-----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, LgIhteuFWYfQT3dPkqyG6dgvnWd92ZgMZVwSn/WUowxENrPkIvLX4v4A/WFMNF1S lm9eN88AxMpbn+7L1X+Vhg== 0000760461-96-000005.txt : 19960816 0000760461-96-000005.hdr.sgml : 19960816 ACCESSION NUMBER: 0000760461-96-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 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: 96614109 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 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, 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 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, 1996 - --------------------- ----------------- $.01 par value 10,496,758 shares Page 1 of 16. There is no Exhibit Index. INDEX Part I. Financial Information: Item 1. Financial Statements (unaudited) Page ---- Condensed Consolidated Balance Sheets as of June 30, 1996 and September 30, 1995. . . . . . . . . . .3-4 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 1996 and 1995. . . . .5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 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 Operation. . . . . . . . . . .13-14 Part II. Other Information: Item 1. Legal Proceedings . . . . . . . . . . . . . . . 15 Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 15 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 PART I. FINANCIAL INFORMATION PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) June 30, 1996 September 30, 1995 -------------- ------------------ (unaudited) Current Assets: Cash $ 356 $ - Accounts receivable, net of allowances for doubtful accounts of $190 at June 30, 1996 and $70 at September 30, 1995 20,070 12,451 Inventories (Note 1) 22,948 22,844 Income taxes receivable 515 1,823 Prepaid expenses and other 1,940 1,227 Deferred tax asset 1,071 991 ------ ------ Total current assets 46,900 39,336 ------ ------ Furniture and equipment (Note 1) 7,919 7,542 Less accumulated depreciation 3,417 2,737 ------ ------ 4,502 4,805 ------ ------ Other assets: Trademarks, net of amortization (Note 1) 196 267 Due from officer 110 110 ------ ----- 306 377 ------ ----- $ 51,708 $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) June 30, 1996 September 30, 1995 ------------- ------------------ (unaudited) Current liabilities: Notes payable, banks (Note 2) $ 21,132 $ 15,169 Bankers' acceptances payable (Note 2) 3,169 1,842 Accounts payable 1,785 2,383 Accrued expenses 3,418 3,014 ------ ------- Total current liabilities 29,504 22,408 ------ ------- Deferred income taxes 816 765 ------ ------- Commitments and contin- gencies (Notes 4 and 7) 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 June 30, 1996 and September 30, 1995, respectively 105 105 Capital in excess of par 5,846 5,846 Retained earnings 15,437 15,394 ------ ------ 21,388 21,345 ------ ------ $ 51,708 $44,518 ====== ====== See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES (unaudited) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (000's omitted except for per share amounts) Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Net sales $21,976 $20,013 $44,278 $41,906 Cost of sales 14,982 13,208 29,590 27,370 ------ ------ ------ ------ Gross profit 6,994 6,805 14,688 14,536 ------ ------ ------ ------ Selling, general and administrative expenses 5,644 5,035 13,650 10,895 Loss on Mexican affiliate 350 Interest expense 362 310 999 786 Interest (income) (6) (7) (30) (24) ------- ------- ------- ------ 6,000 5,338 14,619 12,007 ------- ------- ------ ------ Income before taxes 994 1,467 69 2,529 Income taxes 377 557 26 961 ------- ------ ----- ------ Net income (Note 7) $ 617 $ 910 $ 43 $ 1,568 ======= ====== ===== ====== Net income per share fully diluted (Note 7) $ .06 $ .09 $ .00 $ .15 ======= ====== ====== ===== See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (unaudited) Nine Months Ended June 30, ----------------- 1996 1995 ---- ---- Cash flows from operating activities: Net income $ 43 $ 1,568 ------ ------- Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 770 770 (Increase) decrease in: Accounts receivable (7,619) (5,991) Inventories (104) (2,459) Prepaid expenses and other (713) (860) Income taxes receivable/payable 1,308 (203) Due from officer - (32) Deferred tax asset (80) - Increase (decrease) in: Bankers' acceptances payable 1,327 179 Accounts payable (598) 300 Accrued expenses 404 (206) Deferred income taxes payable 51 100 ------- ------ Total adjustments (5,254) (8,402) ------- ------ Net cash (used in) operating activities (5,211) (6,834) ------- ------ Cash flows from investing activities: (Purchase) of furniture/equipment (377) (533) (Increase) in trademarks (19) (94) (Increase) in equipment deposits - (47) -------- ------- Net cash (used in) investing activities (396) (674) -------- ------- See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000's Omitted) (unaudited) Nine Months Ended June 30, ----------------- 1996 1995 ---- ---- Cash flows from financing activities: Net increase in notes payable $ 5,963 $11,336 Payments to acquire treasury stock - (3,964) Payments to retire Common Stock options - (8) ------ ------ Net cash provided by financing activities 5,963 7,364 ------ ------ Net increase (decrease) in cash and cash equivalents 356 (144) Cash and cash equivalents, beginning of period - 698 ------ ------ Cash and cash equivalents, end of period $ 356 $ 554 ------ ------ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 857 $ 762 Income taxes $ - $ 1,064 See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and nine months ended June 30, 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 the financial position at June 30, 1996, the results of operations for the three and nine month periods ended June 30, 1996 and 1995, and cash flows for the nine month periods ended June 30, 1996 and 1995 Inventory: 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. 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. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (con't) Equipment and Depreciation (continued): 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, 1996 Rates September 30, 1995 ----- ------------- ----- ------------------ Notes payable 8.25% $10,057,000 7.875% $ 9,000,000 Notes payable 8.25% 11,075,000 8.750% 6,169,000 ----------- ---------- $21,132,000 $15,169,000 =========== ========== Bankers' acceptances payable $ 3,169,000 $ 1,842,000 ========== ========== Traditionally, the Company has operated under two lines of credit with two separate banks equalling $34,000,000, subject to limitation based upon eligible inventory and accounts receivable as defined by the banks. The line of credit with one of the banks, totalling $16,000,000, expired on May 31, 1996. The Company is engaged in active negotiations with this lender to extend its line of credit. 3. Common Stock: From October 1994 through June 1995, the Company purchased 950,400 shares of Common Stock at prices ranging from $2.875 to $5.03 per share. As of June 30, 1995, 312,500 shares of Common Stock remained in treasury. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (con't) 4. Contingency: At June 30, 1996, the Company was contingently liable for outstanding letters of credit of approximately $2,892,332. 5. Income taxes: Three Months Ended Nine Months Ended June 30, 1996 June 30, 1996 ------------------ ----------------- Federal: Current $282,000 $ 19,580 Deferred 35,000 2,420 State: Current $ 53,400 $ 3,560 Deferred 6,600 440 ------- -------- $377,000 $ 26,000 ======= ======== Income tax at Federal statutory rate applied to income before taxes $338,000 $ 23,000 Add: state income taxes 60,000 4,000 Less: effect of deduction of state income taxes for Federal purposes (21,000) (1,000) -------- -------- Income taxes provided $377,000 $26,000 ======== ======== PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) Significant components of the Company's deferred tax liability as of June 30, 1996 and September 30, 1995 are as follows: June 30, September 30, 1996 1995 ------- ------------- Deferred tax liability: Depreciation $ 816,000 $765,000 --------- ------- Deferred tax assets: Bad debts 72,200 27,000 Reserve for lawsuit 236,500 141,000 Inventory reserve 520,000 520,000 Reserve for returns and allowances 200,000 260,000 Unicap 34,000 34,000 Other 9,000 9,000 ------- ------- 1,071,700 991,000 --------- ------- Deferred income tax $ 255,700 $226,000 asset, 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: Pentech International, Inc. v. Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc. was filed in the U.S. District Court, Southern District of New York ("SDNY") in October 1987. This action was for a 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. 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. Subsequent to the quarter ended June 30, 1996, the court issued an opinion and order on the damages portion of the action assessing a royalty of $1,032,000 that Pentech is obligated to pay Paradise. The court also trebled this award, directed Pentech to pay Paradise's attorneys' fees and prejudgment interest on the royalty award. This amount, if it is not modified, will result in a judgment against Pentech of approximately $5,000,000. The amount of this judgment is expected to be finalized by September 30, 1996. Pentech strongly disagrees with the outcome of this opinion and order and intends to vigorously appeal. There is no assurance that Pentech will be able to obtain a bond required to stay enforcement pending such appeal. Although Pentech had established a reserve for this award based on the then-available information, it is not adequate to cover this award. As a result, although it is too early to determine with certainty and to what extent, it is likely that Pentech will report a sizable loss for its fiscal year ended September 30, 1996. 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 and nine months ended June 30, 1996, 10% and 6%, respectively, over the same periods in 1995. This was principally due to the success of the Company's licensed products. Gross profit as a percentage of net sales decreased in the three months ended June 30, 1996 to 31.8% from 34.0% in the same 1995 period, and decreased to 33.2% in the nine month period ended June 30, 1996 from 34.7% in the same 1995 period. This decline was due primarily to higher domestic manufacturing costs and an increase in the Company's reserve percentage for returns and allowances. The Company also accelerated the closeout of slow moving inventory. Selling, general and administrative ("SG&A") expenses as a percentage of sales increased during the three months ended June 30, 1996 to 25.6% from 25.1% in the prior year. SG&A expenses increased to 30.8% of sales during the nine months ended June 30, 1996 from 26.0% of sales in the year earlier period. The increases were caused principally by royalties, higher freight costs, an increase in the reserve level for customer charge-backs, and the legal fees incurred associated with the trial discussed in footnote 7 above as well as an increase in the reserve for the loss associated with this matter. There was an increase in interest expense due largely to the higher level of borrowings that were maintained by the Company during the current periods. During the three months ended June 30, 1996, net income decreased to $617,000, or $.06 per share, from $910,000, or $.09 per share, for the three months ended June 30, 1995. During the nine months ended June 30, 1996 net income decreased to $43,000, or $.00 per share, from $1,568,000, or $.15 per share, in the year earlier period. (2) Material Changes in Financial Condition Working capital increased $468,000 to $17,396,000 from $16,928,000 during the nine months ended June 30, 1996. This increase was primarily related to the Company's income reported during the quarter ended June 30, 1996. The Company has in the past periodically been in technical default with various covenants with its primary lenders. In addition, the formal written line of credit with one of its lenders has expired. The Company is engaged in active negotiations with these lenders to extend its loans with such entities. In addition, the Company will likely be required to post a large bond in order to stay enforcement of the judgment which will likely be entered against it in the near future as discussed in note 7 above. There is no assurance that the Company will be able to resolve its outstanding differences with its primary lenders to extend the loans or that it will be able to obtain bond necessary to stay enforcement of the judgment referred to above. Any of these events could result in a situation where the Company could become illiquid. Such event could significantly disrupt the business of the Company and have other material adverse effects on the Company. The Company is exploring avenues to avoid any such disruption, but there is no assurance that it will have any degree of success with respect to any such strategies. The Company is prohibited, without the consent of its primary lender, from declaring cash dividends. PART II. OTHER INFORMATION Item 1. Legal Proceedings. Pentech International, Inc. v. Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc. was filed in the U.S. District Court, Southern District of New York ("SDNY") in October 1987. This action was 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. 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. Subsequent to the quarter ended June 30, 1996, the court issued an opinion and order on the damages portion of the action assessing a royalty of $1,032,000 that Pentech is obligated to pay Paradise. The court also trebled this award, directed Pentech to pay Paradise's attorneys' fees and prejudgment interest on the royalty award. This amount, if it is not modified, wil result in a judgment against Pentech of approximately $5,000,000. The amount of this judgment is expected to be finalized by September 30, 1996. Pentech strongly disagrees with the outcome of this opinion and order and intends to vigorously appeal. There is no assurance that Pentech will be able to obtain a bond required to stay enforcement pending such appeal. Although Pentech had established a reserve for this award based on the then-available information, it is not adequate to cover this award. As a result, although it is too early to determine with certainty and to what extent, it is likely that Pentech will report a sizable loss for its fiscal year ended September 30, 1996. 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, 1996. 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: August 14, 1996 By: /s/ William Visone William Visone, Treasurer and Chief Financial Officer (Duly authorized officer) ptk\10q-jun.96 EX-27 2
5 1000 9-MOS SEP-30-1996 JUN-30-1996 356 0 20,070 190 22,948 46,900 7,919 3,417 51,708 29,504 0 0 0 105 21,283 51,708 44,278 44,278 29,590 14,619 0 0 999 69 26 43 0 0 0 43 .00 .00
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