Pentech International, Inc.

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Pentech International, Inc.

195 Carter Drive
Edison, New Jersey 08817
U.S.A.
(732) 287-6640
Fax: (732) 287-6610

Public Company
Incorporated: 1984
Employees: 208
Sales: $57.5 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: PNTK
NAIC: 339941 Pen & Mechanical Pencil Manufacturing; 339942 Lead Pencil & Art Good Manufacturing; 42212 Stationery & Office Supplies Wholesalers

Pentech International, Inc. manufactures and sells pens, pencils, markers, art supplies, school supplies, and other stationery products. Its products are sold under the Pentech name or under other licensed trademark brands. For example, the company has licensing agreements with entities such as Walt Disney, Lucasfilm, Coca-Cola, the NFL, the NHL, and the NBA, to produce writing implements bearing the logos or characters associated with those groups. Pentech’s products are sold through most mass-marketing retail channels, such as Wal-Mart, Kmart, Target, Walgreen, and other office supply chains. Although the company distributes its products throughout the world, approximately 95 percent of the company’s sales come from within the United States.

The Early Years

Although Pentech International, Inc. was not founded until 1984, the company’s beginnings can actually be traced back to more than 40 years earlier. In 1941, at the age of ten, Norman Melnick began working for his uncle in the pen-making business. He learned a lot about the business in these early years and began experimenting with innovations of his own. Fifteen years later, Melnick found his place in history when he invented the first commercially available dry ink for ballpoint pens.

Almost 25 years passed, and Melnick continued to work in the business. In 1980 he purchased Magic Marker, which was the manufacturer and distributor of a line of felt-tip coloring pens. The pens, known as “markers,” came in many different colors and were a huge hit among children. That year, however, the company was having difficulties. Melnick acquired Magic Marker and made efforts to nurse the ailing company back into health.

Three years later, however, Melnick sold Magic Marker and began formulating plans to start his own company with his son, David Melnick. Together, the two created Pentech International, Inc. in 1984. Their new company designed and sold writing and drawing instruments, as well as other art supplies and stationery items.

Pentech began inking distribution deals with major retail chains around the United States, and soon its products were found nationwide in well-known stores such as discount retailers Wal-Mart, Kmart, and Target; drug stores such as Walgreen, CVS, and Eckerd; and office supply stores such as Office Max and Staples.

Pentech was soon quite successful, and by 1987 had grown to the point that the Melnicks were justified in making the decision to take the company public. Two years later the company created a subsidiary called Sawdust Pencil Company to manufacture Pentech’s line of pencil products.

Growth in the Early 1990s

Pentech also brought in revenue and expanded its product line through licensing agreements, in which it obtained the rights to use another company’s logo or trademark characters on its pens, pencils, and markers. One such deal was formed in 1991 with Walt Disney, who agreed to let Pentech manufacture and market products featuring many different Disney cartoon characters.

The company diversified its product line greatly in 1993. At that time, the company formed a new division to handle— surprisingly—the manufacture of a line of cosmetics products. A few years earlier Pentech had taken on extra business for a while and had used its pencil-making machinery to produce private label eye pencils under the Cara-Bella brand name. The enterprise proved to be profitable, and Pentech began to believe that it could churn out even more revenue if it created an entire line of products to sell on its own. The new product line was named Fun Cosmetics and was planned to be targeted mainly at the teenage market.

Shortly following the company’s foray into the land of cosmetics, Pentech inked another licensing agreement—this time with the National Basketball Association (NBA). The agreement called for Pentech to create, produce, and sell items from its writing implements product line featuring the team logos of different NBA franchises. The agreement gave the NBA increased exposure, while also giving Pentech access to a portion of the near $3 billion in sales of NBA-licensed merchandise during the 1993-1994 season. Pentech soon developed its NBA line into an entire Pro Sports line, which eventually came to include National Hockey League (NHL) and National Football League (NFL) licensed products.

Also in 1994, Pentech created and began to sell the Color Club product line for kids. Color Club was a group of art supply activity sets with numerous different themes. For example, there were sets based on dinosaurs and endangered animals and sets with washable markers and stick-on decals. Furthermore, customers could actually enroll in the Pentech Color Club, which entitled members to an art supply kit and a monthly newsletter in exchange for three proofs of purchase and a $2.95 shipping fee.

Meanwhile, by mid-1995 Pentech was implementing marketing plans for its Fun Cosmetics line. The Pentech cosmetics division worked closely with Teen magazine’s in-house advertising staff to develop a print advertisement campaign, into which more than $1 million was funneled during late 1995 and early 1996. After the product line was test-marketed in Wal-Mart for two months and later shipped to other retailers, the print advertisements began running in Teen and Sassy magazines in December 1995. In the October 10, 1995 issue of Brandweek, Pentech cosmetics marketing director Kristin Penta supported the company’s decision to focus mainly on the teenage market: “Teens are where the spending power is... Teens make or influence purchases of more than $200 billion a year, by some estimates.” According to the U.S. Census Bureau, the teenage demographic was projected to increase dramatically to 31 million by 2010.

Shortly thereafter, the Melnicks made another move that surprised some outsiders when they brought in John Linster as the new Pentech president and CEO. Since its inception, Pentech had been a family-run business. On November 15, 1995, however, the company announced the hiring of Linster, who had worked previously for office supplies manufacturing company Avery Dennison. At Avery Dennison, Linster had worked in the area of new product development and had helped create a division that dramatically increased the company’s annual sales. Thus Pentech’s founders hoped that Linster’s experience would help propel their company forward into an era of new growth.

The Mid-1990s and Beyond

In 1996 Pentech’s sales were slipping and the company posted large overall annual losses that were attributed to a lawsuit settlement paid to Paradise Creations. Paradise had sued Pentech for patent infringement with relation to an erasable marker product and had won the case.

Still experiencing financial woes in 1997, Pentech began a reorganization that included a reaffirmed focus on its roots as a writing instrument developer and manufacturer. This decision was based in part on the fact that in 1997 95 percent of Pentech’s business came from sales of its writing instruments, with the other five percent stemming from sales of cosmetics. The cosmetics line, although doing well, was not contributing enough to Pentech’s earnings to make it a worthwhile keeper. Therefore, the company divested the cosmetics division and also reduced its core product line dramatically. This second move helped Pentech capitalize on its most profitable lines while avoiding the manufacture of the less profitable. Fun Cosmetics was spun off and began publicly trading its own stock in mid-March of 1998. Linster also was let go, and David Melnick assumed the role of CEO in 1998.

Meanwhile, Pentech had sued the law firm that had handled its defense in the Paradise Creations patent infringement case. In the new lawsuit, Pentech accused its former New York-based law firm, Cooper and Dunham, of malpractice when the unfavorable judgment was received in the Paradise case. In April 1998 Pentech won its malpractice case and was awarded a $1.3 million settlement.

Even though the company’s sales slipped by about 1.5 percent from 1996 to 1997, in 1997 the company posted earnings of around $600,000 on its overall sales of $60.8 million. This was a welcome improvement after the previous year’s losses and signaled that the company might be back on track again.

The following year, unfortunately, Pentech’s sales slipped, once again, this time to $57.5 million for the 1998 fiscal year. The decrease resulted in a $3.5 million loss for the year. One contributing factor to the lackluster sales activity was a significant decrease in sales of the company’s licensed products—especially that of its NBA products. The NBA experienced a lockout in late 1998; therefore, fan support of the league—and subsequent purchases of NBA products—was at a low.

In March of 1999 Pentech made a move to increase its exposure and sales potential by announcing its intent to develop a web site and engage in e-commerce. According to David Melnick in a company press release, “We intend to leverage the power of our Color Club brand and become a leading marketer of children’s activity products in the World Wide Web.” The company planned to have the new web site up and running by July 1999.

As the end of the 20th century approached, Pentech announced that it was predicting a turnaround of its sales and earnings declines from the previous few years. The company cited the increasingly strong sales of its popular Color Club line since its inception as a high point during the downturn. Furthermore, Pentech focused on aggressively producing and marketing the line to meet consumer demand and to increase Color Club sales. Pentech’s ability to capitalize on its strong products, while refraining from diverting too much attention to its weaker lines, would determine the company’s potential for profitability in the future.