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 December 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 December 31, 1998:
12,570,258 shares of common stock, par value $.01 per share.
<PAGE>
INDEX
Part I. Financial Information:
Item 1. Financial Statements (Unaudited). Page
Condensed Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1998 3-4
Condensed Consolidated Statements of Operations for the
three months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows
for the three months ended December 31,
1998 and 1997 6-7
Notes to Condensed Consolidated Financial Statements 8-18
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations. 19-21
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
<PAGE>
PART I. FINANCIAL INFORMATION
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
December 31, 1998 September 30, 1998
(unaudited)
Current Assets:
Cash $ 345 $ 759
Accounts receivable, net of
allowances for doubtful
accounts of $35 at
December 31, 1998 and $30
at September 30,
1998, respectively 9,626 14,327
Inventories (Note 1) 19,302 20,015
Income taxes receivable - 448
Prepaid expenses and other 1,542 1,436
Deferred Tax Asset (Note 5) - -
Available-for-Sale Security (Note 7) 622 622
Total current assets 31,437 37,607
Furniture and equipment (Note 1) 8,980 8,934
Less accumulated depreciation (5,618) (5,372)
3,362 3,562
Other assets:
Deferred tax assets,
long-term (Note 5) - -
Trademarks, net of amortization
(Note 1) 236 240
Due from officer 174 174
410 414
$ 35,209 $ 41,583
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
December 31, 1998 September 30, 1998
(unaudited)
Current liabilities:
Notes payable, bank
(Note 2) $ 15,050 $ 18,618
Accounts payable 1,759 2,455
Accrued expenses 1,983 3,352
Settlement note payable (Note 6) 300 300
Total current liabilities 19,092 24,725
Other liabilities:
Royalty payable, long-term (Note 6) 100 100
Settlement note payable,
long-term (Note 6) 1,900 2,000
2,000 2,100
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; 12,570,258 shares issued
and outstanding at December 31, 1998
and September 30, 1998, respectively 125 125
Capital in excess of par 6,838 6,838
Retained earnings 6,532 7,173
Unrealized gain on available-for-
sale security (Note 7) 622 622
14,117 14,758
$ 35,209 $ 41,583
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
December 31,
1998 1997
Net sales $10,568 $10,888
Cost of sales 7,297 6,646
Gross profit 3,271 4,242
Selling, general and
administrative expenses 3,538 3,862
Interest expense 376 349
Interest (income) (2) (1)
3,912 4,210
(Loss) income before
taxes (641) 32
Income taxes - 12
Net (loss) income $ (641) $ 20
Net (loss) income per
share-basic and diluted
(Note 1) $ (.05) $ -
See notes to condensed consolidated financial statements.
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
December 31,
1998 1997
Cash flows from operating activities:
Net (loss) income $ (641) $ 20
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 246 234
Sale of Cosmetic assets - 758
(Increase) decrease in:
Accounts receivable 4,701 5,582
Note receivable - (508)
Inventories 713 (520)
Prepaid expenses and other (106) 17
Income taxes receivable/
payable 448 (237)
Increase (decrease) in:
Accounts payable (696) (111)
Accrued expenses (1,369) (1,587)
Deferred income
taxes payable/receivable - 249
Settlement payable (100) (100)
Total adjustments
3,837 3,777
Net cash provided by
operating activities 3,196 3,797
Cash flows from investing activities:
(Purchase) of furniture/equipment (46) (145)
Decrease in trademarks 4 16
Net cash (used in)
investing activities (42) (129)
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)
Three Months Ended
December 31,
1998 1997
Cash flows from financing activities:
Net (decrease) in notes
payable $ (3,568) $ (3,078)
Proceeds from issuance of
common stock - 2
Net cash (used in)
financing activities (3,568) (3,076)
Net (decrease) increase in cash
and cash equivalents (414) 592
Cash and cash equivalents,
beginning of period 759 649
Cash and cash equivalents, end of period $ 345 $ 1,241
Supplemental disclosures of cash flow
information and non-cash financing activities:
Cash paid during the period for:
Interest $ 456 $ 345
See notes to condensed consolidated financial statements.<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 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 fiscal 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 December 31,
1998 and the results of operations and the statements of
cash flows for the three month period ended December 31,
1998 and 1997.
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
1. Summary of significant accounting policies (Cont'd):
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.
Trademarks:
Costs related to trademarks 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
approximate 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
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
1. Summary of significant accounting policies (Cont'd):
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.
(Loss) 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 the quarter ended December
31, 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.
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
1. Summary of significant accounting policies (Cont'd):
The following table sets for the computation of basic and
diluted earnings per share:
Three months ended December 31,
1998 1997
Numerator:
Net (loss) income $ (641,000) $ 20,000
Numerator for basic and
diluted earnings per share $ (641,000) $ 20,000
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 12,570,258 12,504,925
Effect of dilutive
securities:
Employee stock options 0 484,810
Denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed
conversions: 12,570,258 12,989,735
Basic and diluted (loss)
earnings per share $ (.05) $ -
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
1. Summary of significant accounting policies (Cont'd):
Impact of Recently Issued Accounting Standards:
In June 1997, the Financial Accounting Stands Board
issued Statement of Financial Accounting Standards No.
130 "Reporting Comprehensive Income" ("SFAS No. 130"),
which is effective for years beginning after December 15,
1997. SFAS No. 130 establishes standards for reporting
and display of comprehensive income and its components
(revenues, expenses, gain, and losses) in a full set of
general purpose financial statements. This Statement
requires that all items that are required to be
recognized under accounting standards as components of
comprehensive income be reported in a financial statement
that is displayed with the same prominence as other
financial statements. The Company will adopt the new
requirements in Fiscal 1999. For the quarter ended
December 31, 1998 no additional comprehensive income was
recognized (Note 7).
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No.
131 "Disclosures about Segments of an Enterprise and
Related Information" which is effective for years
beginning after December 15, 1997 and in June 1998, the
Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which is
effective for years beginning after June 15, 1998. The
Company has completed its review of both SFAS 131 and
SFAS 133 and has concluded that the adoption of these
statements would not have any effect on the Company and
its reporting.
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
December 31, September 30,
1998 1998
2. Notes Payable bank:
Revolving line of credit
interest payable monthly
at prime plus .5% (8.25%
at December 31, 1998 and
9% at September 30, 1998) $ 1,050,000 $ 4,618,000
Revolving line of credit
interest payable at maturity
at libor plus 2.5% (ranging
from 7.563% to 7.938% at
December 31, 1998 and 7.813%
to 8.188% at September 30,
1998) 14,000,000 14,000,000
$15,050,000 $18,618,000
(a) In January 1997, the Company entered into a three year
Revolving Credit Agreement with BankAmerica Business
Credit, Inc. (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. 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
divided without the consent of BankAmerica Business
Credit, Inc. ("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.
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended December 31,
1998 and 1997 is unaudited.)
2. Notes Payable Bank: (Cont'd)
(b) On January 11, 1999, the Company and BABC amended the
Credit Agreement (the "Amendment"). The Amendment, among
other things, waived compliance with the aforementioned
covenants, modified the financial covenants 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.
3. Shareholders' Equity:
In December 1997, options to purchase an aggregate of
2,000 shares of common stock were exercised at $.75 per
share resulting in the issuance of 2,000 shares of common
stock and proceeds of $1,500.
4. Contingency:
At December 31, 1998, the Company was contingently liable
for outstanding letters of credit of $54,380.
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
5. Income taxes:
Three Months Ended
December 31
1998 1997
Federal:
Current $ (186,000) $ 1,000
Deferred 186,000 8,000
State:
Current (58,000) 1,500
Deferred 58,000 1,500
$ - $ 12,000
Income tax at Federal
statutory rate applied to
income before taxes $ (218,000) $ 11,000
Add: state income taxes (58,000) 3,000
Less: effect of deduction of
state income taxes for
Federal purposes 32,000 (2,000)
Less: effect of increase in
valuation allowance 244,000 -
Income taxes provided $ - $ 12,000
<PAGE>
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
5. Income taxes (Cont'd):
Significant components of the Company's deferred tax assets
and liability as of December 31, 1998 and September 30, 1998 are as
follows:
December 31, September 30,
1998 1998
Current deferred tax asset
(liability):
State taxes on deferred
federal items $ 99,848 $ (68,687)
Current deferred tax assets:
Bad debts 15,262 55,390
Inventory reserve 477,300 477,300
Reserve for returns and
allowances 218,121 303,528
Unicap 7,787 7,787
Total current deferred
tax assets 718,470 844,005
Valuation allowance on current
deferred tax assets (818,318) (775,318)
(99,848) 68,687
Net current deferred tax assets $ - $ -
Long-term deferred tax liabilities:
Depreciation $ (932,290) $ (932,290)
Long-term deferred tax assets:
Reserve for litigation 1,010,500 1,053,500
State net operating loss
carryforwards 593,598 535,598
Federal net operating loss
carry forward 1,368,076 1,182,076
Total long-term deferred
tax assets 2,972,174 2,771,174
Valuation allowance on
long-term deferred tax assets (2,039,884) (1,838,884)
932,290 932,290
Net long-term deferred tax
assets $ - $ -
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 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 an aggregate minimum royalty
of $500,000 (the "Paradise Settlement"). The Company paid $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 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 the 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 was 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 paid.
This note was paid in full in March 1998. At the time of 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 January 29, 1999 was $3.125 a share. The Company has the right
to begin selling its shares in Fun in January 1999. However, 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. For the quarter ended December 31, 1998, the
Company did not recognize any additional comprehensive income.
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(The information for the three months ended
December 31, 1998 and 1997 is unaudited.)
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.
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 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 computer
applications are Year 2000 compliant. The Company is also
contacting its vendors and customers in order to asses 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.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
(1) Material Changes in Results of Operations
Net sales decreased in the three months ended December 31,
1998 2.9% compared to the same period in 1997. This decrease was
primarily due to sales from its discontinued line of cosmetics
products in the year ago period. Sales from its continuing product
lines were up 6.5%, due to increases in its Color Club and basic
product lines offset by a decrease in sales of licensed products
primarily due to the NBA strike.
Gross profit as a percentage of net sales decreased in the
three month period ended December 31, 1998 to 30.9% from 39.0% for
the three months ended December 31, 1997. This was due to the
decline in sales of licensed products for which the Company
historically obtained higher gross margins. In addition, a greater
percentage of sales this year came from basic commodity items and
direct import programs, which generate lower gross profit margins.
Selling, general and administrative ("SGA") expenses as a
percentage of sales decreased to 33.5% from 35.5% in the three
months ended December 31, 1998 compared to that of the prior
period. This was due to the inception of a cost reduction program
as well as including a reduction in the head count. In addition,
royalty costs declined due to the decrease in sales of licensed
products.
In addition, interest expense increased compared to that of
the same period a year ago due to a higher outstanding loan balance
this year.
During the three months ended December 31, 1998, the Company
incurred a net loss of $641,000, or $.05 cents per share, as
compared to net income of $20,000, or $.00 per share, for the three
months ended December 31, 1997. This was due to the decline in
gross profit margins referred to above.
(2) Material Changes in Financial Condition
In January 1998, 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.
In January 1999, the Company and BABC entered into an
agreement to amend the original loan agreement (the "Amendment").
This Amendment, among other things, reduced the revolving credit
facility to $25,000,000, modified the financial covenants, which it
had violated during Fiscal 1998, for Fiscal 1999 to allow the
Company to be in compliance based upon the Company's operating
Plan, lowered the maximum inventory advance and allowed for a
seasonal over-advance.
The $3,000,000 note (the "Note") issued in connection with the
Paradise Settlement requires $100,000 quarterly principal payments
that commenced January 1, 1998 thru April 1, 2004. Quarterly
principal payments were made in December 1997, April, July, October
1998 and January 1999. The Company does not anticipate any
difficulty meeting this payment schedule.
The Company continued 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. It
continues to reduce the number of items held in inventory, it has
reduced the level of capital expenditures and has begun 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.
Working capital decreased $537,000 to $12,345,000 at December
31, 1998. 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
quarter ended December 31, 1998 reflects primarily this seasonality
due to the decrease in receivables from the collection of its Back-
to-School sales and a decline in inventory.
The Company anticipates that its revolving credit line under
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 equipment,
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
contingency plan. The Company utilizes a third party software
package to run its internal operating and accounting systems and
has purchased the Year 2000 compliant version of this software
which was placed in operation in December 1998. In addition, all
telecommunications equipment and computer applications are Year
2000 compliant. The Company is also contacting its vendors and
customers in order to asses 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. 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 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. Statement No. 2-95102-
NY of the Company.
3.2 The Company's By-Laws incorporated by reference to
Exhibit 3.2 to Form S-18.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
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: February 16, 1999 By:/s/ William Visone
William Visone,
Treasurer and Chief Financial
Officer
N:\RSKLAW\PTK\10Q-DEC.98
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<PERIOD-END> DEC-31-1998
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0
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