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, 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 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, 1998;
12,530,258 shares of common stock, par value $.01 per share.
Page 1 of 19
There is no Exhibit Index.
INDEX
Part I. Financial Information:
Item 1. Financial Statements. Page
Condensed Consolidated Balance Sheets as of
March 31, 1998 and September 30, 1997 3-4
Condensed Consolidated Statements of Operations for the
three and six months ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the three and six months ended March 31,
1998 and 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-14
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. 15-17
Part II. Other Information:
Item 1. Legal Proceedings. 18
Item 5. Other Material Events. 18
Item 6. Exhibits and Reports on Form 8-K. 18
Signatures 19
<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)
March 31, 1998 September 30, 1997
(unaudited)
Current Assets:
Cash $ - $ 649
Accounts receivable, net of
allowances for doubtful
accounts of $138 at
March 31, 1998 and
$30 at September 30,
1997 10,215 16,293
Settlement receivable (Note 9) 965 -
Inventories (Note 1) 19,112 18,481
Income taxes receivable 1,236 422
Prepaid expenses and other 1,677 1,648
Deferred tax asset (Note 5) - 271
------ ------
Total current assets 33,205 37,764
------ ------
Furniture and equipment (Note 1) 8,630 8,895
Less accumulated depreciation (4,895) (4,931)
------ ------
3,735 3,964
------ ------
Other assets:
Deferred tax assets, long-term
(Note 5) 186 364
Trademarks, net of amortization
(Note 1) 235 270
Due from officer 174 142
------ ------
595 776
------ ------
$ 37,535 $ 42,504
====== ======
See notes to condensed consolidated financial statements.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Cont.)
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
March 31, 1998 September 30, 1997
(unaudited)
Current liabilities:
Notes payable, banks
(Note 2) $ 13,614 $ 17,238
Accounts payable 2,408 1,334
Accrued expenses 1,613 3,441
Settlement note payable 300 300
Deferred tax liability (Note 5) 108 -
------ ------
Total current liabilities 18,043 22,313
------ ------
Other liabilities:
Royalty payable, long-term 200 300
Settlement note payable,
long-term 2,100 2,300
------ ------
2,300 2,600
------ ------
Commitments and contingencies
(Note 4)
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; 12,530,258 shares issued
and outstanding at March 31, 1998
and 12,504,258 shares issued
and outstanding at September 30,
1997 125 125
Capital in excess of par 6,808 6,789
Retained earnings 10,259 10,677
------ ------
17,192 17,591
------ ------
$ 37,535 $ 42,504
====== ======
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
(unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Net sales $10,480 $10,852 $21,368 $23,392
Cost of sales 7,312 7,118 13,958 15,165
------ ------ ------ ------
Gross profit 3,168 3,734 7,410 8,227
------ ------ ------ ------
Selling, general and
administrative expenses 4,515 3,809 8,377 7,853
(Income) from Lawsuit
Settlement (Note 9) (965) - (965) -
Loss from Cosmetics
operation - 687 - 687
Interest expense 332 340 681 707
Interest (income) (8) (1) (9) (9)
------ ------ ------ ------
3,874 4,835 8,084 9,238
------ ------ ------ ------
(Loss) before taxes (706) (1,101) (674) (1,011)
Income tax (benefit) (268) (440) (256) (404)
------ ------ ------ ------
Net (loss) $ (438) $ (661) $ (418) $ (607)
====== ====== ====== ======
Net (loss) per share $ (.03) $ (.05) $ (.03) $ (.05)
basic and diluted ====== ====== ====== ======
(Note 1)
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
Six Months Ended
March 31,
----------------
1998 1997
---- ----
Cash flows from operating activities:
Net (loss) $ (418) $ (607)
------ ------
Adjustments to reconcile net
income to net cash provided for
operating activities:
Depreciation and amortization 466 767
Sale of Cosmetic assets 758 -
(Increase) decrease in:
Accounts receivable 5,993 3,795
Settlement receivable (965) -
Inventories (1,054) 472
Prepaid expenses and other (122) (493)
Income taxes receivable (814) (244)
Due from officer (32) (32)
Deferred tax asset 557 752
Increase (decrease) in:
Bankers' acceptances payable - (1,489)
Accounts payable 1,074 23
Accrued expenses (1,828) (1,956)
Deferred income taxes payable - 145
Settlement payable (300) (900)
------ ------
Total adjustments 3,733 840
------ ------
Net cash provided by
operating activities 3,315 233
------ ------
Cash flows (used in) investing activities:
(Purchase) of furniture/equipment (394) (305)
Decrease (Increase) in trademarks 35 (8)
------ ------
Net cash (used in) investing
activities (359) (313)
------ ------
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's omitted)
(unaudited)
Six Months Ended
March 31,
----------------
1998 1997
---- ----
Cash flows from financing activities:
Net (decrease) in notes
payable $ (3,624) $ (7,947)
Issuance of Common Stock - 20
Increase in additional paid in
capital 19 943
------ ------
Net cash (used in)
financing activities (3,605) (6,984)
------ ------
Net (decrease) in cash and
cash equivalents (649) (7,064)
------ ------
Cash and cash equivalents,
beginning of period 649 7,064
------ ------
Cash and cash equivalents, end of period $ - $ -
======= ======
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 686 $ 834
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 six months ended
March 31, 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
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. 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 March 31, 1998
and the results of operations for the three and six month
periods ended March 31, 1998 and 1997 and cash flows for
the six months ended March 31, 1998 and 1997.
<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and six months ended
March 31, 1998 and 1997 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.
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
(The information for the three and six months ended
March 31, 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 Six months ended
March 31, March 31,
------------------ ----------------
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net (loss) $(438,000) $(661,000) $(418,000) $(607,000)
-------- -------- -------- --------
Numerator for basic and
diluted earnings per
share $(438,000) $(661,000) $(418,000) $(607,000)
========== ========== ========== ==========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 12,530,258 12,496,758 12,517,592 11,496,758
Effect of dilutive
securities:
Employee stock
options 344,597 312,018 414,703 156,009
--------- --------- --------- ---------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions: 12,874,855 12,808,776 12,932,295 11,652,767
========== ========== ========== ==========
Basic and diluted (loss)
per share $(.03) $(.05) $(.03) $(.05)
========== ========== ========== ==========
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and six months ended
March 31, 1998 and 1997 is unaudited.)
Trademarks:
Costs related to trademarks are being amortized over a five-year
period on a straight-line basis.
2. Notes payable, bank:
March 31, September 30,
Rate 1998 Rate 1997
---- -------- ---- ------------
Notes payable 8.375% $10,000,000 8.128% $13,000,000
8.125% 1,000,000 -
Notes payable 9.00 % 2,613,955 9.00% 4,238,066
--------- ----------
Total $13,613,955 $17,238,066
========== ==========
Notes payable as of March 31, 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 covenant,
which violation was waived by BABC.
3. Shareholders' Equity:
In December 1997 and January 1998, options to purchase an aggregate
of 26,000 shares of Common Stock were exercised at $.75 per share
resulting in the issuance of 26,000 shares of Common Stock and proceeds
of $19,500.
4. Contingency:
At March 31, 1998, the Company was contingently liable for outstanding
letters of credit of $303,370.
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (cont.)
(The information for the three and six months
ended March 31, 1998 and 1997 is unaudited.)
5. Income taxes:
Three Months Ended Six Months Ended
March 31, 1998 March 31, 1998
------------------ ----------------
Federal:
Current $ (20,500) $ (20,000)
Deferred (184,000) (176,000)
State:
Current (31,750) (30,000)
Deferred (31,750) (30,000)
-------- --------
$(268,000) $(256,000)
======== ========
Income tax at Federal
statutory rate applied to
income before taxes $(240,000) $(229,000)
Add: state income taxes (63,500) (60,000)
Less: effect of deduction of
state income taxes for
Federal purposes 35,500 33,000
-------- --------
Income tax (benefit) $(268,000) $(256,000)
========= =========<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and six months ended
March 31, 1998 and 1997 is unaudited.)
Significant components of the Company's deferred tax assets and
liability as of March 31, 1998 and September 30, 1997 are as follows:
March 31, September 30,
1998 1997
--------- -----------
Current deferred tax liability:
State taxes on deferred
federal items $ (108,044) $ (149,823)
--------- ---------
Current deferred tax assets:
Bad debts $ 59,278 $ 12,938
Inventory reserve 348,300 520,300
Reserve for returns and
allowances 49,259 313,042
Unicap 12,813 12,813
Cosmetics fixed asset reserve - 123,410
-------- --------
Total current deferred
tax assets 469,650 982,503
Valuation allowance on current
deferred tax assets (469,650) (561,500)
-------- --------
- 421,003
Net current deferred tax
(liability) assets $ (108,044) $ 271,180
============ ============
Long-term deferred tax liabilities:
Depreciation $ (832,800) $ (832,800)
----------- -----------
Long-term deferred tax assets:
Reserve for litigation $ 1,204,000 $ 1,290,000
State net operating loss
carryforwards 310,700 310,700
--------- ---------
Total long-term deferred
tax assets 1,514,700 1,600,700
Valuation allowance on
long-term deferred tax assets (495,915) (404,065)
--------- ---------
$ 1,018,785 $ 1,196,635
--------- ----------
Net long-term deferred tax
assets $ 185,985 $ 363,835
============ ============
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and six months ended
March 31, 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 and April 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 $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.
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.
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.
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 and six months ended March 31,
1998 3.4% and 8.7%, respectively, from the same periods a year ago.
These decreases were primarily due to the success of the Company's
licensed products and holiday programs in the prior year.
Gross profit as a percentage of net sales decreased in the three
and six months ended March 31, 1998 to 30.2% and 34.7% from 34.4% and
35.2%, respectively in the same 1997 periods. This was due to an
aggressive program by the company to gain shelf space for some of its
new products. In addition, one of the company's licensed products was
used by a national office superstore as its lead icon causing
significant returns from other office superstores adversely affecting
gross profit. The company also had a large concentration of sales
from its direct product offerings, which are sold at a lower gross
profit. Finally, the company had a lower percentage of sales from its
licensed products, which historically has had a higher gross profit.
Selling, general and administrative ("SG&A") expenses as a
percentage of sales for the three and six month periods ended March
31, 1998 increased to 43.1% and 39.2%, respectively, from 35.1% and
33.6% in the same prior periods. This was due to incurring a similar
level of fixed costs as in the prior year over a lower sales volume.
In addition, the Company recorded a severance accrual associated with
the termination of some high level employees. The company also
incurred a higher bad debt expense as a result of two bankruptcies and
higher advertising costs associated with in-store promotions. This
was offset by a decrease in royalty expenses associated with the lower
sales volume of the licensed products.
For the second quarter ended March 31, 1998, the Company was
awarded a Settlement in the amount of $965,000, net of legal fees.
During the second quarter ended March 31, 1997, the Company wrote down
the fixed assets of its Cosmetics operation approximately $687,000 to
its net realizable value.
For the three and six month periods ended March 31, 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 six months ended March 31, 1998, the net loss was
$438,000 or $.03 per share and $418,000 or $.03 per share,
respectively, as compared to a net loss of $661,000 or $.05 per share
and $607,000 or $.05 per share for the same prior periods. The
increase in income was primarily due to the income from the lawsuit
settlement, the absence of a loss on Cosmetics offset by the lower
sales volume, lower gross profit and higher SG&A.
(2) Material Changes in Financial Condition
In January 1997, the Company entered into a three year $30,000,000
revolving credit facility with BankAmerica Business Credit Inc.
("BABC") (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 financial
results for the current quarter caused the Company to be in technical
violation of its tangible net worth covenant, which violation was
waived by BABC.
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 first quarterly payments were made in
December 1997 and April 1998. The Note also required a prepayment of
$400,000 as a result of tax benefits received by the Company. 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 open 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 $975,000.
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
received at closing an 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.
In March, 1998, the Company was awarded a Settlement in the amount
of $965,000, net of legal fees.
The Company is exploring its options with respect to software in
order to be in compliance with year 2000. The Company does not expect
the costs associated with this to be material.
Working capital decreased $289,000 to $15,162,000 during the six
months ended March 31, 1998.
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.
(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. there 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 1. Legal Proceedings.
On April 10, 1998, the Company terminated the action it filed in
June 1997 described in the Company's Form 10-K Annual Report for its
fiscal year ended September 30, 1997, the only remaining action
arising from a judgement holding the Company liable to Paradise
Creations, Inc. ("Paradise") for patent infringement. The Company
received a payment of $1,250,000, thereby partially offsetting its
liability to Paradise, and all actions arising from the Paradise
dispute have now been discontinued with prejudice.
Item 5. Other Material Events.
On March 27, 1998, the Company was informed by an attorney for a
recently terminated executive that Mr. Norman Melnick had engaged in
a conflict of interest which possibly violated Company policies and
some laws. Several weeks earlier, at a meeting of the Board of
Directors held on March 2, 1998, Mr. Melnick had formally notified the
Company (after informally notifying counsel for the Company two weeks
earlier) that his daughter was about to begin a stationery business
attempting to sell stickers, stampers and musical pens. He advised
the Board that he would not own any of this Company, but that he would
assist his daughter in training and getting started. Mr. Melnick did
not believe this created a conflict of interest, nor that it would
interfere with his duties at Pentech, but he offered to resign as an
officer and director of the Company. During its March 2, 1998
meeting, the Board of Directors established a Special Committee of
disinterested directors (the "Committee") to conduct an independent
investigation of this matter. To date, the Committee has held one
meeting at which it interviewed Mr. Melnick about his activities. It
learned that the activities were not material and at a very early
stage. It did not appear that such limited activities under the
circumstances violated any Company policies or laws. Following the
interview, the Committee appointed counsel to further investigate this
matter and report back to the Committee. This investigation is
presently underway.
Item 6. Exhibits and Reports on Form 8-K.
(b) None.
<PAGE>
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, 1998 By: s/William Visone
William Visone, Vice President -
Finance and Administration
(Duly authorized officer and
Chief Financial Officer)
WPDOCS\PTK\10Q-MAR.98
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