-----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, UTttbZfIxHTb4wE7xZZ4aK1SDt9fWnYFZ/I1CG4r0p2Y1K+85f2YqKSMsYcxewFo vvGLuQ5dynDRrzSYzdLMaQ== 0000760461-97-000004.txt : 19970222 0000760461-97-000004.hdr.sgml : 19970222 ACCESSION NUMBER: 0000760461-97-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 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: 97533939 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, 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 December 31, 1996: 10,496,758 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, 1996 and September 30, 1996 3-4 Condensed Consolidated Statements of Operations for the three months ended December 31, 1996 and 1995 5 Condensed Consolidated Statements of Cash Flows for the three months ended December 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 6. Exhibits and Reports on Form 8-K 14 Signatures 15 PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) December 31, 1996 September 30, 1996 (unaudited) Current Assets: Cash $ 707 $ 7,064 Accounts receivable, net of allowances for doubtful accounts of $403 at December 31, 1996 and at September 30, 1996, respectively 10,413 14,538 Inventories (Note 1) 17,767 18,728 Income taxes receivable 978 1,146 Prepaid expenses and other 1,479 1,042 Deferred Tax Asset 633 619 ------ ------ Total current assets 31,977 43,137 ------ ------ Furniture and equipment (Note 1) 8,051 8,030 Less accumulated depreciation 3,902 3,662 ------ ------ 4,149 4,368 ------ ------ Other assets: Deferred tax assets, long-term 263 306 Trademarks, net of amortization (Note 1) 278 268 Due from officer 110 110 ------ ------ 651 684 ------ ------ $36,777 $48,189 ====== ====== 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, 1996 September 30, 1996 (unaudited) Current liabilities: Notes payable, banks (Note 2) $12,301 $21,352 Bankers' acceptances payable (Note 2) 992 1,489 Accounts payable 789 1,593 Accrued expenses 2,713 3,827 Settlement payable 500 500 Settlement note payable 700 700 ------ ------- Total current liabilities 17,995 29,461 ------ ------- Other liabilities: Royalty payable, long-term 400 400 Settlement note payable, long-term 2,300 2,300 ------ ------ 2,700 2,700 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 December 31, 1996 and September 30, 1996, re- spectively 105 105 Capital in excess of par 5,846 5,846 Retained earnings 10,131 10,077 ------ ------ 16,082 16,028 ------ ------ $36,777 $48,189 ====== ====== See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended December 31, 1996 1995 Net sales $12,540 $11,892 Cost of sales 8,047 7,656 Gross profit 4,493 4,236 Selling, general and administrative expenses 4,044 3,713 Interest expense 367 324 Interest (income) (8) (11) ----- ----- 4,403 4,026 ----- ----- Income before taxes 90 210 Income taxes 36 80 ---- ----- Net income $ 54 $ 130 ====== ====== Net income per share- primary and fully diluted $ .01 $ .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, 1996 1995 Cash flows from operating activities: Net income $ 54 $ 130 ----- ----- Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 240 257 (Increase) decrease in: Accounts receivable 4,125 1,877 Inventories 961 (245) Prepaid expenses and other (437) 76 Income taxes receivable/ payable 168 (128) Increase (decrease) in: Bankers' acceptances payable (497) (656) Accounts payable (804) (779) Accrued expenses (1,114) (265) Deferred income taxes payable\receivable 29 208 ----- ----- Total adjustments 2,671 345 ----- ----- Net cash provided by operating activities 2,725 475 ----- ----- Cash flows from investing activities: (Purchase) of furniture/equipment (21) (99) (Increase) in trademarks (10) (8) ----- ----- Net cash (used in) investing activities (31) (107) ----- ----- 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, 1996 1995 Cash flows from financing activities: Net (decrease) increase in notes payable $ (9,051) $ 684 ----- ----- Net cash (used in) provided by financing activities (9,051) 684 ----- ------ Net (decrease) increase in cash and cash equivalents (6,357) 1,052 Cash and cash equivalents, beginning of period 7,064 -0- ----- ------ Cash and cash equivalents, end of period $ 707 $1,052 ===== ====== Supplemental disclosures of cash flow information and non-cash financing activities: Cash paid during the period for: Interest $ 468 $ 324 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, 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 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, 1996 and the results of operations and the statements of cash flows for the three month period ended December 31, 1996 and 1995. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1996 and 1995 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. Trademarks: The costs thereof are being amortized over a five-year period on a straight-line basis. 2. Notes payable, bank: December 31, September 30, Rate 1996 Rate 1996 Notes payable(a) 9.25% $ 6,575,575 8.25% $11,725,000 9.25% 5,725,781 8.25% 9,627,498 ---------- ---------- Total $12,301,356 $21,352,498 ========== ========== Bankers' acceptances $ 992,279 None $ 1,488,757 payable(a) ========== ========== (a) Notes and bankers' acceptance payable as of December 31, 1996 and September 30, 1996 were initially advanced under a $34,000,000 line of credit which was available at the banks' discretion and subject to limitations based upon eligible inventory and accounts receivable as defined by that agreement. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1996 and 1995 is unaudited.) As a result of the events leading to the Paradise settlement, the Company's original line of credit was restructured by the Banks for a period ending January 31, 1997. In January, 1997, the Company entered into a new three year $30,000,000 Revolving Credit Agreement with BankAmerica Business Credit, Inc. (the "New Credit Agreement"). Borrowings under the New Credit Agreement are subject to limitations based upon eligible inventory and accounts receivable as defined in the New 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. Contingency: At December 31, 1996 the Company was contingently liable for outstanding letters of credit of $1,184,426. 4. Income taxes: Three Months Ended December 31 1996 1995 Federal: Current $ 3,000 $ 51,000 Deferred 25,000 16,000 State: Current 4,000 12,000 Deferred 4,000 1,000 ------ ------- $ 36,000 $ 80,000 ======= ======= Income tax at Federal statutory rate applied to income before taxes $ 31,000 $ 71,000 Add: state income taxes 8,000 13,000 Less: effect of deduction of state income taxes for Federal purposes (3,000) (4,000) ------- ------ Income taxes provided $ 36,000 $ 80,000 ======= ======= PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1996 and 1995 is unaudited.)
Significant components of the Company's deferred tax assets and liability as of December 31, 1996 and September 30, 1996 are as follows: December 31, September 30, 1996 1996 Current deferred tax liability: State taxes on deferred federal items $ (224,935) $ (224,935) ------- ------- Current deferred tax assets: Bad debts 216,582 231,392 Inventory reserve 509,980 595,980 Reserve for returns and allowances 606,165 369,017 Unicap 33,110 33,110 Reserve for restructuring 6,472 129,000 --------- -------- Total current deferred tax assets 1,372,309 1,358,499 Valuation allowance on current deferred tax assets (514,635) (514,635) --------- --------- 857,674 843,864 --------- --------- Net current deferred tax assets 632,739 618,929 ========= ========= Long-term deferred tax liabilities: Depreciation (888,450) (888,450) --------- --------- Long-term deferred tax assets: Reserve for litigation 1,677,000 1,720,000 State net operating loss carryforwards 203,191 203,191 --------- --------- Total long-term deferred tax assets 1,880,191 1,923,191 Valuation allowance on long-term deferred tax assets (728,556) (728,556) --------- --------- 1,151,635 1,194,635 --------- --------- Net long-term deferred tax assets (liabilities) $ 263,185 $ 306,185 ========= =========
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1996 and 1995 is unaudited.) 5. 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 be determined. 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 $500,000 in January 1997, and $100,000 of the minimum royalty in December 1996. 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. 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 months ended December 31, 1996 5.4% compared to the same period in 1995. This was principally due to the success of the Company's holiday licensed programs. Gross profit as a percentage of net sales increased in the three month period ended December 31, 1996 to 35.8% from 35.6% for the three months ended December 31, 1995. Selling, general and administrative ("SGA") expenses as a percentage of sales increased to 32.2% from 31.2% in the three months ended December 31, 1996 compared to the same prior period. The higher SGA expenses were due primarily to higher royalty expenses and some additional costs associated with the Company's Bank Refinancing. In addition, interest expense increased compared to the same prior period due to higher interest rates and a higher outstanding balance as a result of the bank restructuring as well as the additional interest costs associated with the Paradise note. During the three months ended December 31, 1996, net income decreased to $54,000 or $.01 cents per share, from $130,000 or $.01 per share for the three months ended December 31, 1995. This was due to the higher SGA expenses and the higher interest costs. (2) Material Changes in Financial Condition During Fiscal 1996, the Company maintained a line of credit with European American Bank ("EAB") and Chase Manhattan Bank (collectively referred to as "the Banks"), which permitted maximum availability of $34,000,000 subject to the Banks' discretion. As a result of the events leading up to the Paradise Settlement, this line of credit was restructured by the Banks to provide a maximum amount of $22,000,000 for the period ending January 31, 1997. 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 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 vendor 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 proceeds of approximately $975,000. Finally the Company has been aggressively reducing its inventory levels over the last several months. Working capital increased $306,000 to $13,982,000 during the three months ended December 31, 1996. 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. 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 14, 1997 By: /s/ William Visone William Visone, Treasurer and Chief Financial Officer ptk\10q-dec.96 EX-27 2
5 1000 3-MOS SEP-30-1997 DEC-31-1996 707 0 10,413 403 17,767 31,977 8,051 3,902 36,777 17,995 0 0 0 105 15,977 36,777 12,540 12,540 8,047 4,044 0 0 367 90 36 54 0 0 0 54 .01 .01
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