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, 1999
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 July 26, 1999 there were 12,570,258 shares of common
stock outstanding, par value $.01 per share.
Page 1 of 21.
There is no Exhibit Index.
INDEX
Page
Part I. Financial Information:
Item 1. Financial Statements (unaudited).
Condensed Consolidated Balance Sheets as of
June 30, 1999 and September 30, 1998 3-4
Condensed Consolidated Statements of Operations for the
three and nine months ended June 30, 1999 and 1998 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended June 30, 1999 and 1998 6-7
Notes to Condensed Consolidated Financial Statements 8-16
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operation. 17-19
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K. 20
Signature 21
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, 1999 September 30, 1998
(unaudited)
Current Assets:
Cash $ - $ 759
Accounts receivable, net of
allowances for doubtful
accounts of $79 at
June 30, 1999 and
$30 at September 30,
1998 21,302 14,327
Inventories (Note 1) 16,410 20,015
Income taxes receivable - 448
Prepaid expenses and other 1,660 1,436
Deferred tax asset (Note 5) - -
Available-for-Sale Security (Note 7) 325 622
Total current assets 39,697 37,607
Furniture and equipment (Note 1) 9,299 8,934
Less accumulated depreciation (6,160) (5,372)
3,139 3,562
Other assets:
Deferred tax assets, long-term
(Note 5) - -
Trademarks, net of amortization
(Note 1) 233 240
Due from officer 174 174
407 414
$43,243 $41,583
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, 1999 September 30, 1998
(unaudited)
Current liabilities:
Notes payable, bank
(Note 2) $19,691 $18,618
Accounts payable 3,528 2,455
Accrued expenses 3,022 3,352
Settlement note payable (Note 6) 300 300
Total current liabilities 26,541 24,725
Other liabilities:
Royalty payable, long-term (Note 6) 50 100
Settlement note payable,
long-term (Note 6) 1,600 2,000
1,650 2,100
Commitments and contin-
gencies (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;
12,570,258 shares issued and
outstanding at June 30, 1999 and
September 30, 1998, respectively 125 125
Capital in excess of par 6,838 6,838
Retained earnings 7,764 7,173
Unrealized gain on Available-for-
Sale Security (Note 7) 325 622
15,052 14,758
$43,243 $41,583
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,
1999 1998 1999 1998
Net sales $25,472 $21,931 $45,228 $43,299
Cost of sales 16,976 14,995 30,361 28,954
Gross profit 8,496 6,936 14,867 14,345
Selling, general and
administrative expenses 6,093 5,213 13,234 13,590
(Income) from Lawsuit
settlement (Note 9) - - - (965)
Loss (income) from Sale
of Security (Note 7) 11 - (2) -
Interest expense 347 362 1,047 1,043
Interest (income) - - (3) (9)
6,451 5,575 14,276 13,659
Income before
taxes 2,045 1,361 591 686
Income taxes - 517 - 261
Net income $ 2,045 $ 844 $ 591 $ 425
Net income per share
basic and diluted
(Note 1) $ .16 $ .07 $ .05 $ .03
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,
1999 1998
Cash flows from operating activities:
Net income $ 591 $ 425
Adjustments to reconcile net
income to net cash (used in)
operating activities:
Depreciation and amortization 788 699
Sale of Cosmetic assets - 758
(Increase) decrease in:
Accounts receivable (6,975) (2,655)
Inventories 3,605 (1,822)
Prepaid expenses and other (224) (71)
Income taxes receivable 448 150
Due from officer - (32)
Deferred tax asset - 85
Increase (decrease) in:
Accounts payable 1,073 1,078
Accrued expenses (330) (430)
Settlement payables (450) (300)
Total adjustments (2,065) (2,540)
Net cash (used in) operating
activities (1,474) (2,115)
Cash flows from investing activities:
(Purchase) of furniture/equipment (365) (620)
Decrease in trademarks 7 51
Net cash (used in) investing activities (358) (569)
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,
1999 1998
Cash flows from financing activities:
Net increase in notes
payable $ 1,073 $ 2,041
Proceeds from the issuance
of Common Stock - 50
Net cash provided by
financing activities 1,073 2,091
Net (decrease) in cash
and cash equivalents (759) (593)
Cash and cash equivalents,
beginning of period 759 649
Cash and cash equivalents, end of period $ - $ 56
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest $ 1,142 $ 1,031
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, 1999 and 1998 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, 1999, the results of operations
for the three and nine month periods ended June 30, 1999 and
1998, and cash flows for the nine months ended June 30, 1999
and 1998.
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
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited)
1. Summary of significant accounting policies (cont'd):
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.
Trademarks:
The costs thereof are being amortized over a five-year
period on a straight-line basis.
Revenue recognition:
Revenue is recognized upon shipment of product to the
customer.
Fair Value of Financial Instruments:
The fair value for cash and accounts receivable
approximates carrying amounts due to the short maturity of
these instruments. The fair value amounts for notes payable
approximate carrying amounts due to the variable interest
rates.
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.
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited.)
1. Summary of significant accounting policies (Cont d):
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.
Earnings per share:
In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, Earnings Per Share, which was
adopted by the Company in December, 1997. SFAS No. 128
replaced the calculation of primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share exclude
any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All
earnings per share for all periods have been presented, and
where appropriate, restated to conform to the SFAS No. 128
requirements.
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited.)
1. Summary of significant accounting policies (Cont d):
Earnings per share (Cont d):
The following table sets forth the computation of basic and diluted
earnings per share:
Three months ended Nine months ended
June 30, June 30,
1999 1998 1999 1998
Numerator:
Net Income $2,045,000 $ 844,000 $ 591,000 $ 425,000
Numerator for basic and
diluted earnings per
share $2,045,000 $ 844,000 $ 591,000 $ 425,000
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 12,570,258 12,543,591 12,570,258 12,526,258
Effect of dilutive
securities:
Employee stock
options - 256,782 37,140 362,063
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions: 12,570,258 12,800,373 12,607,398 12,888,321
Basic and diluted
income per share $ .16 $ .07 $ .05 $ .03
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Th e information for the three and nine months ended
Jun e 30, 1999 and 1998 is unaudited.)
2. Notes payable, bank:
June 30, 1999 September 30, 1998
Revolving line of credit
interest payable monthly
at prime plus .5% (8.25%
at June 30, 1999 and 9%
at September 30, 1998) $ 5,961,000 $ 4,618,000
Revolving line of credit
interest payable at maturity
at libor plus 2.5% (7.5%
at June 30, 1999 and ranging
from 7.813% to 8.188% at
September 30, 1998) 14,000,000 14,000,000
$19,961,000 $18,618,000
(a) In January 1997, the Company entered into a three year
Revolving Credit Agreement (the Credit Agreement ) with
BankAmerica Business Credit, Inc. ( BABC ). Borrowings under
the Credit Agreement are subject to limitations based upon
eligible inventory and accounts receivable as defined in the
Credit Agreement. Borrowing under the Credit Agreement accrues
interest, at the Company s option, at either prime plus .5% or
libor plus 2.5%.
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, interest coverage ratios and
cannot declare a cash dividend without the consent of BABC.
The Company was in violation of its tangible net worth and
interest rate coverage covenants at March 31, 1998, June 30,
1998 and September 30, 1998.
On January 11, 1999, the Company and BABC amended the Credit
Agreement (the Amendment ). The Amendment, among other
things, modified the financial covenants for Fiscal 1999 to
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited.)
2. Notes payable, bank (Cont d):
allow the Company to be in compliance based upon its current
operating plan, lowered the maximum inventory advance and
allowed for a seasonal over-advance.
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, 1999, the Company was contingently liable for
outstanding letters of credit of approximately $107,247.
5. Income taxes: Three Months Ended Nine Months Ended
June 30, 1999 June 30, 1999
Federal:
Current $ 633,000 $183,000
Deferred (633,000) (183,000)
State:
Current 184,000 53,000
Deferred (184,000) (53,000)
$ - $ -
Income tax at Federal
statutory rate applied to
income before taxes $ 695,000 $201,000
Add: state income taxes 184,000 53,000
Less: effect of deduction of
state income taxes for
Federal purposes (62,000) (18,000)
Less: effect of decrease in
Valuation allowance (817,000) (236,000)
Income taxes $ - $ -
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited.)
5. Income taxes (Cont d):
Significant components of the Company's deferred tax assets and
liability as of June 30, 1999 and September 30, 1998 are as follows:
June 30, September 30,
1999 1998
Current deferred tax assets
(liability):
State taxes on deferred
federal items $ 258,328 $ (68,687)
Bad debts 33,942 55,390
Inventory reserve 477,300 477,300
Reserve for returns and
allowances 234,461 303,528
Unicap 7,787 7,787
Total current deferred tax assets 1,011,818 775,318
Valuation allowance on current
deferred tax assets (1,011,818) (775,318)
Net current deferred tax assets $ - $ -
Long-term deferred tax assets
(liability):
Depreciation $ (932,290) $ (932,290)
Reserve for litigation 817,000 1,053,500
State net operating loss
carryforwards 482,598 535,598
Federal net operating loss
carry forward 999,076 1,182,076
Total long-term deferred tax assets 1,366,384 1,838,884
Valuation allowance on
long-term deferred tax assets (1,366,384) (1,838,884)
Net long-term deferred tax assets $ - $ -
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited.)
6. Paradise Settlement:
In Fiscal 1997, the Company entered into a settlement
agreement with Leon Hayduchok, All-Mark Corporation and Paradise
Creations, Inc., (collectively, "Paradise") 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 (the
Note ) 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
$500,000 at the date of signing in January 1997 and a required
payment against the Note of $400,000 in February 1997. In
addition, the Note required $100,000 quarterly principal
payments commencing January 1, 1998. Quarterly principal
payments were made in December 1997, April, July and October
1998, and January, April, and June 1999. The Company also paid
$300,000 against the minimum royalty.
7. Sale of Cosmetic Assets/Available-for-Sale Security
In November 1997, the Company entered into an agreement to
sell fixed assets and inventory of its Cosmetics subsidiary to
an outside company, Fun Cosmetics, Inc. ( Fun ) (significantly
owned by a former employee) for its net book value of $758,000
plus 200,000 shares of Fun. 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 provided that the
principal be reduced by $150,000 a month commencing February
1998, until repaid. This note was paid in full in March 1998.
At the time of the sale, the Company assigned no value to the
shares received since the acquiring company was a start-up
company with minimal assets and was still seeking financing.
Since November 1997, Fun has raised additional equity and
funding and has become a non-reporting company whose shares are
listed on the NASD Electronic Bulletin Board. The value of this
stock(based on quoted market prices) as of June 30, 1999 was
$1.625 a share. Due to the historically low level of trading
activity, the number of shares the Company owns and the fact
that the shares are unregistered, there is no assurance the
Company will realize the current market value.
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 1999 and 1998 is unaudited.)
7. Sale of Cosmetic Assets/Available-for-Sale Security (Cont d)
Unrealized Gain on
Available-for-Sale Security
Beginning balance $622,000
Less: reclassification
Adjustment for gains
realized (2,000)
Net unrealized loss (295,000)
Ending balance $325,000
8. Impact of Year 2000
With respect to the Year 2000 issue, the Company is in the
process of ensuring that all internal computer, manufacturing,
distribution and business equipment will be Year 2000 compliant by
August, 1999. The Company is in the process of making a full
assessment of the risk associated with the Year 2000 issue and
determine whether the consequences (if any) will have a material
effect on the Company s business. In addition, if necessary upon
completion of the assessment, the Company will develop a
contingency plan. The Company utilizes a third party software
package to run its internal operating and accounting systems and
has purchased and installed the Year 2000 compliant version of this
software. In addition, all telecommunications equipment and
primary computer applications are Year 2000 compliant. 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 2000 compliant to be material and believes that
it will be absorbed, for the most part, in its normal information
technology budget.
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 and nine months ended June
30, 1999 16.1% and 4.4%, respectively, from the same periods a year
ago. These increases were as a result of the success of the
Company s new licenses and further market penetration of the
children's activity product line.
Gross profit as a percentage of net sales increased in the
three months ended June 30, 1999 to 33.3% from 31.6% in the same
1998 period. This was due to an aggressive program by the Company
to gain shelf space for some its new products in the prior year.
Gross profit as a percentage of net sales decreased for the nine
months ended June 30, 1999 to 32.8% from 33.1% in the same 1998
period. This was due to a greater percentage of sales in the first
six months from its basic commodity and direct import programs,
which are sold at a lower gross profit.
Selling, general and administrative ("SG&A") expenses as a
percentage of sales for the three months ended June 30, 1999
slightly increased to 23.9% from 23.8% in the same 1998 period.
This was due to an increase in royalties resulting from sales from
three new licenses. SG&A expenses as a percentage of sales for the
nine months ended June 30, 1999 decreased to 29.3% from 31.4%.
This was due to the Company s cost reduction program. In addition,
the Company recorded a severance accrual associated with the
termination of some high level employees in the prior nine month
period.
For the three months ended June 30, 1999, interest expense
decreased as compared to the same period a year ago. This was due
to lower interest rates and a lower outstanding balance due to the
Company's inventory reduction program. For the nine months ended
June 30, 1999, interest expense slightly increased as a result of
a higher average outstanding balance this year which began at the
start of the Fiscal year.
For the three and nine months ended June 30, 1999, the net
income was $2,045,000 or $.16 per share and $591,000 or $.05 per
share, respectively, as compared to a net income of $844,000 or
$.07 per share and $425,000 or $.03 per share for the same periods
in the prior fiscal year. The increase in income was primarily due
to the higher sales volume. In addition, the Company's income tax
expense for the three and nine months ended June 30, 1999 was zero
as a result of the reduction in the Company's allowance for
deferred tax assets.
(2) Material Changes in Financial Condition
In January 1997, the Company entered into a three year
$30,000,000 revolving credit facility (the Credit Agreement ) with
BankAmerica Business Credit ( 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.
In January 1999, the Company and BABC amended the Credit
Agreement (the Amendment ). The Amendment, among other things,
reduced the revolving credit facility to $25,000,000, modified the
financial covenants (which had been violated by the Company during
Fiscal 1998) for Fiscal 1999 to allow the Company to be in
compliance based upon its current operating plan, lowered the
maximum inventory advance and allowed for a seasonal over-advance.
The $3,000,000 note (the Note ) issued in connection the
Paradise Settlement requires $100,000 quarterly principal payments
that commenced January 1, 1998 and are scheduled through April 1,
2004. Quarterly principal payments were made in December 1997,
April, July, October 1998, January, April and June 1999.
The Company continued several actions to increase its
liquidity. It established a policy obtaining thirty to sixty open
credit to finance a majority of its purchases that historically had
been financed pursuant to letters of credit. It continues to
reduce the number of items held in inventory, has reduced the level
of capital expenditures and has continued a cost reduction program.
In November 1997, the Company entered into an agreement to
sell the fixed assets and inventory of its Cosmetics subsidiary to
Fun Cosmetics, Inc. ( Fun ) (significantly owned by a former
employee) for its net book value of $758,000. This amount was paid
in Fiscal 1998. The Company also received 200,000 shares of Common
stock of Fun.
In March 1998, the Company as part of the settlement of a
lawsuit was awarded $965,000, net of legal fees.
Working capital increased $274,000 to $13,156,000 during the
nine months ended June 30, 1999. As a result of the seasonal
nature of the Company s business, the Company s use of its credit
facility increases significantly in the months of May, June, July
and August as the Company finances its inventory and receivables,
and declines in September and October after the collections of
receivables from its Back-to-School sales. The change in financial
position during the nine months ended June 30, 1999 reflects
primarily this seasonality due to the increase in receivables.
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.
With respect to the Year 2000 issue, the Company is in the
process of ensuring that all internal computer, manufacturing,
distribution and business equipment will be Year 2000 compliant by
August 1999. The Company is in the process of making a full
assessment of the risk associated with the Year 2000 issue and
determine whether the consequences (if any) 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 and installed the Year 2000 compliant version of this
software. In addition, all telecommunications equipment and
primary computer applications are Year 2000 compliant. 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 2000 compliant to be material and believes that
it will be absorbed for the most part in its normal information
technology budget.
(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.
PART II. OTHER INFORMATION
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 Company's Annual Report on Form 10-K for Fiscal Year
1992.
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: July 27, 1999 By:/s/ William Visone
William Visone, Vice-President,
Finance and Administration
(Duly authorized officer)
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