0000760461-95-000003.txt : 19950815 0000760461-95-000003.hdr.sgml : 19950815 ACCESSION NUMBER: 0000760461-95-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19950630 FILED AS OF DATE: 19950814 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: 95562422 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, 1995 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, 1995 --------------------- ----------------- $.01 par value 10,858,258 shares Page 1 of 15. There is no Exhibit Index. INDEX Part I. Financial Information: Item 1. Financial Statements (unaudited) Page ---- Condensed Consolidated Balance Sheets as of June 30, 1995 and September 30, 1994. . . . . . . . . . .3-4 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 1995 and 1994. . . . .5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 1995 and 1994. . . . .6-7 Notes to Condensed Consolidated Financial Statements. . 8-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. . . . . . . . . . .12-13 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 14 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 15 PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) June 30, 1995 September 30, 1994 -------------- ------------------ (unaudited) Current Assets: Cash $ 554 $ 698 Accounts receivable, net of allowances for doubtful accounts of $79 at June 30, 1995 and $55 at September 30, 1994 19,121 13,130 Inventories (Note 1) 23,786 21,327 Income taxes receivable 572 369 Prepaid expenses and other 2,168 1,308 ------ ------ Total current assets 46,201 36,832 ------ ------ Furniture and equipment (Note 1) 7,423 6,890 Less accumulated depreciation 2,555 1,889 ------ ------ 4,868 5,001 ------ ------ Other assets: Trademarks, net of amortization (Note 1) 279 289 Due from officer 110 78 Deposits on equipment 47 ------ ----- 436 367 ------ ----- $ 51,505 $42,200 ====== ====== 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, 1995 September 30, 1994 ------------- ------------------ (unaudited) Current liabilities: Notes payable, banks (Note 2) $20,499 $ 9,163 Bankers' acceptances payable (Note 2) 2,039 1,860 Accounts payable 1,725 1,425 Accrued expenses 2,726 2,932 ------ ------- Total current liabilities 26,989 15,380 ------ ------- Deferred income taxes 440 340 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; 10,858,258 shares issued and outstanding at June 30, 1995 and 11,692,958 at September 30, 1994 109 117 Capital in excess of par 6,047 6,512 Retained earnings 19,319 20,894 Treasury stock (1,399) (1,043) ------ ------ 24,076 26,480 ------ ------ $51,505 $42,200 ====== ====== 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, ------------------ ----------------- 1995 1994 1995 1994 ---- ---- ---- ---- Net sales $20,013 $22,928 $41,906 $46,155 Cost of sales 13,208 14,713 27,370 29,463 ------ ------ ------ ------ Gross profit 6,805 8,215 14,536 16,692 ------ ------ ------ ------ Selling, general and administrative expenses 5,035 4,295 10,895 9,983 Loss on Mexican affiliate 350 Interest expense 310 194 786 492 Interest (income) (7) (2) (24) (6) ------- ------- ------- ------- 5,338 4,487 12,007 10.469 ------- ------- ------ ------- Income before taxes 1,467 3,728 2,529 6,223 Income taxes 557 1,448 961 2,396 ------- ------ ------- ------ Net income $ 910 $2,280 $1,568 $ 3,827 ======= ====== ====== ====== Net income per share fully diluted $ .09 $ .19 $ .15 $ .32 ======= ====== ====== ====== 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, ----------------- 1995 1994 ---- ---- Cash flows from operating activities: Net income $ 1,568 $ 3,827 ------ ------- Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 770 556 (Increase) decrease in: Accounts receivable (5,991) (4,661) Inventories (2,459) (5,367) Prepaid expenses and other (860) 320 Income taxes receivable (203) Due from officer (32) (66) Increase (decrease) in: Bankers' acceptances payable 179 (690) Accounts payable 300 541 Accrued expenses (206) 281 Income taxes payable 78 Deferred income taxes payable 100 307 ------- ------ Total adjustments (8,402) (8,701) ------- ------ Net cash (used in) operating activities (6,834) (4,874) ------- ------ Cash flows from investing activities: (Purchase) of furniture/equipment (533) (726) (Increase)/Decrease in trademarks (94) 29 (Increase) in equipment deposits (47) (3) -------- --------- Net cash (used in) investing activities (674) (700) -------- --------- 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, ----------------- 1995 1994 ---- ---- Cash flows from financing activities: Net increase in notes payable $11,336 $ 5,294 Payments to acquire treasury stock (3,964) (546) Proceeds from the issuance of Common Stock and exercise of options 10 Payments to retire Common Stock options (8) ------ ------ Net cash provided by financing activities 7,364 4,758 ------ ------ Net decrease in cash and cash equivalents (144) (816) Cash and cash equivalents, beginning of period 698 843 ------ ------ Cash and cash equivalents, end of period $ 554 $ 27 ------ ------ Supplemental disclosures of cash flow information and non-cash financing activities: Non-cash financing activities: Issuance of Common Stock pursuant to exercise of options $ 606 Acquisition of treasury stock $ 606 Retirement of treasury stock $ 606 Cash paid during the period for: Interest $ 762 $ 492 Income taxes $1,064 $2,030 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, 1995 and 1994 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, 1995, the results of operations for the three and nine month periods ended June 30, 1995 and 1994, and cash flows for the nine month periods ended June 30, 1995 and 1994 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. 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, 1995 Rates September 30, 1994 ----- ------------- ----- ------------------ Notes payable 9.00% $ 2,999,000 7.75% $ 9,163,000 ========== Notes payable 8.15% 5,000,000 Notes payable 8.20% 8,000,000 Notes payable 7.80% 4,000,000 Notes payable 8.00% 500,000 ---------- $20,499,000 ========== Bankers' acceptances payable $ 2,039,000 $ 1,860,000 ========== ========== The above were collateralized by a security interest in substantially all of the assets of the Company. The credit lines available to the Company at the discretion of the banks with which the Company maintains these lines (the "Banks") were increased to $34,000,000. 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 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. In February 1994, options to purchase an aggregate of 175,000 shares of Common Stock were exercised at prices ranging from $3.19 to $3.51 per share resulting in the issuance of 175,000 shares of Common Stock. The persons paid the exercise price of those options by delivery of 91,506 shares of Common Stock with a value of $606,250 to the Company. These 91,506 shares of Common Stock have been retired. In March 1994, options to purchase an aggregate of 2,000 shares of Common Stock were exercised at $5.125 per share, resulting in the issuance of 2,000 shares of Common Stock and proceeds of $10,250. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Financial Statements (con't) 4. Contingency: At June 30, 1995, the Company was contingently liable for outstanding letters of credit of approximately $2,557,000. 5. Income taxes: Three Months Ended Nine Months Ended June 30, 1995 June 30, 1995 ------------------ ----------------- Federal: Current $ 435,000 $ 718,000 Deferred 34,000 91,000 State: Current $ 82,000 $ 143,000 Deferred 6,000 9,000 ------- -------- $ 557,000 $ 961,000 ======= ======== Income tax at Federal statutory rate applied to income before taxes $ 499,000 $ 860,000 Add: state income taxes 88,000 152,000 Less: effect of deduction of state income taxes for Federal purposes (30,000) (51,000) -------- -------- Income taxes provided $ 557,000 $ 961,000 ======== ======== PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) Effective October 1, 1993, the Company adopted FASB Statement No. 109, Accounting for Income Taxes. Under Statement 109, the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the difference between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Prior to the adoption of Statement 109, income tax expense was determined using the deferred method. Deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the differences originated. As permitted by Statement 109, the Company has elected not to restate the financial statements for prior years. The effect of the change on pretax income from continuing operations for the three and six months ended June 30, 1995 was not material. Significant components of the Company's deferred tax liability as of June 30, 1995 and September 30, 1994 are as follows: June 30, September 30, 1995 1994 ------- ------------- Deferred tax liability: Depreciation $818,000 $698,000 ------- ------- Deferred tax assets: Reserve for lawsuit 99,000 99,000 Inventory reserve 37,000 37,000 Reserve for returns and allowances 124,000 124,000 Unicap 16,000 16,000 Loss on foreign 96,000 76,000 affiliate Other 6,000 6,000 ------- ------- 378,000 358,000 ------- ------- Deferred income tax $440,000 $340,000 liability, Net ======= ======= 6. Related party transactions: In December 1993, the Company sublet premises, which it originally used as its primary offices and leased from a Company controlled by two officers/shareholders (the "sublease"). The Company's lease of those premises expires September 30, 1995, is triple net and provides for a base rent of $3,930 per month. The sublease, to an unaffiliated company, is for $2,750 per month and expires June 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 decreased in the three and nine months ended June 30, 1995, 13% and 9%, respectively, over the same periods in 1994. This was principally due to one of the Company's largest customers significantly reducing their back to school orders. The Company's relationship with this customer however, still remains solid. The remainder of the Company's customer base continued to demonstrate a strong demand for new products. Gross profit as a percentage of net sales decreased in the three months ended June 30, 1995 to 34.0% from 35.8% in the same 1994 period, and decreased to 34.7% in the nine month period ended June 30, 1995 from 36.2% in the same 1994 period. This decrease was due to the product mix, primarily the commodity pencil program and higher packaging and display costs. 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, 1995 to 25.1% from 18.7% in the prior year. SG&A expenses increased to 26.0% of sales during the nine months ended June 30, 1995 from 21.6% of sales in the year earlier period. The increases were caused principally by royalty expenses associated with the new licensed products and the lower sales for the year associated with a similar level of fixed SGA expenses. There was an increase in interest expense due largely to financing the stock buy back and higher interest rates. During the three months ended June 30, 1995, net income decreased to $910,000, or $.09 per share, from $2,280,000, or $.19 per share, for the three months ended June 30, 1994. This is a decrease of 60%. During the nine months ended June 30, 1995 net income decreased to $1,568,000, or $.15 per share, from $3,827,000, or $.32 per share, in the year earlier period, a deease of 59.0%. These decreases in net income are a direct result of lower sales. (2) Material Changes in Financial Condition Working capital decreased $2,240,000 to $19,212,000 from $21,452,000 during the nine months ended June 30, 1995. This decrease was primarily related to the Company funding its share repurchase programs with its working capital. On a long-term basis, the Company's liquidity is strong due to its relatively stable credit facilities, its strong current ratio, the quality of its receivables, the largely finished nature of its inventory, and the size of its shareholders' equity as compared to its traditional borrowing needs. The Company is prohibited, without the consent of its primary lender, from declaring cash dividends. PART II. OTHER INFORMATION 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, 1995. 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 11, 1995 By: /s/ David Melnick David Melnick, President and Principal Financial Officer ptk\10q-jun.95 EX-27 2
5 1000 9-MOS SEP-30-1995 JUN-30-1995 554 0 19,121 79 23,786 46,201 7,423 2,555 51,505 26,989 0 109 0 0 24,076 51,505 20,013 20,013 13,208 5,035 0 0 303 1,467 557 910 0 0 0 910 .09 .09