-----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, HDfx+baI+eGdx/mNNleRVlMEB++/t0guXlhRrk6vGhAwNsGHLP1jIKuIiRkq3Vtu ow6jM/NmQBQPUB4+QASLjg== 0000760461-98-000008.txt : 19980217 0000760461-98-000008.hdr.sgml : 19980217 ACCESSION NUMBER: 0000760461-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980212 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: SEC FILE NUMBER: 000-15374 FILM NUMBER: 98533003 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 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. 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 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. 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. 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. 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. 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. 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. 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 ========== ========== 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. 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. 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 EX-27 2
5 9-MOS 9-MOS SEP-30-1997 SEP-30-1997 DEC-31-1997 DEC-31-1996 1,241 649 0 0 10,626 16,293 0 0 18,578 18,481 33,258 37,764 8,381 8,895 4,663 4,931 37,650 42,504 17,537 22,313 0 0 0 0 0 0 125 125 0 0 37,650 42,200 10,888 12,540 10,888 12,540 6,646 8,047 3,862 4,044 0 0 0 0 349 367 32 90 12 36 20 54 0 0 0 0 0 0 20 54 0 .01 0 .01
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