-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LFIdSpe2P+enPNAs4Qa/p5XBiZvRpZFinsNOa3akhHtqMMnsyhK79p2yVxN8M8KX /BdaRUZ5ZAStcAlMejx46Q== 0000760461-98-000012.txt : 19980515 0000760461-98-000012.hdr.sgml : 19980515 ACCESSION NUMBER: 0000760461-98-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTECH INTERNATIONAL INC CENTRAL INDEX KEY: 0000760461 STANDARD INDUSTRIAL CLASSIFICATION: PENS, PENCILS & OTHER ARTISTS' MATERIALS [3950] IRS NUMBER: 232259391 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-15374 FILM NUMBER: 98621018 BUSINESS ADDRESS: STREET 1: 195 CARTER DRIVE CITY: EDISON STATE: NJ ZIP: 08817 BUSINESS PHONE: 9082876640 MAIL ADDRESS: STREET 2: 195 CARTER DR CITY: EDISON STATE: NJ ZIP: 08817 10-Q 1 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 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. 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. 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. 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. 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. 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) ========= ========= 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. 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. 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 EX-27 2
5 1000 6-MOS SEP-30-1998 MAR-31-1998 0 0 11,318 138 19,112 33,205 8,630 (4,895) 37,535 18,043 0 0 0 125 17,067 37,535 21,368 21,368 13,958 13,958 7,412 0 672 (674) (256) (418) 0 0 0 (418) (.03) (.03)
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