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, 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)
(732) 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, 1997:
12,506,258 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, 1997 and September 30, 1997 3-4
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows
for the three months ended December 31,
1997 and 1996 6-7
Notes to Condensed Consolidated Financial Statements 8-14
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 15-16
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
<PAGE>
PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
December 31, 1997 September 30, 1997
(unaudited)
Current Assets:
Cash $ 1,241 $ 649
Accounts receivable, net of
allowances for doubtful
accounts of $30 at
December 31, 1997 and
at September 30,
1997, respectively 10,626 16,293
Note receivable (Note 8) 508 -
Inventories (Note 1) 18,578 18,481
Income taxes receivable 659 422
Prepaid expenses and other 1,538 1,648
Deferred Tax Asset 108 271
Total current assets 33,258 37,764
Furniture and equipment (Note 1) 8,381 8,895
Less accumulated depreciation (4,663) (4,931)
3,718 3,964
Other assets:
Deferred tax assets, long-term 278 364
Trademarks, net of amortization
(Note 1) 254 270
Due from officer 142 142
674 776
$ 37,650 $ 42,504
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
December 31, 1997 September 30, 1997
(unaudited)
Current liabilities:
Notes payable, bank
(Note 2) $ 14,160 $ 17,238
Accounts payable 1,223 1,334
Accrued expenses 1,854 3,441
Settlement note payable 300 300
Total current liabilities 17,537 22,313
Other liabilities:
Royalty payable, long-term 300 300
Settlement note payable,
long-term 2,200 2,300
2,500 2,600
Commitments and contingencies
(Note 4)
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; 12,506,258 and 12,504,258
shares issued and outstanding at
December 31, 1997 and September 30,
1997, respectively 125 125
Capital in excess of par 6,791 6,789
Retained earnings 10,697 10,677
17,613 17,591
$37,650 $42,504
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1997 1996
Net sales $10,888 $12,540
Cost of sales 6,646 8,047
Gross profit 4,242 4,493
Selling, general and
administrative expenses 3,862 4,044
Interest expense 349 367
Interest (income) (1) (8)
4,210 4,403
Income before
taxes 32 90
Income taxes 12 36
Net income $ 20 $ 54
====== ======
Net income per share-
basic and diluted (Note 1) $ - $ .01
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1997 1996
Cash flows from operating activities:
Net income $ 20 $ 54
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 234 240
Sale of Cosmetic assets 758 -
(Increase) decrease in:
Accounts receivable 5,582 4,125
Note receivable (508) -
Inventories (520) 961
Prepaid expenses and other 17 (437)
Income taxes receivable/
payable (237) 168
Increase (decrease) in:
Bankers' acceptances payable - (497)
Accounts payable (111) (804)
Accrued expenses (1,587) (1,114)
Deferred income
taxes payable\receivable 249 29
Settlement payable (100) -
Total adjustments
3,777 2,671
Net cash provided by
operating activities 3,797 2,725
Cash flows from investing activities:
(Purchase) of furniture/equipment (145) (21)
Decrease (Increase) in trademarks 16 (10)
Net cash (used in)
investing activities (129) (31)
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended
December 31,
1997 1996
Cash flows from financing activities:
Net (decrease) in notes
payable $ (3,078) $ (9,051)
Proceeds from issuance of
common stock 2 -
Net cash (used in)
financing activities (3,076) (9,051)
Net increase (decrease) in cash and cash
equivalents 592 (6,357)
Cash and cash equivalents,
beginning of period 649 7,064
Cash and cash equivalents, end of period $ 1,241 $ 707
===== =====
Supplemental disclosures of cash flow
information and non-cash financing activities:
Cash paid during the period for:
Interest $ 345 $ 468
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, 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
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. During fiscal 1997 the Company decided
to dispose of this product line. 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,
1997 and the results of operations and the statements of
cash flows for the three month period ended December 31,
1997 and 1996.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1997 and 1996 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.
Use of Estimates:
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts
of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock Based Compensation:
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," encourages,
but does not require companies to record compensation
cost for stock-based employee compensation plans at fair
value. 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.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1997 and 1996 is unaudited.)
Earnings per common equivalent shares:
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings Per Share, which
was adopted by the Company in the quarter ended December
31, 1997. The Company is required to change the method
currently used to compute earnings per share and to
restate all prior periods. Under the new requirements
for calculating basic earnings per share, the dilutive
effect of stock options will be excluded.
The following table sets for the computation of basic and diluted
earnings per share:
Three months ended December 31,
1997 1996
Numerator:
Net Income $20,000 $54,000
Numerator for basic and
diluted earnings per share $20,000 $54,000
=========== ===========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 12,504,925 10,496,758
Effect of dilutive
securities:
Employee stock options 484,810 -
Denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed
conversions: 12,989,735 10,496,758
=========== ===========
Basic and diluted earnings
per share $ - $.01
======= ======
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1997 and 1996 is unaudited.)
Trademarks:
Costs related to trademarks are being amortized over a
five-year period on a straight-line basis.
2. Notes payable, bank:
December 31, September 30,
Rate 1997 Rate 1997
Notes payable 8.188% $11,000,000 8.128% $13,000,000
Notes payable 9.00 % 3,160,219 9.00 % 4,238,066
Total $14,160,219 $17,238,066
=========== ============
Notes payable as of December 31, 1997 and September 30, 1997 were
advanced under a three year $30,000,000 Revolving credit agreement
with BankAmerica Business Credit, Inc. (the "Credit Agreement").
Borrowings under the credit agreement are subject to limitations based
upon eligible inventory and accounts receivable as defined in the
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. Shareholders' Equity:
In December 1997, options to purchase an aggregate of 2,000
shares of common stock were exercised at $.75 per share resulting in
the issuance of 2,000 shares of common stock and proceeds of $1,500.
4. Contingency:
At December 31, 1997 the Company was contingently liable for
outstanding letters of credit of $276,110.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1997 and 1996 is unaudited.)
.
5. Income taxes:
Three Months Ended
December 31
1997 1996
Federal:
Current $ 1,000 $ 3,000
Deferred 8,000 25,000
State:
Current 1,500 4,000
Deferred 1,500 4,000
$ 12,000 $ 36,000
========== ==========
Income tax at Federal
statutory rate applied to
income before taxes $ 11,000 $ 31,000
Add: state income taxes 3,000 8,000
Less: effect of deduction of
state income taxes for
Federal purposes (2,000) (3,000)
Income taxes provided $ 12,000 $ 36,000
========== ==========
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1997 and 1996 is unaudited.)
Significant components of the Company's deferred tax assets and
liability as of December 31, 1997 and September 30, 1997 are as
follows:
December 31, September 30,
1997 1997
Current deferred tax liability:
State taxes on deferred
federal items $ (131,155) $ (149,823)
Current deferred tax assets:
Bad debts 12,938 12,938
Inventory reserve 348,300 520,300
Reserve for returns and
allowances 426,856 313,042
Unicap 12,813 12,813
Cosmetics fixed asset reserve --- 123,410
Total current deferred
tax assets 800,907 982,503
Valuation allowance on current
deferred tax assets (561,500) (561,500)
239,407 421,003
Net current deferred tax assets $ 108,252 $ 271,180
============ ============
Long-term deferred tax liabilities:
Depreciation $ (832,800) $ (832,800)
Long-term deferred tax assets:
Reserve for litigation $ 1,204,000 $ 1,290,000
State net operating loss
carryforwards 310,700 310,700
Total long-term deferred
tax assets 1,514,700 1,600,700
Valuation allowance on
long-term deferred tax assets (404,065) (404,065)
$ 1,110,635 $ 1,196,635
Net long-term deferred tax
assets $ 277,835 $ 363,835
============ ============
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1997 and 1996 is unaudited.)
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 $400,000 in February 1997,
$500,000 in January 1997, and $200,000 of the minimum royalty. In
addition, the note requires $100,000 quarterly principal payments
commencing January 1, 1998. The first quarterly payment was made in
December 1997.
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.
8. Sale of Cosmetic Assets
In November 1997, the Company entered into an agreement to sell
fixed assets and inventory of its Cosmetics subsidiary to an outside
company (significantly owned by a former employee) for its book value.
In December 1997, $100,000 was received as a down payment, $150,000
received at closing and a note was issued for approximately $508,000
bearing interest at a rate of 9% per annum. The terms of the note
provide that the principal be reduced by $150,000 a month commencing
February 1998, until repaid.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
(1) Material Changes in Results of Operations
Net sales decreased in the three months ended December 31, 1997
13.2% compared to the same period in 1996. This was principally due
to the success of the Company's holiday licensed programs in the prior
year.
Gross profit as a percentage of net sales increased in the three
month period ended December 31, 1997 to 39.0% from 35.8% for the three
months ended December 31, 1996. This was due to lower closeout sales
as compared to the prior period. In addition, there were improved
manufacturing costs as well as an improved product mix.
Selling, general and administrative ("SGA") expenses as a
percentage of sales increased to 35.5% from 32.2% in the three months
ended December 31, 1997 compared to the same prior period. This was
due to incurring a similar level of fixed costs as in the prior period
over a lower sales volume. In addition, there was a higher percentage
of sales to office superstores which incurred higher freight and
warehouse costs as a percentage of sales.
In addition, interest expense decreased compared to the same
prior period due to lower interest rates and a lower outstanding
balance.
During the three months ended December 31, 1997, net income
decreased to $20,000 or $.00 cent per share, from $54,000 or $.01 per
share for the three months ended December 31, 1996. This was due to
lower sales volume.
(2) Material Changes in Financial Condition
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 first quarterly payment was made in
December 1997. 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 open 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 $975,000.
In November 1997, the Company entered into an agreement to sell
the fixed assets and inventory of its Cosmetics subsidiary to an
outside company (significantly owned by a former employee) for its
book value. In December 1997, $100,000 was received as a down
payment, $150,000 received at closing an a note was issued for
approximately $508,000 bearing interest at a rate of 9% per annum.
The terms of the note provide that the principal be reduced by
$150,000 a month commencing February 1998, until repaid.
The Company is exploring its options with respect to software in
order to be in compliance with year 2000. The Company does not expect
the costs associated with this to be material.
Working capital increased $270,000 to $15,721,000 during the
three months ended December 31, 1997.
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.
(3) Safe Harbor Statement
Statements which are not historical facts, including statements
about the Company's confidence and strategies and its expectations
about new and existing products, technologies and opportunities,
market and industry segment growth, demand and acceptance of new and
existing products are forward looking statements that involve risks
and uncertainties. there include, but are not limited to, product
demand and market acceptance risks; the impact of competitive products
and pricing; the results of financing efforts; the loss of any
significant customers of any business; the effect of the Company's
accounting policies; the effects of economic conditions and trade,
legal, social, and economic risks, such as import, licensing, and
trade restrictions; the results of the Company's business plan and the
impact on the Company of its relationship with its lenders.
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 __, 1998 By: /s/ William Visone
William Visone,
Treasurer and Chief Financial
Officer
WP51\PTK\10Q-DEC.97
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1997 SEP-30-1997
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,241 649
<SECURITIES> 0 0
<RECEIVABLES> 10,626 16,293
<ALLOWANCES> 0 0
<INVENTORY> 18,578 18,481
<CURRENT-ASSETS> 33,258 37,764
<PP&E> 8,381 8,895
<DEPRECIATION> 4,663 4,931
<TOTAL-ASSETS> 37,650 42,504
<CURRENT-LIABILITIES> 17,537 22,313
<BONDS> 0 0
0 0
0 0
<COMMON> 125 125
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 37,650 42,200
<SALES> 10,888 12,540
<TOTAL-REVENUES> 10,888 12,540
<CGS> 6,646 8,047
<TOTAL-COSTS> 3,862 4,044
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 349 367
<INCOME-PRETAX> 32 90
<INCOME-TAX> 12 36
<INCOME-CONTINUING> 20 54
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20 54
<EPS-PRIMARY> 0 .01
<EPS-DILUTED> 0 .01
</TABLE>
