-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K69N4J1ArUVYAqwjKcR2MziAz0vXcn7cjDiB5Z1/avPuQz9BFBFXwd6oW2IncPfA rsTp9WOOyVpTEjlV4ZUtwg== 0000760461-96-000004.txt : 19960517 0000760461-96-000004.hdr.sgml : 19960517 ACCESSION NUMBER: 0000760461-96-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTECH INTERNATIONAL INC CENTRAL INDEX KEY: 0000760461 STANDARD INDUSTRIAL CLASSIFICATION: PENS, PENCILS & OTHER ARTISTS' MATERIALS [3950] IRS NUMBER: 232259391 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15374 FILM NUMBER: 96567427 BUSINESS ADDRESS: STREET 1: 195 CARTER DRIVE CITY: EDISON STATE: NJ ZIP: 08817 BUSINESS PHONE: 9082876640 MAIL ADDRESS: STREET 2: 195 CARTER DR CITY: EDISON STATE: NJ ZIP: 08817 10-Q 1 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 March 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 March 31, 1996; 10,496,758 shares of common stock, par value $.01 per share. Page 1 of 16 There is no Exhibit Index. INDEX Part I. Financial Information: Item 1. Financial Statements Page Condensed Consolidated Balance Sheets as of March 31, 1996 and September 30, 1995 3-4 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows for the three and six months ended March 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 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) March 31, 1996 September 30, 1995 (unaudited) Current Assets: Cash $ 1,122 $ - Accounts receivable, net of allowances for doubtful accounts of $88 at March 31, 1996 and $70 at September 30, 1995 8,361 12,451 Inventories (Note 1) 25,944 22,844 Income taxes receivable 1,098 1,823 Prepaid expenses and other 1,268 1,227 Deferred Tax Asset 848 991 Total current assets 38,641 36,336 Furniture and equipment (Note 1) 7,826 7,542 Less accumulated depreciation 3,190 2,737 4,636 4,805 Other assets: Trademarks, net of amortization (Note 1) 226 267 Due from officer 110 110 336 377 $43,613 $44,518 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (000's omitted) March 31, 1996 September 30, 1995 (unaudited) Current liabilities: Notes payable, banks (Note 2) $16,870 $ 15,169 Bankers' acceptances payable (Note 2) 2,137 1,842 Accounts payable 1,828 2,383 Accrued expenses 1,207 3,014 Total current liabilities 22,042 22,408 Deferred income taxes 799 765 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 March 31, 1996 and September 30, 1995, respectively 105 105 Capital in excess of par 5,846 5,846 Retained earnings 14,821 15,394 20,772 21,345 $43,613 $44,518 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (000's omitted except for per share amounts) Three Months Ended Six Months Ended March 31, March 31, 1996 1995 1996 1995 Net sales $10,410 $12,249 $22,302 $21,893 Cost of sales 6,952 7,954 14,608 14,162 Gross profit 3,458 4,295 7,694 7,731 Selling, general and administrative expenses 4,292 3,380 8,005 5,860 Loss on Mexican affiliate - - - 350 Interest expense 312 319 636 476 Interest (income) (12) (8) (23) (17) 4,592 3,691 8,618 6,669 (Loss) Income before taxes (1,134) 604 (924) 1,062 Income tax (benefit) (431) 229 (351) 404 provision Net (loss) income $ (703) 375 $ (573) $ 658 Net (loss) income $ (.07) $ .04 $ (.05) $ .06 per share primary and fully diluted See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) Six Months Ended March 31, 1996 1995 Cash flows from operating activities: Net (loss) income $ (573) $ 658 Adjustments to reconcile net income to net cash provided for (used in) operating activities: Depreciation and amortization 513 486 (Increase) decrease in: Accounts receivable 4,090 1,290 Inventories (3,100) (3,660) Prepaid expenses and other (41) (741) Income taxes receivable/payable 725 68 Due from officer - (44) Deferred tax asset 143 - Increase (decrease) in: Bankers' acceptances payable 295 354 Accounts payable (555) 263 Accrued expenses (1,807) (677) Deferred income taxes payable 34 60 Total adjustments 297 (2,601) Net cash (used in) operating activities (276) (1,943) Cash flows (used in) investing activities: (Purchase) of furniture/equipment (284) (447) (Increase) in trademarks (19) (41) (Increase) in equipment deposits - (47) Net cash (used in) investing activities (303) (535) See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000's omitted) Six Months Ended March 31, 1996 1995 Cash flows from financing activities: Net increase in notes payable $ 1,701 $ 5,760 Payments to acquire treasury stock - (3,782) Payments to retire Common Stock options - (8) Net cash provided by financing activities 1,701 1,970 Net increase (decrease) in cash and cash equivalents 1,122 (508) Cash and cash equivalents, beginning of period - 698 Cash and cash equivalents, end of period $ 1,122 $ 190 Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 574 $ 476 Income taxes $ 140 $ 276 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 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'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. 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 financial position at March 31, 1996, the results of operations for the three and six month periods ended March 31, 1996 and 1995 and cash flows for the six month periods ended March 31, 1996 and 1995. Inventory: Inventory is stated at the lower of cost or market (first-in, first-out). Interim inventories are based on a calculated gross profit percentage by product, calculated monthly. 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. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) Trademarks: The costs thereof are being amortized over a five-year period on a straight-line basis. 2. Notes payable, bank: Rate March 31, 1996 Rate September 30, 1995 Notes payable 6.77% $ 8,370,000 7.875% $ 9,000,000 Notes payable 7.31% 7,100,000 8.75% 6,169,000 Notes payable 8.25% 1,400,000 - Total $16,870,000 $15,169,000 Bankers' payable $ 2,137,000 $ 1,842,000 The above were collateralized by a security interest in substantially all of the assets of the Company. A credit line of $34,000,000 is available to the Company at the discretion of the banks. This $34,000,000 is subject to limitation based upon eligible inventory and accounts receivable as defined by the banks. 3. Common Stock: From October 1994 through March 1995, the Company purchased 890,400 shares of its Common Stock for prices ranging from $3.50 to $5.375 per share. The Company has completed both of its 500,000 share repurchase programs. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) 4. Contingency: At March 31, 1996 the Company was contingently liable for outstanding letters of credit of $6,242,952. 5. Income taxes: Three Months Ended Six Months Ended March 31, 1996 March 31, 1996 Federal: Current $(181,000) $(130,000) Deferred (181,500) (165,500) State: Current (57,000) (45,000) Deferred (11,500) (10,500) $(431,000) $(351,000) Income tax at Federal statutory rate applied to income before taxes $(386,000) $(314,000) Add: state income taxes (68,000) (55,500) Less: effect of deduction of state income taxes for Federal purposes 23,000 18,500 Income taxes benefit $(431,000) $(351,000) PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) Significant components of the Company's deferred tax liability as of March 31, 1996 and September 30, 1995 are as follows: March 31, September 30, 1996 1995 Deferred tax liability: Depreciation $799,000 $765,000 Deferred tax assets: Reserve for lawsuit 189,000 141,000 Inventory reserve 520,000 520,000 Reserve for returns and allowances 51,000 260,000 Unicap 34,000 34,000 Loss on foreign affiliate 45,000 27,000 Other 9,000 9,000 848,000 991,000 Deferred income tax asset $ 49,000 $226,000 Net 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'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 been determined. 7. Litigation: During the quarter ended March 31, 1996, a trial as to damages was held concerning the Company's infringement of a patent entitled "Kit Comprising Multi-Colored Fluid Dispenser Markers Together with Eradicating Fluid Dispenser." No decision has been reached as of the date hereof as a result of such trial, and the Company is unable to predict the outcome of said trial. The Company has established a reserve within the range of outcomes it believes are likely as a result of such trial. The Company is unable to determine whether its determination of a range of outcomes is accurate and although the Company has several options in the event of a decision outside of the range of outcomes it anticipates as a result of such trial, there is no assurance that the decision resulting from such trial will not have a material adverse effect on the Company.
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 March 31, 1996 15% and increased 2% for the six months ended March 31, 1996 as compared to the same periods a year ago. The three month decrease was principally due to a decline in some seasonal spring time promotions sold a year ago, while the six month increase was primarily due to the success of the Company's licensed products. Gross profit as a percentage of net sales decreased in the three months ended March 31, 1996 to 33.2% from 35.1% in the same 1995 period, and to 34.5% in the six months ended March 31, 1996 from 35.3% in the same 1995 period. This decline was primarily due to higher domestic manufacturing costs and an increase in the Company's reserve percentage for returns and allowances. Selling, general and administrative (SG&A) expenses as a percentage of net sales increased during the three months ended March 31, 1996 to 41.2% from 27.6% in the prior year. This increase was primarily related to the legal fees incurred in the quarter associated with the trial discussed in footnote 7 as well as an increase in the reserve for the loss associated with this matter. The increase was also associated with the increase in royalties, the continued development of the Company's new marketing initiatives, higher freight costs, and an increase in the reserve level for customer chargebacks. SGA increased for the six months ended March 31, 1996 from 26.8% to 35.9% of sales compared to the same prior period. This increase was primarily related to the costs incurred in the second quarter ended March 31, 1996 discussed above as well as the cost associated with the Company moving and establishing a new distribution center in the first quarter ended December 31, 1995. There was a decrease in interest expense for the three months ended March 31, 1996 due to lower interest rates for the period as compared to the year ago period. Interest expense for the six months ended March 31, 1996 were higher due to the higher level of borrowings that were maintained by the Company after the completion of its stock buy-back program in December 1994. (2) Material Changes in Financial Condition Working capital decreased $329,000 to $16,599,000 at March 31, 1996. This decrease was primarily due to financing the Company's loss during the six months ended March 31, 1996. Net cash used in operating activities was $276,000 during the six months ended March 31, 1996 as compared to $1,943,000 in the corresponding period last year. This was primarily due to a decrease in accounts receivable, less inventory build-up and lower accrued expenses, partially offset by the net loss during the current period. Net cash used in investing activities during the six months ended March 31, 1996 was $303,000 as compared to $535,000 during the corresponding year ago period. This was primarily due to decreases in purchases of equipment in the current period. Net cash provided by financing activities during the six months ended March 31, 1996 was $1,701,000 as compared to $1,970,000 during the year ago period. Notes payable increased at a substantially slower rate because the Company did not acquire additional treasury stock during the current period. Subject to extraordinary conditions, the Company believes it has ample liquidity to finance its continuing obligations. The Company is prohibited without the consent of its primary lenders, from declaring cash dividends. Although the Company has been required to amend certain of its covenants with its primary lenders, it believes its relationship with its primary lenders remains stable and good. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Pentech International, Inc. v. Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc., filed in the U.S. District Court, Southern District of New York ("SDNY") in October 1987. This action is for declaratory judgment against the defendants that U.S. Patent No. 4,681,471 entitled "Kit Comprising Multi- Colored Fluid Dispenser Markers Together With Eradicating Fluid Dispenser" is not infringed, and is invalid and unenforceable. This action was bifurcated into two parts: (i) liability and (ii) damages. A trial as to liability was held. On November 12, 1990, an opinion and order of findings of fact and conclusions of law were released rejecting Pentech's effort to invalidate the patent, rejecting defendant's counterclaim of Pentech's misappropriation and finding that Pentech infringed said patent. During the quarter ended March 31, 1996, a trial as to damages was held. No decision has been reached as of the date hereof as a result of said trial, and the Company is unable to predict the outcome of said trial. The Company has established a reserve within the range of outcomes it believes are likely as a result of such trial. The Company is unable to determine whether its determination of a range of outcomes is accurate and although the Company has several options in the event of a decision outside of the range of outcomes it anticipates as a result of such trial, there is no assurance that the decision resulting from such trial will not have a material adverse effect on the Company. Item 6. Exhibits and Reports on Form 8-K. (b) None. 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: May 14, 1996 By: s/William Visone William Visone, Treasurer (Duly authorized officer and Chief Financial Officer) ptk\10q-mar.96 EX-27 2
5 1000 6-MOS SEP-30-1996 MAR-31-1996 1,122 0 8,361 88 25,944 38,641 7,826 3,190 43,613 22,042 0 0 0 105 20,772 43,613 10,410 10,410 6,952 4,292 0 0 312 (1,134) (431) (703) 0 0 0 (703) (.07) (.07)
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