30, 1996
------------- ------------------
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks
(Note 2) $ 19,338 $ 21,352
Bankers' acceptances
payable (Note 2) - 1,489
Accounts payable 1,598 1,593
Accrued expenses 3,752 3,827
Settlement payable - 500
Settlement note payable 500 700
------ -------
Total current liabilities 25,188 29,461
------ -------
Other liabilities:
Deferred tax liability,
long-term (Note 4) 156 -
Royalty payable, long-term 300 400
Settlement note payable,
long-term 2,100 2,300
------ -------
2,556 2,700
------ -------
Commitments and contin-
gencies (Note 3)
Shareholders' equity:
Preferred stock, par value $.10
per share; authorized 500,000
shares; issued and outstanding none
Common stock, par value $.01 per
share; authorized 20,000,000 shares;
12,496,758 shares issued and
outstanding at June 30, 1997 and
10,496,758 shares issued and
outstanding at September 30,
1996, respectively 125 105
Capital in excess of par 6,789 5,846
Retained earnings 10,380 10,077
------ ------
17,294 16,028
------ ------
$45,038 $48,189
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
(unaudited)
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $21,333 $21,976 $44,725 $44,278
Cost of sales 13,907 14,982 29,072 29,590
------ ------ ------ ------
Gross profit 7,426 6,994 15,653 14,688
------ ------ ------ ------
Selling, general and
administrative expenses 5,520 5,644 13,373 13,650
Loss on Cosmetics
operation (Note 5) - - 687 -
Interest expense 389 362 1,097 999
Interest (income) - (6) (9) (30)
------ ------ ------ ------
5,909 6,000 15,148 14,619
------ ------ ------ ------
Income before
taxes 1,517 994 505 69
Income taxes 606 377 202 26
------ ------ ----- ------
Net income $ 911 $ 617 $ 303 $ 43
====== ====== ===== ======
Net income per share
fully diluted (Note 6) $ .07 $ .06 $ .03 $ .00
====== ====== ===== =====
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 303 $ 43
------ -------
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Depreciation and amortization 1,007 770
(Increase) decrease in:
Accounts receivable (4,482) (7,619)
Inventories (200) (104)
Prepaid expenses and other (647) (713)
Income taxes receivable/payable 675 1,308
Due from officer (32) -
Deferred tax asset 390 (80)
Increase (decrease) in:
Bankers' acceptances payable (1,489) 1,327
Accounts payable 5 (598)
Accrued expenses (75) 404
Deferred income taxes payable 156 51
Settlement payables (1,000) -
------- ------
Total adjustments (5,692) (5,254)
------- ------
Net cash (used in) operating
activities (5,389) (5,211)
------- ------
Cash flows from investing activities:
(Purchase) of furniture/equipment (576) (377)
(Increase) in trademarks (5) (19)
-------- -------
Net cash (used in) investing activities (581) (396)
-------- -------
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
<CAPTION>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's Omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in
notes payable $(2,014) $ 5,963
Issuance of Common Stock 20 -
Increase in additional paid in capital 943 -
------ ------
Net cash (used in) provided by
financing activities (1,051) 5,963
------ ------
Net (decrease) increase in cash
and cash equivalents (7,021) 356
Cash and cash equivalents,
beginning of period 7,064 -
------ ------
Cash and cash equivalents, end of period $ 43 $ 356
------ ------
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,193 $ 857
Income taxes $ - $ -
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1997 and 1996 is unaudited)
1. Summary of significant accounting policies:
Organization:
Pentech International, Inc. (the "Company") was formed in
April 1984. A wholly-owned subsidiary, Sawdust Pencil
Co. ("Sawdust") was formed in November 1989 and commenced
operations in January 1991. The Company and its
subsidiary are engaged in the production, design and
marketing of writing and drawing instruments. In October
1993, the Company formed a wholly-owned subsidiary,
Pentech Cosmetics, Inc. ("Cosmetics"), to manufacture and
distribute cosmetic pencils. The Company primarily
operates in one business segment: the manufacture and
marketing of pens, markers, pencils and other writing
instruments and related products to major mass market
retailers located in the United States, under the
"Pentech" name or licensed trademark brand. The
Company's fiscal year ends September 30.
Principles of consolidation:
The consolidated financial statements include the
accounts of the Company and its subsidiaries. All
significant intercompany balances and transactions have
been eliminated.
Cash Equivalents:
The Company considers all time deposits with a maturity
of three months or less to be cash equivalents.
Unaudited financial statements:
All unaudited financial information includes all
adjustments (consisting of normal recurring adjustments)
which the Company considers necessary for a fair
presentation of the financial position at June 30, 1997,
the results of operations for the three and nine month
periods ended June 30, 1997 and 1996, and cash flows for
the nine month periods ended June 30, 1997 and 1996.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
1. Summary of significant accounting policies (con't):
Inventory and Cost of Sales:
Inventory is stated at the lower cost or market (first-
in, first-out). Interim inventories are based on an
estimated gross profit percentage by product, calculated
monthly. Cost of Sales for imported products includes
the invoice cost, duty, freight in, display and packaging
costs. Cost of domestically manufactured products
includes raw materials, labor, overhead and packaging
costs.
Equipment and depreciation:
Equipment is stated at cost. Depreciation is provided by
the straight-line method over the estimated useful lives
of the assets, which range from three to ten years.
Major improvements to existing equipment are capitalized.
Expenditures for maintenance and repairs which do not
extend the life of the assets are charged to expense as
incurred.
Trademarks:
The costs thereof are being amortized over a five-year
period on a straight-line basis.
2. Notes payable, bank:
Rates June 30, 1997 Rates September 30, 1996
----- ------------- ----- ------------------
Notes payable(a) 8.375% $12,000,000 8.25% $11,725,000
9.0% 7,338,212 8.25% 9,627,498
---------- ----------
$19,338,212 $21,352,498
========== ==========
Bankers' acceptances
payable(a) $ - None $ 1,488,757
========== ==========
(a) Notes and bankers' acceptances payable as of September 30,
1996 were initially advanced under a $34,000,000 line of
credit which was available at the banks' discretion and
subject to limitations based upon eligible inventory and
accounts receivable as defined by that agreement.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
2. Notes payable, bank (con't):
As a result of the events leading to the Paradise Settlement
(defined below), the Company's original line of credit was
restructured by the banks for a period ending January 31,
1997.
In January, 1997, the Company entered into a new three year
$30,000,000 Revolving Credit Agreement with BankAmerica
Business Credit, Inc. (the "New Credit Agreement").
Borrowings under the New Credit Agreement are subject to
limitations based upon eligible inventory and accounts
receivable as defined in the New Credit Agreement.
The Credit Agreement is collateralized by a security interest
in substantially all of the assets of the Company. In
connection with the Credit Agreement, the Company has agreed,
among other things, to the maintenance of certain minimum
amounts of tangible net worth and interest coverage ratios.
3. Contingency:
At June 30, 1997, the Company was contingently liable for
outstanding letters of credit of approximately $581,869.
4. Income taxes: Three Months Ended Nine Months Ended
June 30, 1997 June 30, 1997
------------------ -----------------
Federal:
Current $ 145,000 $ 48,000
Deferred 324,000 108,000
State:
Current 45,000 15,000
Deferred 92,000 31,000
------- -------
$ 606,000 $ 202,000
======= =======
Income tax at Federal statutory
rate applied to income before
taxes $ 516,000 $ 172,000
Add: state income taxes 137,000 46,000
Less: effect of deduction of
state income taxes for
Federal purposes (47,000) (16,000)
-------- --------
Income taxes $ 606,000 $ 202,000
======= ========
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
4. Income taxes (con't):
Significant components of the Company's deferred tax assets
(liability) as of June 30, 1997 and September 30, 1996 are as
follows:
June 30, September 30,
1997 1996
------- -------------
Current deferred tax liability:
State taxes on deferred
federal items $ (224,935) $ (224,935)
------- -------
Current deferred tax assets:
Bad debts 37,854 231,392
Inventory reserve 414,520 595,980
Reserve for returns and
allowances 789,799 369,017
Unicap 33,110 33,110
Reserve for restructuring - 129,000
--------- --------
Total current deferred
tax assets 1,275,283 1,358,499
Valuation allowance on current
deferred tax assets (514,635) (514,635)
--------- ---------
760,648 843,864
--------- ---------
Net current deferred tax assets 535,713 618,929
========= =========
Long-term deferred tax liability:
Depreciation (920,700) (888,450)
--------- ---------
Long-term deferred tax assets:
Reserve for litigation 1,290,000 1,720,000
State net operating loss
carryforwards 203,191 203,191
--------- ---------
Total long-term deferred
tax assets 1,493,191 1,923,191
Valuation allowance on
long-term deferred
tax assets (728,556) (728,556)
--------- ---------
764,635 1,194,635
--------- ---------
Net long-term deferred tax
(liability) assets $ (156,065) $ 306,185
========= =========
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
5. Loss from Cosmetics operation:
During the second quarter of 1997, the Board of Directors
determined to discontinue its Cosmetics subsidiary and focus its
efforts primarily on its writing instruments business. The loss
from Cosmetics operation reported in the second quarter reflects
the write down of certain assets of the operation to their
estimated net realizable value. The Company is still considering
several options on how to dispose of the operations.
6. New authoritative accounting pronouncements:
The Financial Accounting Standards Board has issued Financial
Accounting Standard No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 will take effect for
transactions entered into during the fiscal year beginning October
1, 1996; with respect to disclosures required for entities that
elect to continue to measure compensation cost using a prior
permitted accounting method, such disclosures must include the
effects of all awards granted in the fiscal year beginning October
1, 1995. The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees"
(APB 25) and related interpretations in accounting for its employee
stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is
recognized.
In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, which is required to
be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings
per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. There is no
impact on primary earnings per share for the third quarter ended
June 30, 1997 and June 30, 1996, respectively. The impact of
Statement 128 on the calculation of fully diluted earnings per
share for these quarters is not expected to be material.
7. Paradise Settlement:
In October 1987, the Company commenced an action against Leon
Hayduchok, All-Mark Corporation and Paradise Creations, Inc.,
(collectively, "Paradise") in the United States District Court for
the Southern District of New York which resulted in an adverse
multi-million dollar judgment against Pentech. In December 1996,
the parties to such litigation entered into a settlement agreement
providing, among other things, for Pentech to pay $500,000, deliver
a $3,000,000 promissory note plus interest at the rate of 7% per
annum and enter into a five year non-exclusive license to sell such
products for a 10% royalty, with a minimum royalty of $500,000 (the
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
7. Paradise Settlement (con't):
"Paradise Settlement"). The Company paid Paradise $400,000 in
February 1997, $500,000 in January 1997, and $100,000 of the
minimum royalty in December 1996.
8. Private Placement:
In January 1997, the Company completed a private offering of
20 Units, each Unit consisting of 100,000 shares of Common Stock of
the Company for $50,000 per Unit (the "Private Offering"). The
Company received net proceeds of $963,000 from the Private
Offering. Officers and directors of the Company acquired 52.5% of
the Units sold in the Private Offering and participated on the same
terms as the other investors in the Private Offering. The terms of
the Private Offering were established by a Special Committee of the
Board of Directors who did not participate in the Private Offering.
The Company was required by its banks (at that time) to raise funds
in the Private Offering in order to fund the $500,000 payment
referred to in Note 7 and to enable the Company to fund its
requirements for capital expenditures.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
This report on Form 10-Q may contain forward-looking
statements, within the meaning of the Private Securities Litigation
Reform Act of 1995. These forward looking statements are subject
to the business and economic risks faced by the Company and the
Company's actual results could differ materially from those
anticipated in these forward looking statements as a result of
certain factors, including those set forth in this "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" below.
(1) Material Changes in Results of Operations
Net sales decreased 3% for the three months ended June 30,
1997 as compared to the same period a year ago. This was
principally due to higher sales in the prior year from inventory
closeouts and private label programs. Net sales increased 1% for
the nine months ended June 30, 1997 as compared to the same period
a year ago as a result of the success of the Company's licensed
products and childrens' activity products.
Gross profit as a percentage of net sales increased for the
three months ended June 30, 1997 to 34.8% from 31.8% in the same
quarter a year ago, and increased for the nine months ended June
30, 1997 to 35% from 33.2% in the same period a year ago. This was
primarily due to less closeouts and lower manufacturing costs in
1997 versus 1996.
Selling, general and administrative ("SG&A") expenses as a
percentage of sales increased for the three months ended June 30,
1997 to 25.9% from 25.7% in the same quarter a year ago as a result
of an increase in royalties. SG&A decreased for the nine months
ended June 30, 1997 to 29.9% from 30.8% in the same period a year
ago as a result of legal fees associated with Paradise litigation
and an increase in the reserve for the loss associated with this
matter incurred in the prior year.
There was an increase in interest expense for the three and
nine months ended June 30, 1997 due to interest payments made
regarding the Paradise settlement as compared to these periods a
year ago.
For the three months ended June 30, 1997, net income increased
to $911,000 or $.07 per share, from $617,000 or $.06 per share, for
the three months ended June 30, 1996. For the nine months ended
June 30, 1997, net income increased to $303,000, or $.03 per share,
from $43,000, or $.00 per share, for the nine months ended June 30,
1996.
<PAGE>
(2) Material Changes in Financial Condition
During Fiscal 1996, the Company maintained a line of credit
with European American Bank ("EAB") and Chase Manhattan Bank
(collectively referred to as the "Banks"), which permitted maximum
availability of $34,000,000 subject to the Banks' discretion. As
a result of the events leading up to the Paradise Settlement, this
line of credit was restructured by the Banks to provide a maximum
amount of $22,000,000 for the period ending January 31, 1997.
In January 1997, the Company entered into a three year
$30,000,000 revolving credit facility with BankAmerica Business
Credit Inc. (the "New Credit Agreement"). The amount of drawings
under the facility is subject to limitations based upon eligible
inventory and accounts receivable as described in the New Credit
Agreement. The New Credit Agreement is collateralized by a
security interest in substantially all of the assets of the
Company. In addition, in accordance with the New Credit Agreement,
the Company has agreed, among other things, to the maintenance of
certain minimum amounts of tangible net worth and interest coverage
ratios.
The $3,000,000 note (the "Note") issued in connection with the
Paradise Settlement required $100,000 quarterly principal payments
commencing January 1, 1998. The Note also requires prepayment
under certain conditions related to when the Company obtains tax
benefits. The Company does not anticipate any difficulty meeting
this payment schedule.
The Company initiated several actions to increase its
liquidity. It established a policy obtaining thirty to sixty day
vendor credit to finance a majority of its purchases that
historically have been financed pursuant to letters of credit.
In January 1997, the Company completed a private offering of
securities raising net proceeds of approximately $963,000.
During the second quarter of 1997, the Company decided to
discontinue its Cosmetics line of product to concentrate its cash
flow on its core stationery line of products. The Company is
considering several options on how to dispose of the business. The
Company wrote down assets of approximately $687,000 to their
estimated net realizable value.
Finally, the Company has been aggressively reducing its
inventory levels over the last several months.
Working capital increased $1,822,000 to $15,498,000 for the
nine months ended June 30, 1997. Net cash used in operating
activities was $5,692,000 for the nine months ended June 30, 1997
as compared to $5,254,000 used in operating activities for the same
period a year ago. This was primarily due to a decrease in bankers
acceptances payable and settlement payables partially offset by the
decrease in accounts receivable and net income in the current
period. Net cash used in investing activities for the nine months
ended June 30, 1997 was $581,000 as compared to $396,000 for the
same period a year ago. This was due to the purchase of
manufacturing and computer equipment. Net cash used in financing
activities for the nine months ended June 30, 1997 was $1,051,000
as compared to $5,963,000 provided by financing activities for the
same period a year ago. This was due to a decrease in notes
payable which resulted from the Company's inventory reduction
program.
The Company anticipates the New Credit Agreement together with
anticipated cash from operations should be sufficient to provide
liquidity on both a short-term and long-term basis to finance its
future operations. The Company believes these resources are
sufficient to support its operating expenses.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(b) The Company did not file any reports on Form 8-K
during the quarter ended June 30, 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
PENTECH INTERNATIONAL, INC.
Dated: July 28, 1997 By: /s/ William Visone
William Visone, Treasurer
and Chief Financial Officer
(Duly authorized officer)
ptk\10q-jun.97
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 43
<SECURITIES> 0
<RECEIVABLES> 19,035
<ALLOWANCES> 15
<INVENTORY> 18,928
<CURRENT-ASSETS> 40,686
<PP&E> 8,606
<DEPRECIATION> 4,669
<TOTAL-ASSETS> 45,038
<CURRENT-LIABILITIES> 25,188
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 17,169
<TOTAL-LIABILITY-AND-EQUITY> 45,038
<SALES> 21,333
<TOTAL-REVENUES> 21,333
<CGS> 13,907
<TOTAL-COSTS> 5,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 389
<INCOME-PRETAX> 1,517
<INCOME-TAX> 606
<INCOME-CONTINUING> 911
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 911
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
