-----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, T9elrhDPdls8rcQVKTzcLMgpzEAr5ZgXt1+ECatQwc6IEgbHginhtQ446u06pF4h LpHPgQ7kwxPsrMtRWQ0ECQ== 0000760461-97-000010.txt : 19970729 0000760461-97-000010.hdr.sgml : 19970729 ACCESSION NUMBER: 0000760461-97-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970728 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: 97646280 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, 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) (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, 1997 - --------------------- ----------------- $.01 par value 12,496,758 shares Page 1 of 17. There is no Exhibit Index. INDEX Part I. Financial Information: Item 1. Financial Statements (unaudited) Page ---- Condensed Consolidated Balance Sheets as of June 30, 1997 and September 30, 1996. . . . . . . . . . .3-4 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 1997 and 1996. . . . .5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 1997 and 1996. . . . .6-7 Notes to Condensed Consolidated Financial Statements. . 8-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. . . . . . . . . . .14-16 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K. . . . . . . . 16 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . 17 PART I. FINANCIAL INFORMATION PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) June 30, 1997 September 30, 1996 -------------- ------------------ (unaudited) Current Assets: Cash $ 43 $ 7,064 Accounts receivable, net of allowances for doubtful accounts of $15 at June 30, 1997 and $403 at September 30, 1996 19,020 14,538 Inventories (Note 1) 18,928 18,728 Income taxes receivable 471 1,146 Prepaid expenses and other 1,689 1,042 Deferred tax asset (Note 4) 535 619 ------ ------ Total current assets 40,686 43,137 ------ ------ Furniture and equipment (Note 1) 8,606 8,030 Less accumulated depreciation 4,669 3,662 ------ ------ 3,937 4,368 ------ ------ Other assets: Deferred tax assets, long-term (Note 4) - 306 Trademarks, net of amortization (Note 1) 273 268 Due from officer 142 110 ------ ----- 415 684 ------ ----- $ 45,038 $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) June 30, 1997 September 30, 1996 ------------- ------------------ (unaudited) Current liabilities: Notes payable, banks (Note 2) $ 19,338 $ 21,352 Bankers' acceptances payable (Note 2) - 1,489 Accounts payable 1,598 1,593 Accrued expenses 3,752 3,827 Settlement payable - 500 Settlement note payable 500 700 ------ ------- Total current liabilities 25,188 29,461 ------ ------- Other liabilities: Deferred tax liability, long-term (Note 4) 156 - Royalty payable, long-term 300 400 Settlement note payable, long-term 2,100 2,300 ------ ------- 2,556 2,700 ------ ------- Commitments and contin- gencies (Note 3) Shareholders' equity: 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; 12,496,758 shares issued and outstanding at June 30, 1997 and 10,496,758 shares issued and outstanding at September 30, 1996, respectively 125 105 Capital in excess of par 6,789 5,846 Retained earnings 10,380 10,077 ------ ------ 17,294 16,028 ------ ------ $45,038 $48,189 ====== ====== 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, ------------------ ----------------- 1997 1996 1997 1996 ---- ---- ---- ---- Net sales $21,333 $21,976 $44,725 $44,278 Cost of sales 13,907 14,982 29,072 29,590 ------ ------ ------ ------ Gross profit 7,426 6,994 15,653 14,688 ------ ------ ------ ------ Selling, general and administrative expenses 5,520 5,644 13,373 13,650 Loss on Cosmetics operation (Note 5) - - 687 - Interest expense 389 362 1,097 999 Interest (income) - (6) (9) (30) ------ ------ ------ ------ 5,909 6,000 15,148 14,619 ------ ------ ------ ------ Income before taxes 1,517 994 505 69 Income taxes 606 377 202 26 ------ ------ ----- ------ Net income $ 911 $ 617 $ 303 $ 43 ====== ====== ===== ====== Net income per share fully diluted (Note 6) $ .07 $ .06 $ .03 $ .00 ====== ====== ===== ===== 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, ----------------- 1997 1996 ---- ---- Cash flows from operating activities: Net income $ 303 $ 43 ------ ------- Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 1,007 770 (Increase) decrease in: Accounts receivable (4,482) (7,619) Inventories (200) (104) Prepaid expenses and other (647) (713) Income taxes receivable/payable 675 1,308 Due from officer (32) - Deferred tax asset 390 (80) Increase (decrease) in: Bankers' acceptances payable (1,489) 1,327 Accounts payable 5 (598) Accrued expenses (75) 404 Deferred income taxes payable 156 51 Settlement payables (1,000) - ------- ------ Total adjustments (5,692) (5,254) ------- ------ Net cash (used in) operating activities (5,389) (5,211) ------- ------ Cash flows from investing activities: (Purchase) of furniture/equipment (576) (377) (Increase) in trademarks (5) (19) -------- ------- Net cash (used in) investing activities (581) (396) -------- ------- 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, ----------------- 1997 1996 ---- ---- Cash flows from financing activities: Net (decrease) increase in notes payable $(2,014) $ 5,963 Issuance of Common Stock 20 - Increase in additional paid in capital 943 - ------ ------ Net cash (used in) provided by financing activities (1,051) 5,963 ------ ------ Net (decrease) increase in cash and cash equivalents (7,021) 356 Cash and cash equivalents, beginning of period 7,064 - ------ ------ Cash and cash equivalents, end of period $ 43 $ 356 ------ ------ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,193 $ 857 Income taxes $ - $ - 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, 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 Co. ("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. ("Cosmetics"), 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 June 30, 1997, the results of operations for the three and nine month periods ended June 30, 1997 and 1996, and cash flows for the nine month periods ended June 30, 1997 and 1996. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) 1. Summary of significant accounting policies (con't): Inventory and Cost of Sales: Inventory is stated at the lower 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 three 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, 1997 Rates September 30, 1996 ----- ------------- ----- ------------------ Notes payable(a) 8.375% $12,000,000 8.25% $11,725,000 9.0% 7,338,212 8.25% 9,627,498 ---------- ---------- $19,338,212 $21,352,498 ========== ========== Bankers' acceptances payable(a) $ - None $ 1,488,757 ========== ========== (a) Notes and bankers' acceptances payable as of 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 (con't) 2. Notes payable, bank (con't): As a result of the events leading to the Paradise Settlement (defined below), 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 June 30, 1997, the Company was contingently liable for outstanding letters of credit of approximately $581,869. 4. Income taxes: Three Months Ended Nine Months Ended June 30, 1997 June 30, 1997 ------------------ ----------------- Federal: Current $ 145,000 $ 48,000 Deferred 324,000 108,000 State: Current 45,000 15,000 Deferred 92,000 31,000 ------- ------- $ 606,000 $ 202,000 ======= ======= Income tax at Federal statutory rate applied to income before taxes $ 516,000 $ 172,000 Add: state income taxes 137,000 46,000 Less: effect of deduction of state income taxes for Federal purposes (47,000) (16,000) -------- -------- Income taxes $ 606,000 $ 202,000 ======= ======== PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) 4. Income taxes (con't): Significant components of the Company's deferred tax assets (liability) as of June 30, 1997 and September 30, 1996 are as follows: June 30, September 30, 1997 1996 ------- ------------- Current deferred tax liability: State taxes on deferred federal items $ (224,935) $ (224,935) ------- ------- Current deferred tax assets: Bad debts 37,854 231,392 Inventory reserve 414,520 595,980 Reserve for returns and allowances 789,799 369,017 Unicap 33,110 33,110 Reserve for restructuring - 129,000 --------- -------- Total current deferred tax assets 1,275,283 1,358,499 Valuation allowance on current deferred tax assets (514,635) (514,635) --------- --------- 760,648 843,864 --------- --------- Net current deferred tax assets 535,713 618,929 ========= ========= Long-term deferred tax liability: Depreciation (920,700) (888,450) --------- --------- Long-term deferred tax assets: Reserve for litigation 1,290,000 1,720,000 State net operating loss carryforwards 203,191 203,191 --------- --------- Total long-term deferred tax assets 1,493,191 1,923,191 Valuation allowance on long-term deferred tax assets (728,556) (728,556) --------- --------- 764,635 1,194,635 --------- --------- Net long-term deferred tax (liability) assets $ (156,065) $ 306,185 ========= ========= PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) 5. Loss from Cosmetics operation: During the second quarter of 1997, the Board of Directors determined to discontinue its Cosmetics subsidiary and focus its efforts primarily on its writing instruments business. The loss from Cosmetics operation reported in the second quarter reflects the write down of certain assets of the operation to their estimated net realizable value. The Company is still considering several options on how to dispose of the operations. 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 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. In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which is required to be adopted on December 31, 1997. At that time, the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. There is no impact on primary earnings per share for the third quarter ended June 30, 1997 and June 30, 1996, respectively. The impact of Statement 128 on the calculation of fully diluted earnings per share for these quarters is not expected to be material. 7. 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 PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) 7. Paradise Settlement (con't): "Paradise Settlement"). The Company paid Paradise $400,000 in February 1997, $500,000 in January 1997, and $100,000 of the minimum royalty in December 1996. 8. 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 $963,000 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 7 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. This report on Form 10-Q may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to the business and economic risks faced by the Company and the Company's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those set forth in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. (1) Material Changes in Results of Operations Net sales decreased 3% for the three months ended June 30, 1997 as compared to the same period a year ago. This was principally due to higher sales in the prior year from inventory closeouts and private label programs. Net sales increased 1% for the nine months ended June 30, 1997 as compared to the same period a year ago as a result of the success of the Company's licensed products and childrens' activity products. Gross profit as a percentage of net sales increased for the three months ended June 30, 1997 to 34.8% from 31.8% in the same quarter a year ago, and increased for the nine months ended June 30, 1997 to 35% from 33.2% in the same period a year ago. This was primarily due to less closeouts and lower manufacturing costs in 1997 versus 1996. Selling, general and administrative ("SG&A") expenses as a percentage of sales increased for the three months ended June 30, 1997 to 25.9% from 25.7% in the same quarter a year ago as a result of an increase in royalties. SG&A decreased for the nine months ended June 30, 1997 to 29.9% from 30.8% in the same period a year ago as a result of legal fees associated with Paradise litigation and an increase in the reserve for the loss associated with this matter incurred in the prior year. There was an increase in interest expense for the three and nine months ended June 30, 1997 due to interest payments made regarding the Paradise settlement as compared to these periods a year ago. For the three months ended June 30, 1997, net income increased to $911,000 or $.07 per share, from $617,000 or $.06 per share, for the three months ended June 30, 1996. For the nine months ended June 30, 1997, net income increased to $303,000, or $.03 per share, from $43,000, or $.00 per share, for the nine months ended June 30, 1996. (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 required $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 net proceeds of approximately $963,000. During the second quarter of 1997, the Company decided to discontinue its Cosmetics line of product to concentrate its cash flow on its core stationery line of products. The Company is considering several options on how to dispose of the business. The Company wrote down assets of approximately $687,000 to their estimated net realizable value. Finally, the Company has been aggressively reducing its inventory levels over the last several months. Working capital increased $1,822,000 to $15,498,000 for the nine months ended June 30, 1997. Net cash used in operating activities was $5,692,000 for the nine months ended June 30, 1997 as compared to $5,254,000 used in operating activities for the same period a year ago. This was primarily due to a decrease in bankers acceptances payable and settlement payables partially offset by the decrease in accounts receivable and net income in the current period. Net cash used in investing activities for the nine months ended June 30, 1997 was $581,000 as compared to $396,000 for the same period a year ago. This was due to the purchase of manufacturing and computer equipment. Net cash used in financing activities for the nine months ended June 30, 1997 was $1,051,000 as compared to $5,963,000 provided by financing activities for the same period a year ago. This was due to a decrease in notes payable which resulted from the Company's inventory reduction program. The Company anticipates the New Credit Agreement together with anticipated cash from operations should 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) The Company did not file any reports on Form 8-K during the quarter ended June 30, 1997. 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: July 28, 1997 By: /s/ William Visone William Visone, Treasurer and Chief Financial Officer (Duly authorized officer) ptk\10q-jun.97 EX-27 2
5 1,000 9-MOS SEP-30-1997 JUN-30-1997 43 0 19,035 15 18,928 40,686 8,606 4,669 45,038 25,188 0 0 0 125 17,169 45,038 21,333 21,333 13,907 5,520 0 0 389 1,517 606 911 0 0 0 911 .07 .07
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