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, 1998
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)
(732) 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: As of August 3, 1998 there were 12,570,258 shares of common
stock outstanding, par value $.01 per share.
Page 1 of 20. There is no Exhibit Index.
INDEX
Part I. Financial Information:
Item 1. Financial Statements (unaudited). Page
Condensed Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1997 3-4
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 1998 and 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-15
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operation. 16-18
Part II. Other Information:
Item 5. Other Information. 19
Item 6. Exhibits and Reports on Form 8-K. 19
Signature 20
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
June 30, 1998 September 30, 1997
------------- ------------------
(unaudited)
Current Assets:
Cash $ 56 $ 649
Accounts receivable, net of
allowances for doubtful
accounts of $138 at
June 30, 1998 and
$30 at September 30,
1997 18,863 16,293
Inventories (Note 1) 19,880 18,481
Income taxes receivable 272 422
Prepaid expenses and other 1,626 1,648
Deferred tax asset (Note 5) 316 271
------ ------
Total current assets 41,013 37,764
------ ------
Furniture and equipment (Note 1) 8,856 8,895
Less accumulated depreciation (5,128) (4,931)
------ ------
3,728 3,964
------ ------
Other assets:
Deferred tax assets, long-term
(Note 5) 234 364
Trademarks, net of amortization
(Note 1) 219 270
Due from officer 174 142
------ ------
627 776
------ ------
$45,368 $42,504
====== ======
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (CONT'D)
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
June 30, 1998 September 30, 1997
------------- ------------------
(unaudited)
Current liabilities:
Notes payable, bank
(Note 2) $ 19,279 $ 17,238
Accounts payable 2,412 1,334
Accrued expenses 3,011 3,441
Settlement note payable (Note 6) 300 300
------ ------
Total current liabilities 25,002 22,313
------ ------
Other liabilities:
Royalty payable, long-term (Note 6) 200 300
Settlement note payable,
long-term (Note 6) 2,100 2,300
------ ------
Commitments and contin-
gencies (Note 4) 2,300 2,600
------ ------
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;
12,570,258 shares issued and
outstanding at June 30, 1998 and
12,504,258 shares issued and
outstanding at September 30,
1997, respectively 126 125
Capital in excess of par 6,838 6,789
Retained earnings 11,102 10,677
------ ------
18,066 17,591
------ ------
$45,368 $42,504
====== ======
See notes to condensed consolidated financial statements.
<PAGE>
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,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $21,931 $21,333 $43,299 $44,725
Cost of sales 14,995 13,907 28,954 29,072
------ ------ ------ ------
Gross profit 6,936 7,426 14,345 15,653
------ ------ ------ ------
Selling, general and
administrative expenses 5,213 5,520 13,590 13,373
(Income) from Lawsuit
settlement (Note 9) - - (965) -
Loss on Cosmetics
operation - - - 687
Interest expense 362 389 1,043 1,097
Interest (income) - - (9) (9)
------ ------ ------ ------
5,575 5,909 13,659 15,148
------ ------ ------ ------
Income before
taxes 1,361 1,517 686 505
Income taxes 517 606 261 202
------ ------ ------ ------
Net income $ 844 $ 911 $ 425 $ 303
====== ====== ====== ======
Net income per share
basic and diluted
(Note 1) $ .07 $ .07 $ .03 $ .03
====== ====== ====== ======
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1998 1997
---- ----
Cash flows from operating activities:
Net income $ 425 $ 303
------ ------
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Depreciation and amortization 699 1,007
Sale of Cosmetic assets 758 -
(Increase) decrease in:
Accounts receivable (2,655) (4,482)
Inventories (1,822) (200)
Prepaid expenses and other (71) (647)
Income taxes receivable 150 675
Due from officer (32) (32)
Deferred tax asset 85 390
Increase (decrease) in:
Bankers' acceptances payable - (1,489)
Accounts payable 1,078 5
Accrued expenses (430) (75)
Deferred income taxes payable - 156
Settlement payables (300) (1,000)
------ ------
Total adjustments (2,540) (5,692)
------ ------
Net cash (used in) operating
activities (2,115) (5,389)
------ -------
Cash flows from investing activities:
(Purchase) of furniture/equipment (620) (576)
Decrease (Increase) in trademarks 51 (5)
------ -------
Net cash (used in) investing activities (569) (581)
------ -------
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's omitted)
(unaudited)
Nine Months Ended
June 30,
-----------------
1998 1997
---- ----
Cash flows from financing activities:
Net increase (decrease) in
notes payable $ 2,041 $(2,014)
Proceeds from the issuance
of Common Stock 50 963
------- ------
Net cash provided by (used in)
financing activities 2,091 (1,051)
------- -------
Net (decrease) in cash
and cash equivalents (593) (7,021)
Cash and cash equivalents,
beginning of period 649 7,064
------- ------
Cash and cash equivalents, end of period $ 56 $ 43
======= ======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,031 $ 1,193
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1998 and 1997 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. During its fiscal year ended
September 30, 1997, the Company decided to dispose of this product
line. 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, 1998, the results of operations for the three
and nine month periods ended June 30, 1998 and 1997, and cash flows
for the nine months ended June 30, 1998 and 1997.
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,
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
(The information for the three and nine months ended June 30, 1998
and 1997 is unaudited)
1. Summary of significant accounting policies (con't):
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.
Use of Estimates:
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Stock Based Compensation:
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," encourages, but does not
require companies to record compensation cost for stock-based
employee compensation plans at fair value. 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.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Con't)
(The information for the three and nine months ended
June 30, 1998 and 1997 is unaudited.)
Earnings per Common Equivalent Shares:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which was adopted by the Company
in December, 1997. The Company is required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating basic earnings per
share, the dilutive effect of stock options will be excluded.
The following table sets for the computation of basic and diluted
earnings per share:
Three months ended Nine months ended
June 30, June 30,
1998 1997 1998 1997
Numerator:
Net Income $ 844,000 $ 911,000 $ 425,000 $ 303,000
Numerator for basic and
diluted earnings per
share $ 844,000 $ 911,000 $ 425,000 $ 303,000
========== ========== ========== ==========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 12,543,591 12,496,758 12,526,258 11,830,091
Effect of dilutive
securities:
Employee stock
options 256,782 383,243 362,063 231,754
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions: 12,800,373 12,880,001 12,888,321 12,061,845
========== ========== ========== ==========
Basic and diluted income
per share $.07 $.07 $.03 $.03
========== ========== ========== ==========
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Con't)
(The information for the three and nine months ended
June 30, 1998 and 1997 is unaudited.)
2. Notes payable, bank:
Rates June 30, 1998 Rates September 30, 1997
----- ------------- ----- ------------------
Notes payable(a) 8.188% $11,000,000 8.128% $13,000,000
8.125% $ 4,000,000
9.0% $ 4,279,409 9.0% $ 4,238,066
---------- ----------
$19,279,409 $17,238,066
========== ==========
Notes payable as of June 30, 1998 and September 30, 1997 were
advanced under a three year $30,000,000 Revolving Credit Agreement with
BankAmerica Business Credit, Inc. ("BABC") (the "Credit Agreement").
Borrowings under the Credit Agreement are subject to limitations based
upon eligible inventory and accounts receivable as defined in the 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. The financial results of the current quarter caused the
Company to be in technical violation of its tangible net worth and its
interest coverage covenants, which violation was waived by BABC.
3. Shareholders' Equity:
In December 1997, January 1998 and June 1998, options to purchase an
aggregate of 66,000 shares of Common Stock were exercised at $.75 per
share resulting in the issuance of 66,000 shares of Common Stock and
proceeds of $49,500.
4. Contingency:
At June 30, 1998, the Company was contingently liable for
outstanding letters of credit of approximately $179,390.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Con't)
(The information for the three and nine months ended
June 30, 1998 and 1997 is unaudited.)
5. Income taxes: Three Months Ended Nine Months Ended
June 30, 1998 June 30, 1998
------------------ -----------------
Federal:
Current $ 34,000 $ 134,000
Deferred 361,000 65,000
State:
Current 11,000 42,000
Deferred 111,000 20,000
-------- --------
$ 517,000 $ 261,000
======== ========
Income tax at Federal statutory
rate applied to income before
taxes $ 463,000 $ 233,000
Add: state income taxes 122,000 62,000
Less: effect of deduction of
state income taxes for
Federal purposes (68,000) (34,000)
-------- -------
Income taxes $ 517,000 $ 261,000
======== =======
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
(The information for the three and nine months ended
June 30, 1998 and 1997 is unaudited.)
5. Income taxes (con't):
Significant components of the Company's deferred tax assets
(liability) as of June 30, 1998 and September 30, 1997 are as follows:
June 30, September 30,
1998 1997
------- -------------
Current deferred tax liability:
State taxes on deferred
federal items $ (143,538) $ (149,823)
---------- ----------
Current deferred tax assets:
Bad debts $ 59,278 $ 12,938
Inventory reserve 348,300 520,300
Reserve for returns and
allowances 601,017 313,042
Unicap 12,813 12,813
Cosmetic fixed asset reserve - 123,410
---------- ----------
Total current deferred
tax assets 1,021,408 982,503
Valuation allowance on current
deferred tax assets (561,500) (561,500)
---------- ----------
$ 459,908 $ 421,003
---------- ----------
Net current deferred tax assets $ 316,370 $ 271,180
========== ==========
Long-term deferred tax liability:
Depreciation $ (832,800) $ (832,800)
---------- ----------
Long-term deferred tax assets:
Reserve for litigation $1,161,000 $1,290,000
State net operating loss
carryforwards 310,700 310,700
---------- ----------
Total long-term deferred
tax assets 1,471,700 1,600,700
Valuation allowance on
long-term deferred
tax assets (404,065) (404,065)
---------- ----------
$1,067,635 $1,196,635
---------- ----------
Net long-term deferred tax
assets $ 234,835 $ 363,835
========== ==========
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
(The information for the three and nine months ended
June 30, 1998 and 1997 is unaudited.)
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 $400,000 in February 1997,
$500,000 in January 1997, and $200,000 of the minimum royalty. In
addition, the note requires $100,000 quarterly principal payments
commencing January 1, 1998. Quarterly principal payments were made in
December 1997, April 1998 and July 1998.
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 $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 6 and to enable
the Company to fund its requirements for capital expenditures.
8. Sale of Cosmetic Assets
In November 1997, the Company entered into an agreement to sell
fixed assets and inventory of its Cosmetics subsidiary to an outside
company (significantly owned by a former employee) for its book value.
In December 1997, $100,000 was received as a down payment, $150,000
received at closing and a note was issued for approximately $508,000
bearing interest at a rate of 9% per annum. The terms of the note
provide that the principal be reduced by $150,000 a month commencing
February 1998, until repaid. This note was paid in full in March
1998.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (con't)
(The information for the three and nine months ended
June 30, 1998 and 1997 is unaudited.)
9. Income from Lawsuit Settlement
In March 1998, the Company executed a settlement agreement
providing for the Company to receive a payment in the amount of
$965,000, net of legal fees, which payment was received in April,
1998.
<PAGE>
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 increased in the three months ended June 30, 1998 2.8%
from the same period a year ago as a result of the success of the
children's activity products and an increase in sales to the office
superstores. Net sales decreased for the nine months ended June 30,
1998 3.2% from the same period a year ago. This was due to larger
sales of the Company's licensed products and additional holiday
programs in the prior year.
Gross profit as a percentage of net sales decreased in the three
and nine months ended June 30, 1998 to 31.6% and 33.1% from 34.8% and
35%, respectively in the same 1997 periods. This was due to an
increase in sales from its direct product offerings, which are sold at
a lower gross profit. In addition, the Company had a lower percentage
of its sales from licensed products, which historically offer higher
gross profit margins. The Company also began an aggressive program to
gain shelf space for some of its new products.
Selling, general and administrative ("SG&A") expenses as a
percentage of sales for the three months ended June 30, 1998 decreased
to 23.8% from 25.9% in the same prior period. This was partially due
to an aggressive cost reduction program begun in March 1998. This
program has included reduced salaries at the senior management level
and a reduction in the use of outside consultants. In addition, there
was a decrease in royalty expenses associated with the lower sales
volume of licensed products. SG&A expenses as a percentage of sales
for the nine months ended June 30, 1998 increased to 31.4% from 29.9%
in the same prior period. This was due to incurring a similar level
of fixed costs as in the prior year over a lower sales volume. In
addition, during the current nine month period the Company recorded a
severance accrual associated with the termination of some high level
employees. The Company also incurred a higher bad debt expense in the
current nine month period as a result of the bankruptcies of two of
its customers.
For the three and nine months ended June 30, 1998, interest
expense decreased as compared to the same periods a year ago. This
was due to lower interest rates and a lower outstanding balance.
For the three and nine months ended June 30, 1998, the net income
was $844,000 or $.07 per share and $425,000 or $.03 per share,
respectively, as compared to a net income of $911,000 or $.07 per
share and $303,000 or $.03 per share for the same periods in the prior
fiscal year. The decrease in income for the three months ended June
30, 1998 was primarily due to the lower gross profit. The increase in
income for the nine months ended June 30, 1998 was due to the income
from the lawsuit settlement and the absence of a loss on Cosmetics
offset by higher SG&A expenses and a lower gross profit margin.
(2) Material Changes in Financial Condition
In January 1997, the Company entered into a three year Credit
Agreement with BABC. The amount of drawings under the Credit
Agreement are subject to limitations based upon eligible inventory and
accounts receivable as described in the Credit Agreement. The Credit
Agreement is collateralized by a security interest in substantially
all of the assets of the Company. In addition, in accordance 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. The Company was in technical violation of
its tangible net worth and interest coverage covenants at June 30,
1998, which violation was waived by BABC.
The Paradise Settlement requires $100,000 quarterly principal
payments commencing January 1, 1998, which payments were made. The
Company does not foresee any difficulty meeting its obligations
pursuant to the Paradise Settlement.
In November 1997, the Company entered into an agreement to sell
the fixed assets and inventory of its Cosmetics subsidiary to an
outside company (significantly owned by a former employee) for its
book value. In December 1997, $100,000 was received as a down
payment, $150,000 was received at closing and a note was issued for
approximately $508,000 bearing interest at a rate of 9% per annum.
This note was paid in full in March 1998.
In March 1998, the Company as part of the settlement of a lawsuit
was awarded $965,000, net of legal fees.
With respect to the Year 2000 issue, the Company is in the
process of ensuring that all internal computer equipment,
telecommunications equipment, computer applications, manufacturing,
distribution and business equipment will be Year 2000 compliant. Upon
completion of that review, the Company will make a full assessment of
the risk associated with the Year 2000 issue and determine whether the
consequences will have a material effect on the Company's business.
In addition, if necessary, upon completion of the assessment, the
Company will develop a complete contingency plan. The Company
utilizes a third party software package to run its internal operating
and accounting systems and has purchased the Year 2k compliant version
of this software which should be operating by December 1998. The
Company is also contacting its vendors and customers in order to
assess any third party risk. The Company does not expect the costs
associated with becoming year 2k compliant to be material and believes
that it will be absorbed for the most part in its normal information
technology budget.
Working capital increased $560,000 to $16,011,000 during the nine
months ended June 30, 1998.
The Company anticipates that the Credit Agreement 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.
(3) Safe Harbor Statement
Statements which are not historical facts, including statements
about the Company's confidence and strategies and its expectations
about new and existing products, technologies and opportunities,
market and industry segment growth, demand and acceptance of new and
existing products are forward looking statements that involve risks
and uncertainties. These include, but are not limited to, product
demand and market acceptance risks; the impact of competitive products
and pricing; the results of financing efforts; the loss of any
significant customers of any business; the effect of the Company's
accounting policies; the effects of economic conditions and trade,
legal, social, and economic risks, such as import, licensing, and
trade restrictions; the results of the Company's business plan and the
impact on the Company of its relationship with its lenders.
<PAGE>
PART II. OTHER INFORMATION
Item 5. Other Information.
Regarding the potential conflict of interest involving Mr. Norman
Melnick, Chairman of the Board of Directors of the Company, that was
disclosed in the Company's Form 10-Q Quarterly Report for the period
ended March 31, 1998, the Company established a Special Committee
comprised of disinterested directors (the "Committee") to conduct an
independent investigation. The Committee appointed counsel to assist
it in its investigation. During the quarter, counsel completed its
review and reported its findings to the Committee. The Committee met
with Mr. Melnick and advised him of counsel's recommendation that it
found no impropriety, but it recommended that Mr. Melnick disassociate
with his daughter's company to avoid any appearance of impropriety.
Mr. Melnick has voluntarily agreed to do so. Counsel also recommended
that the Company adopt and implement a formal policy designed to
reduce potential conflicts of interest in the future. At a meeting of
the Board held on August 5, 1998, the Company adopted such a policy,
which has been circulated to employees and has been included in the
Company's Employee Policy Manual.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
3.1 Certificate of Incorporation of the Company, as amended,
incorporated by reference to Exhibit 3.1 to Registration
Statement No. 2-95102-NY of the Company ("Form S-18").
3.2 The Company's By-Laws are incorporated by referenced to
Exhibit 3.2 of Form S-18.
10.1 The 1989 Stock Option Plan incorporated by reference to the
Registration Statement No. 33-27009 ("Form S-8").
10.2 The 1993 Stock Option Plan incorporated by reference to the
1992 Form 10-K.
10.3 The 1995 Stock Option Plan incorporated by reference to the
Registration Statement No. 333-30595 filed on Form S-8.
27 Financial Data Schedule
(b) Reports on Form 8-K.
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: August 12, 1998 By: /s/ William Visone
William Visone, Vice-President,
Finance and Administration
(Duly authorized officer)
WPDOCS\PTK\10Q-JUN.98
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 56
<SECURITIES> 0
<RECEIVABLES> 19,001
<ALLOWANCES> 138
<INVENTORY> 19,880
<CURRENT-ASSETS> 41,013
<PP&E> 8,856
<DEPRECIATION> (5,128)
<TOTAL-ASSETS> 45,368
<CURRENT-LIABILITIES> 25,002
<BONDS> 0
0
0
<COMMON> 126
<OTHER-SE> 17,940
<TOTAL-LIABILITY-AND-EQUITY> 45,368
<SALES> 43,299
<TOTAL-REVENUES> 43,299
<CGS> 28,954
<TOTAL-COSTS> 28,954
<OTHER-EXPENSES> 12,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,034
<INCOME-PRETAX> 686
<INCOME-TAX> 261
<INCOME-CONTINUING> 425
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 425
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
