FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1996
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 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.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of December 31, 1996:
10,496,758 shares of common stock, par value $.01 per share.
<PAGE>
INDEX
Part I. Financial Information:
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Balance Sheets as of
December 31, 1996 and September 30, 1996 3-4
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows
for the three months ended December 31,
1996 and 1995 6-7
Notes to Condensed Consolidated Financial Statements 8-12
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 13-14
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
December 31, 1996 September 30, 1996
(unaudited)
<S> <C> <C>
Current Assets:
Cash $ 707 $ 7,064
Accounts receivable, net of
allowances for doubtful
accounts of $403 at
December 31, 1996 and
at September 30,
1996, respectively 10,413 14,538
Inventories (Note 1) 17,767 18,728
Income taxes receivable 978 1,146
Prepaid expenses and other 1,479 1,042
Deferred Tax Asset 633 619
------ ------
Total current assets 31,977 43,137
------ ------
Furniture and equipment (Note 1) 8,051 8,030
Less accumulated depreciation 3,902 3,662
------ ------
4,149 4,368
------ ------
Other assets:
Deferred tax assets, long-term 263 306
Trademarks, net of amortization
(Note 1) 278 268
Due from officer 110 110
------ ------
651 684
------ ------
$36,777 $48,189
====== ======
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
December 31, 1996 September 30, 1996
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks
(Note 2) $12,301 $21,352
Bankers' acceptances
payable (Note 2) 992 1,489
Accounts payable 789 1,593
Accrued expenses 2,713 3,827
Settlement payable 500 500
Settlement note payable 700 700
------ -------
Total current liabilities 17,995 29,461
------ -------
Other liabilities:
Royalty payable, long-term 400 400
Settlement note payable,
long-term 2,300 2,300
------ ------
2,700 2,700
Commitments and contingencies
(Notes 4 and 5)
Shareholders' equity (Note 3):
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; 10,496,758 shares issued
and outstanding at December 31,
1996 and September 30, 1996, re-
spectively 105 105
Capital in excess of par 5,846 5,846
Retained earnings 10,131 10,077
------ ------
16,082 16,028
------ ------
$36,777 $48,189
====== ======
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1996 1995
<S> <C> <C>
Net sales $12,540 $11,892
Cost of sales 8,047 7,656
Gross profit 4,493 4,236
Selling, general and
administrative expenses 4,044 3,713
Interest expense 367 324
Interest (income) (8) (11)
----- -----
4,403 4,026
----- -----
Income before
taxes 90 210
Income taxes 36 80
---- -----
Net income $ 54 $ 130
====== ======
Net income per share-
primary and fully diluted $ .01 $ .01
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54 $ 130
----- -----
Adjustments to reconcile net
income to net cash provided
by (used in) operating activities:
Depreciation and amortization 240 257
(Increase) decrease in:
Accounts receivable 4,125 1,877
Inventories 961 (245)
Prepaid expenses and other (437) 76
Income taxes receivable/
payable 168 (128)
Increase (decrease) in:
Bankers' acceptances payable (497) (656)
Accounts payable (804) (779)
Accrued expenses (1,114) (265)
Deferred income
taxes payable\receivable 29 208
----- -----
Total adjustments 2,671 345
----- -----
Net cash provided by
operating activities 2,725 475
----- -----
Cash flows from investing activities:
(Purchase) of furniture/equipment (21) (99)
(Increase) in trademarks (10) (8)
----- -----
Net cash (used in)
investing activities (31) (107)
----- -----
See notes to condensed consolidated financial statements.
<CAPTION>
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended
December 31,
1996 1995
<S> <C> <C>
Cash flows from financing activities:
Net (decrease) increase in notes
payable $ (9,051) $ 684
----- -----
Net cash (used in) provided by
financing activities (9,051) 684
----- ------
Net (decrease) increase in cash and cash
equivalents (6,357) 1,052
Cash and cash equivalents,
beginning of period 7,064 -0-
----- ------
Cash and cash equivalents, end of period $ 707 $1,052
===== ======
Supplemental disclosures of cash flow
information and non-cash financing activities:
Cash paid during the period for:
Interest $ 468 $ 324
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1996 and 1995 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
Company ("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. 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 December 31,
1996 and the results of operations and the statements of
cash flows for the three month period ended December 31,
1996 and 1995.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1996 and 1995 is unaudited.)
Inventory and Cost of Sales:
Inventory is stated at the lower of 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 five 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:
December 31, September 30,
Rate 1996 Rate 1996
Notes payable(a) 9.25% $ 6,575,575 8.25% $11,725,000
9.25% 5,725,781 8.25% 9,627,498
---------- ----------
Total $12,301,356 $21,352,498
========== ==========
Bankers' acceptances $ 992,279 None $ 1,488,757
payable(a) ========== ==========
(a) Notes and bankers' acceptance payable as of December 31,
1996 and 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.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1996 and 1995 is unaudited.)
As a result of the events leading to the Paradise
settlement, 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 December 31, 1996 the Company was contingently liable for
outstanding letters of credit of $1,184,426.
4. Income taxes:
Three Months Ended
December 31
1996 1995
Federal:
Current $ 3,000 $ 51,000
Deferred 25,000 16,000
State:
Current 4,000 12,000
Deferred 4,000 1,000
------ -------
$ 36,000 $ 80,000
======= =======
Income tax at Federal statutory
rate applied to income before
taxes $ 31,000 $ 71,000
Add: state income taxes 8,000 13,000
Less: effect of deduction of
state income taxes for
Federal purposes (3,000) (4,000)
------- ------
Income taxes provided $ 36,000 $ 80,000
======= =======
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1996 and 1995 is unaudited.)
</TABLE>
<TABLE>
<CAPTION>
Significant components of the Company's deferred tax assets and
liability as of December 31, 1996 and September 30, 1996 are as
follows:
December 31, September 30,
1996 1996
<S> <C> <C>
Current deferred tax liability:
State taxes on deferred
federal items $ (224,935) $ (224,935)
------- -------
Current deferred tax assets:
Bad debts 216,582 231,392
Inventory reserve 509,980 595,980
Reserve for returns and
allowances 606,165 369,017
Unicap 33,110 33,110
Reserve for restructuring 6,472 129,000
--------- --------
Total current deferred
tax assets 1,372,309 1,358,499
Valuation allowance on current
deferred tax assets (514,635) (514,635)
--------- ---------
857,674 843,864
--------- ---------
Net current deferred tax assets 632,739 618,929
========= =========
Long-term deferred tax liabilities:
Depreciation (888,450) (888,450)
--------- ---------
Long-term deferred tax assets:
Reserve for litigation 1,677,000 1,720,000
State net operating loss
carryforwards 203,191 203,191
--------- ---------
Total long-term deferred
tax assets 1,880,191 1,923,191
Valuation allowance on
long-term deferred
tax assets (728,556) (728,556)
--------- ---------
1,151,635 1,194,635
--------- ---------
Net long-term deferred tax
assets (liabilities) $ 263,185 $ 306,185
========= =========
</TABLE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1996 and 1995 is unaudited.)
5. 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's election under
FAS 123 has not been determined and the effect of adoption of FAS 123
on the Company's financial statements has not be determined.
6. 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 "Paradise
Settlement"). The Company paid Paradise $500,000 in January 1997, and
$100,000 of the minimum royalty in December 1996.
7. 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 $975,000 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 6 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.
(1) Material Changes in Results of Operations
Net sales increased in the three months ended December 31, 1996
5.4% compared to the same period in 1995. This was principally due
to the success of the Company's holiday licensed programs.
Gross profit as a percentage of net sales increased in the three
month period ended December 31, 1996 to 35.8% from 35.6% for the three
months ended December 31, 1995.
Selling, general and administrative ("SGA") expenses as a
percentage of sales increased to 32.2% from 31.2% in the three months
ended December 31, 1996 compared to the same prior period. The higher
SGA expenses were due primarily to higher royalty expenses and some
additional costs associated with the Company's Bank Refinancing.
In addition, interest expense increased compared to the same
prior period due to higher interest rates and a higher outstanding
balance as a result of the bank restructuring as well as the
additional interest costs associated with the Paradise note.
During the three months ended December 31, 1996, net income
decreased to $54,000 or $.01 cents per share, from $130,000 or $.01
per share for the three months ended December 31, 1995. This was due
to the higher SGA expenses and the higher interest costs.
(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 requires $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 proceeds of approximately $975,000.
Finally the Company has been aggressively reducing its inventory
levels over the last several months.
Working capital increased $306,000 to $13,982,000 during the
three months ended December 31, 1996.
The Company anticipates that its revolving credit line with
BankAmerica Business Credit together with anticipated revenues from
operations, will 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) None.
<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: February 14, 1997 By: /s/ William Visone
William Visone,
Treasurer and Chief Financial
Officer
ptk\10q-dec.96
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 707
<SECURITIES> 0
<RECEIVABLES> 10,413
<ALLOWANCES> 403
<INVENTORY> 17,767
<CURRENT-ASSETS> 31,977
<PP&E> 8,051
<DEPRECIATION> 3,902
<TOTAL-ASSETS> 36,777
<CURRENT-LIABILITIES> 17,995
<BONDS> 0
0
0
<COMMON> 105
<OTHER-SE> 15,977
<TOTAL-LIABILITY-AND-EQUITY> 36,777
<SALES> 12,540
<TOTAL-REVENUES> 12,540
<CGS> 8,047
<TOTAL-COSTS> 4,044
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 367
<INCOME-PRETAX> 90
<INCOME-TAX> 36
<INCOME-CONTINUING> 54
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
