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 March 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 March 31, 1996;
10,496,758 shares of common stock, par value $.01 per share.
Page 1 of 16
There is no Exhibit Index.
INDEX
Part I. Financial Information:
Item 1. Financial Statements Page
Condensed Consolidated Balance Sheets as of
March 31, 1996 and September 30, 1995 3-4
Condensed Consolidated Statements of Operations for the
three and six months ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows
for the three and six months ended March 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 1. Legal Proceedings 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
March 31, 1996 September 30, 1995
(unaudited)
Current Assets:
Cash $ 1,122 $ -
Accounts receivable, net of
allowances for doubtful
accounts of $88 at
March 31, 1996 and
$70 at September 30,
1995 8,361 12,451
Inventories (Note 1) 25,944 22,844
Income taxes receivable 1,098 1,823
Prepaid expenses and other 1,268 1,227
Deferred Tax Asset 848 991
Total current assets 38,641 36,336
Furniture and equipment (Note 1) 7,826 7,542
Less accumulated depreciation 3,190 2,737
4,636 4,805
Other assets:
Trademarks, net of amortization
(Note 1) 226 267
Due from officer 110 110
336 377
$43,613 $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)
March 31, 1996 September 30, 1995
(unaudited)
Current liabilities:
Notes payable, banks
(Note 2) $16,870 $ 15,169
Bankers' acceptances
payable (Note 2) 2,137 1,842
Accounts payable 1,828 2,383
Accrued expenses 1,207 3,014
Total current liabilities 22,042 22,408
Deferred income taxes 799 765
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 March 31, 1996
and September 30, 1995,
respectively 105 105
Capital in excess of par 5,846 5,846
Retained earnings 14,821 15,394
20,772 21,345
$43,613 $44,518
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
1996 1995 1996 1995
Net sales $10,410 $12,249 $22,302 $21,893
Cost of sales 6,952 7,954 14,608 14,162
Gross profit 3,458 4,295 7,694 7,731
Selling, general and
administrative expenses 4,292 3,380 8,005 5,860
Loss on Mexican affiliate - - - 350
Interest expense 312 319 636 476
Interest (income) (12) (8) (23) (17)
4,592 3,691 8,618 6,669
(Loss) Income
before taxes (1,134) 604 (924) 1,062
Income tax (benefit) (431) 229 (351) 404
provision
Net (loss) income $ (703) 375 $ (573) $ 658
Net (loss) income $ (.07) $ .04 $ (.05) $ .06
per share primary
and fully diluted
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
Six Months Ended
March 31,
1996 1995
Cash flows from operating activities:
Net (loss) income $ (573) $ 658
Adjustments to reconcile net
income to net cash provided for
(used in) operating activities:
Depreciation and amortization 513 486
(Increase) decrease in:
Accounts receivable 4,090 1,290
Inventories (3,100) (3,660)
Prepaid expenses and other (41) (741)
Income taxes receivable/payable 725 68
Due from officer - (44)
Deferred tax asset 143 -
Increase (decrease) in:
Bankers' acceptances payable 295 354
Accounts payable (555) 263
Accrued expenses (1,807) (677)
Deferred income taxes payable 34 60
Total adjustments 297 (2,601)
Net cash (used in)
operating activities (276) (1,943)
Cash flows (used in) investing activities:
(Purchase) of furniture/equipment (284) (447)
(Increase) in trademarks (19) (41)
(Increase) in equipment deposits - (47)
Net cash (used in) investing activities (303) (535)
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's omitted)
Six Months Ended
March 31,
1996 1995
Cash flows from financing activities:
Net increase in notes payable $ 1,701 $ 5,760
Payments to acquire treasury stock - (3,782)
Payments to retire Common Stock options - (8)
Net cash provided by
financing activities 1,701 1,970
Net increase (decrease) in
cash and cash equivalents 1,122 (508)
Cash and cash equivalents,
beginning of period - 698
Cash and cash equivalents, end of period $ 1,122 $ 190
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 574 $ 476
Income taxes $ 140 $ 276
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and six months ended March 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'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 financial position
at March 31, 1996, the results of operations for the three and six
month periods ended March 31, 1996 and 1995 and cash flows for the
six month periods ended March 31, 1996 and 1995.
Inventory:
Inventory is stated at the lower of cost or market (first-in,
first-out). Interim inventories are based on a calculated 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.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
Trademarks:
The costs thereof are being amortized over a five-year period
on a straight-line basis.
2. Notes payable, bank:
Rate March 31, 1996 Rate September 30, 1995
Notes payable 6.77% $ 8,370,000 7.875% $ 9,000,000
Notes payable 7.31% 7,100,000 8.75% 6,169,000
Notes payable 8.25% 1,400,000 -
Total $16,870,000 $15,169,000
Bankers' payable $ 2,137,000 $ 1,842,000
The above were collateralized by a security interest in
substantially all of the assets of the Company. A credit line of
$34,000,000 is available to the Company at the discretion of the
banks. 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 March 1995, the Company purchased
890,400 shares of its Common Stock for prices ranging from $3.50 to
$5.375 per share. The Company has completed both of its 500,000
share repurchase programs.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
4. Contingency:
At March 31, 1996 the Company was contingently liable for
outstanding letters of credit of $6,242,952.
5. Income taxes:
Three Months Ended Six Months Ended
March 31, 1996 March 31, 1996
Federal:
Current $(181,000) $(130,000)
Deferred (181,500) (165,500)
State:
Current (57,000) (45,000)
Deferred (11,500) (10,500)
$(431,000) $(351,000)
Income tax at Federal statutory
rate applied to income before
taxes $(386,000) $(314,000)
Add: state income taxes (68,000) (55,500)
Less: effect of deduction of
state income taxes for
Federal purposes 23,000 18,500
Income taxes benefit $(431,000) $(351,000)
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
Significant components of the Company's deferred tax liability as of
March 31, 1996 and September 30, 1995 are as follows:
March 31, September 30,
1996 1995
Deferred tax liability:
Depreciation $799,000 $765,000
Deferred tax assets:
Reserve for lawsuit 189,000 141,000
Inventory reserve 520,000 520,000
Reserve for returns and
allowances 51,000 260,000
Unicap 34,000 34,000
Loss on foreign affiliate 45,000 27,000
Other 9,000 9,000
848,000 991,000
Deferred income tax asset $ 49,000 $226,000
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:
During the quarter ended March 31, 1996, a trial as to damages
was held concerning the Company's infringement of a patent entitled
"Kit Comprising Multi-Colored Fluid Dispenser Markers Together with
Eradicating Fluid Dispenser." No decision has been reached as of
the date hereof as a result of such trial, and the Company is
unable to predict the outcome of said trial. The Company has
established a reserve within the range of outcomes it believes are
likely as a result of such trial. The Company is unable to
determine whether its determination of a range of outcomes is
accurate and although the Company has several options in the event
of a decision outside of the range of outcomes it anticipates as a
result of such trial, there is no assurance that the decision
resulting from such trial will not have a material adverse effect
on the Company.
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 March 31, 1996
15% and increased 2% for the six months ended March 31, 1996 as
compared to the same periods a year ago. The three month decrease
was principally due to a decline in some seasonal spring time
promotions sold a year ago, while the six month increase was
primarily due to the success of the Company's licensed products.
Gross profit as a percentage of net sales decreased in the
three months ended March 31, 1996 to 33.2% from 35.1% in the same
1995 period, and to 34.5% in the six months ended March 31, 1996
from 35.3% in the same 1995 period. This decline was primarily due
to higher domestic manufacturing costs and an increase in the
Company's reserve percentage for returns and allowances.
Selling, general and administrative (SG&A) expenses as a
percentage of net sales increased during the three months ended
March 31, 1996 to 41.2% from 27.6% in the prior year. This
increase was primarily related to the legal fees incurred in the
quarter associated with the trial discussed in footnote 7 as well
as an increase in the reserve for the loss associated with this
matter. The increase was also associated with the increase in
royalties, the continued development of the Company's new marketing
initiatives, higher freight costs, and an increase in the reserve
level for customer chargebacks. SGA increased for the six months
ended March 31, 1996 from 26.8% to 35.9% of sales compared to the
same prior period. This increase was primarily related to the
costs incurred in the second quarter ended March 31, 1996 discussed
above as well as the cost associated with the Company moving and
establishing a new distribution center in the first quarter ended
December 31, 1995.
There was a decrease in interest expense for the three months
ended March 31, 1996 due to lower interest rates for the period as
compared to the year ago period. Interest expense for the six
months ended March 31, 1996 were higher due to the higher level of
borrowings that were maintained by the Company after the completion
of its stock buy-back program in December 1994.
(2) Material Changes in Financial Condition
Working capital decreased $329,000 to $16,599,000 at March 31,
1996. This decrease was primarily due to financing the Company's
loss during the six months ended March 31, 1996.
Net cash used in operating activities was $276,000 during the
six months ended March 31, 1996 as compared to $1,943,000 in the
corresponding period last year. This was primarily due to a
decrease in accounts receivable, less inventory build-up and lower
accrued expenses, partially offset by the net loss during the
current period. Net cash used in investing activities during the
six months ended March 31, 1996 was $303,000 as compared to
$535,000 during the corresponding year ago period. This was
primarily due to decreases in purchases of equipment in the current
period. Net cash provided by financing activities during the six
months ended March 31, 1996 was $1,701,000 as compared to
$1,970,000 during the year ago period. Notes payable increased at
a substantially slower rate because the Company did not acquire
additional treasury stock during the current period.
Subject to extraordinary conditions, the Company believes it
has ample liquidity to finance its continuing obligations. The
Company is prohibited without the consent of its primary lenders,
from declaring cash dividends. Although the Company has been
required to amend certain of its covenants with its primary
lenders, it believes its relationship with its primary lenders
remains stable and good.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Pentech International, Inc. v. Leon Hayduchok, All-Mark
Corporation and Paradise Creations, Inc., filed in the U.S.
District Court, Southern District of New York ("SDNY") in October
1987.
This action is 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. A trial as to liability was held. 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.
During the quarter ended March 31, 1996, a trial as to damages
was held. No decision has been reached as of the date hereof as a
result of said trial, and the Company is unable to predict the
outcome of said trial. The Company has established a reserve
within the range of outcomes it believes are likely as a result of
such trial. The Company is unable to determine whether its
determination of a range of outcomes is accurate and although the
Company has several options in the event of a decision outside of
the range of outcomes it anticipates as a result of such trial,
there is no assurance that the decision resulting from such trial
will not have a material adverse effect on the Company.
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: May 14, 1996 By: s/William Visone
William Visone, Treasurer
(Duly authorized officer and
Chief Financial Officer)
ptk\10q-mar.96