-----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, MXYX/I5Ts/vFlKl3sfIUqMU2sX/7rAnUrL/0XyHbpUIncVNFyZh9agEn7rgjx6Kp +LqcFmqv2zgylRggg+L25g== 0000806384-98-000026.txt : 19980813 0000806384-98-000026.hdr.sgml : 19980813 ACCESSION NUMBER: 0000806384-98-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 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: 98684145 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 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-15374 PENTECH INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) Delaware 23-2259391 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 195 Carter Drive, Edison, New Jersey 08817 (Address of principal executive offices) (Zip Code) (732) 287-6640 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 3, 1998 there were 12,570,258 shares of common stock outstanding, par value $.01 per share. Page 1 of 20. There is no Exhibit Index. INDEX Part I. Financial Information: Item 1. Financial Statements (unaudited). Page Condensed Consolidated Balance Sheets as of June 30, 1998 and September 30, 1997 3-4 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 1998 and 1997 6-7 Notes to Condensed Consolidated Financial Statements 8-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation. 16-18 Part II. Other Information: Item 5. Other Information. 19 Item 6. Exhibits and Reports on Form 8-K. 19 Signature 20 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) June 30, 1998 September 30, 1997 ------------- ------------------ (unaudited) Current Assets: Cash $ 56 $ 649 Accounts receivable, net of allowances for doubtful accounts of $138 at June 30, 1998 and $30 at September 30, 1997 18,863 16,293 Inventories (Note 1) 19,880 18,481 Income taxes receivable 272 422 Prepaid expenses and other 1,626 1,648 Deferred tax asset (Note 5) 316 271 ------ ------ Total current assets 41,013 37,764 ------ ------ Furniture and equipment (Note 1) 8,856 8,895 Less accumulated depreciation (5,128) (4,931) ------ ------ 3,728 3,964 ------ ------ Other assets: Deferred tax assets, long-term (Note 5) 234 364 Trademarks, net of amortization (Note 1) 219 270 Due from officer 174 142 ------ ------ 627 776 ------ ------ $45,368 $42,504 ====== ====== See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (CONT'D) LIABILITIES AND SHAREHOLDERS' EQUITY (000's omitted) June 30, 1998 September 30, 1997 ------------- ------------------ (unaudited) Current liabilities: Notes payable, bank (Note 2) $ 19,279 $ 17,238 Accounts payable 2,412 1,334 Accrued expenses 3,011 3,441 Settlement note payable (Note 6) 300 300 ------ ------ Total current liabilities 25,002 22,313 ------ ------ Other liabilities: Royalty payable, long-term (Note 6) 200 300 Settlement note payable, long-term (Note 6) 2,100 2,300 ------ ------ Commitments and contin- gencies (Note 4) 2,300 2,600 ------ ------ Shareholders' equity (Note 3): Preferred stock, par value $.10 per share; authorized 500,000 shares; issued and outstanding none Common stock, par value $.01 per share; authorized 20,000,000 shares; 12,570,258 shares issued and outstanding at June 30, 1998 and 12,504,258 shares issued and outstanding at September 30, 1997, respectively 126 125 Capital in excess of par 6,838 6,789 Retained earnings 11,102 10,677 ------ ------ 18,066 17,591 ------ ------ $45,368 $42,504 ====== ====== See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES (unaudited) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (000's omitted except for per share amounts) Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net sales $21,931 $21,333 $43,299 $44,725 Cost of sales 14,995 13,907 28,954 29,072 ------ ------ ------ ------ Gross profit 6,936 7,426 14,345 15,653 ------ ------ ------ ------ Selling, general and administrative expenses 5,213 5,520 13,590 13,373 (Income) from Lawsuit settlement (Note 9) - - (965) - Loss on Cosmetics operation - - - 687 Interest expense 362 389 1,043 1,097 Interest (income) - - (9) (9) ------ ------ ------ ------ 5,575 5,909 13,659 15,148 ------ ------ ------ ------ Income before taxes 1,361 1,517 686 505 Income taxes 517 606 261 202 ------ ------ ------ ------ Net income $ 844 $ 911 $ 425 $ 303 ====== ====== ====== ====== Net income per share basic and diluted (Note 1) $ .07 $ .07 $ .03 $ .03 ====== ====== ====== ====== See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (unaudited) Nine Months Ended June 30, ----------------- 1998 1997 ---- ---- Cash flows from operating activities: Net income $ 425 $ 303 ------ ------ Adjustments to reconcile net income to net cash (used in) operating activities: Depreciation and amortization 699 1,007 Sale of Cosmetic assets 758 - (Increase) decrease in: Accounts receivable (2,655) (4,482) Inventories (1,822) (200) Prepaid expenses and other (71) (647) Income taxes receivable 150 675 Due from officer (32) (32) Deferred tax asset 85 390 Increase (decrease) in: Bankers' acceptances payable - (1,489) Accounts payable 1,078 5 Accrued expenses (430) (75) Deferred income taxes payable - 156 Settlement payables (300) (1,000) ------ ------ Total adjustments (2,540) (5,692) ------ ------ Net cash (used in) operating activities (2,115) (5,389) ------ ------- Cash flows from investing activities: (Purchase) of furniture/equipment (620) (576) Decrease (Increase) in trademarks 51 (5) ------ ------- Net cash (used in) investing activities (569) (581) ------ ------- See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000's omitted) (unaudited) Nine Months Ended June 30, ----------------- 1998 1997 ---- ---- Cash flows from financing activities: Net increase (decrease) in notes payable $ 2,041 $(2,014) Proceeds from the issuance of Common Stock 50 963 ------- ------ Net cash provided by (used in) financing activities 2,091 (1,051) ------- ------- Net (decrease) in cash and cash equivalents (593) (7,021) Cash and cash equivalents, beginning of period 649 7,064 ------- ------ Cash and cash equivalents, end of period $ 56 $ 43 ======= ====== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 1,031 $ 1,193 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited) 1. Summary of significant accounting policies: Organization: Pentech International, Inc. (the "Company") was formed in April 1984. A wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust") was formed in November 1989 and commenced operations in January 1991. The Company and its subsidiary are engaged in the production, design and marketing of writing and drawing instruments. In October 1993, the Company formed a wholly-owned subsidiary, Pentech Cosmetics, Inc. ("Cosmetics"), to manufacture and distribute cosmetic pencils. During its fiscal year ended September 30, 1997, the Company decided to dispose of this product line. The Company primarily operates in one business segment: the manufacture and marketing of pens, markers, pencils and other writing instruments and related products to major mass market retailers located in the United States, under the "Pentech" name or licensed trademark brand. The Company's fiscal year ends September 30. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Cash Equivalents: The Company considers all time deposits with a maturity of three months or less to be cash equivalents. Unaudited Financial Statements: All unaudited financial information includes all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at June 30, 1998, the results of operations for the three and nine month periods ended June 30, 1998 and 1997, and cash flows for the nine months ended June 30, 1998 and 1997. Inventory and Cost of Sales: Inventory is stated at the lower of cost or market (first-in, first-out). Interim inventories are based on an estimated gross profit percentage by product, calculated monthly. Cost of Sales for imported products includes the invoice cost, duty, freight in, PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited) 1. Summary of significant accounting policies (con't): display and packaging costs. Cost of domestically manufactured products includes raw materials, labor, overhead and packaging costs. Equipment and Depreciation: Equipment is stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, which range from five to ten years. Major improvements to existing equipment are capitalized. Expenditures for maintenance and repairs which do not extend the life of the assets are charged to expense as incurred. Trademarks: The costs thereof are being amortized over a five-year period on a straight-line basis. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited.) Earnings per Common Equivalent Shares: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which was adopted by the Company in December, 1997. The Company is required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. The following table sets for the computation of basic and diluted earnings per share: Three months ended Nine months ended June 30, June 30, 1998 1997 1998 1997 Numerator: Net Income $ 844,000 $ 911,000 $ 425,000 $ 303,000 Numerator for basic and diluted earnings per share $ 844,000 $ 911,000 $ 425,000 $ 303,000 ========== ========== ========== ========== Denominator: Denominator for basic earnings per share - weighted average shares 12,543,591 12,496,758 12,526,258 11,830,091 Effect of dilutive securities: Employee stock options 256,782 383,243 362,063 231,754 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions: 12,800,373 12,880,001 12,888,321 12,061,845 ========== ========== ========== ========== Basic and diluted income per share $.07 $.07 $.03 $.03 ========== ========== ========== ========== PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited.) 2. Notes payable, bank: Rates June 30, 1998 Rates September 30, 1997 ----- ------------- ----- ------------------ Notes payable(a) 8.188% $11,000,000 8.128% $13,000,000 8.125% $ 4,000,000 9.0% $ 4,279,409 9.0% $ 4,238,066 ---------- ---------- $19,279,409 $17,238,066 ========== ========== Notes payable as of June 30, 1998 and September 30, 1997 were advanced under a three year $30,000,000 Revolving Credit Agreement with BankAmerica Business Credit, Inc. ("BABC") (the "Credit Agreement"). Borrowings under the Credit Agreement are subject to limitations based upon eligible inventory and accounts receivable as defined in the Credit Agreement. The Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In connection with the Credit Agreement, the Company has agreed, among other things, to the maintenance of certain minimum amounts of tangible net worth and interest coverage ratios. The financial results of the current quarter caused the Company to be in technical violation of its tangible net worth and its interest coverage covenants, which violation was waived by BABC. 3. Shareholders' Equity: In December 1997, January 1998 and June 1998, options to purchase an aggregate of 66,000 shares of Common Stock were exercised at $.75 per share resulting in the issuance of 66,000 shares of Common Stock and proceeds of $49,500. 4. Contingency: At June 30, 1998, the Company was contingently liable for outstanding letters of credit of approximately $179,390. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited.) 5. Income taxes: Three Months Ended Nine Months Ended June 30, 1998 June 30, 1998 ------------------ ----------------- Federal: Current $ 34,000 $ 134,000 Deferred 361,000 65,000 State: Current 11,000 42,000 Deferred 111,000 20,000 -------- -------- $ 517,000 $ 261,000 ======== ======== Income tax at Federal statutory rate applied to income before taxes $ 463,000 $ 233,000 Add: state income taxes 122,000 62,000 Less: effect of deduction of state income taxes for Federal purposes (68,000) (34,000) -------- ------- Income taxes $ 517,000 $ 261,000 ======== ======= PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited.) 5. Income taxes (con't): Significant components of the Company's deferred tax assets (liability) as of June 30, 1998 and September 30, 1997 are as follows: June 30, September 30, 1998 1997 ------- ------------- Current deferred tax liability: State taxes on deferred federal items $ (143,538) $ (149,823) ---------- ---------- Current deferred tax assets: Bad debts $ 59,278 $ 12,938 Inventory reserve 348,300 520,300 Reserve for returns and allowances 601,017 313,042 Unicap 12,813 12,813 Cosmetic fixed asset reserve - 123,410 ---------- ---------- Total current deferred tax assets 1,021,408 982,503 Valuation allowance on current deferred tax assets (561,500) (561,500) ---------- ---------- $ 459,908 $ 421,003 ---------- ---------- Net current deferred tax assets $ 316,370 $ 271,180 ========== ========== Long-term deferred tax liability: Depreciation $ (832,800) $ (832,800) ---------- ---------- Long-term deferred tax assets: Reserve for litigation $1,161,000 $1,290,000 State net operating loss carryforwards 310,700 310,700 ---------- ---------- Total long-term deferred tax assets 1,471,700 1,600,700 Valuation allowance on long-term deferred tax assets (404,065) (404,065) ---------- ---------- $1,067,635 $1,196,635 ---------- ---------- Net long-term deferred tax assets $ 234,835 $ 363,835 ========== ========== PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited.) 6. Paradise Settlement: In October 1987, the Company commenced an action against Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc., (collectively, "Paradise") in the United States District Court for the Southern District of New York which resulted in an adverse multi- million dollar judgment against Pentech. In December 1996, the parties to such litigation entered into a settlement agreement providing, among other things, for Pentech to pay $500,000, deliver a $3,000,000 promissory note plus interest at the rate of 7% per annum and enter into a five year non-exclusive license to sell such products for a 10% royalty, with a minimum royalty of $500,000 (the "Paradise Settlement"). The Company paid Paradise $400,000 in February 1997, $500,000 in January 1997, and $200,000 of the minimum royalty. In addition, the note requires $100,000 quarterly principal payments commencing January 1, 1998. Quarterly principal payments were made in December 1997, April 1998 and July 1998. 7. Private Placement: In January 1997, the Company completed a private offering of 20 Units, each Unit consisting of 100,000 shares of Common Stock of the Company for $50,000 per Unit (the "Private Offering"). The Company received net proceeds of $963,000 from the Private Offering. Officers and directors of the Company acquired 52.5% of the Units sold in the Private Offering and participated on the same terms as the other investors in the Private Offering. The terms of the Private Offering were established by a Special Committee of the Board of Directors who did not participate in the Private Offering. The Company was required by its banks (at that time) to raise funds in the Private Offering in order to fund the $500,000 payment referred to in Note 6 and to enable the Company to fund its requirements for capital expenditures. 8. Sale of Cosmetic Assets In November 1997, the Company entered into an agreement to sell fixed assets and inventory of its Cosmetics subsidiary to an outside company (significantly owned by a former employee) for its book value. In December 1997, $100,000 was received as a down payment, $150,000 received at closing and a note was issued for approximately $508,000 bearing interest at a rate of 9% per annum. The terms of the note provide that the principal be reduced by $150,000 a month commencing February 1998, until repaid. This note was paid in full in March 1998. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (con't) (The information for the three and nine months ended June 30, 1998 and 1997 is unaudited.) 9. Income from Lawsuit Settlement In March 1998, the Company executed a settlement agreement providing for the Company to receive a payment in the amount of $965,000, net of legal fees, which payment was received in April, 1998. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. This report on Form 10-Q may contain forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. These forward looking statements are subject to the business and economic risks faced by the Company and the Company's actual results could differ materially from those anticipated in these forward looking statements as a result of certain factors, including those set forth in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" below. (1) Material Changes in Results of Operations Net sales increased in the three months ended June 30, 1998 2.8% from the same period a year ago as a result of the success of the children's activity products and an increase in sales to the office superstores. Net sales decreased for the nine months ended June 30, 1998 3.2% from the same period a year ago. This was due to larger sales of the Company's licensed products and additional holiday programs in the prior year. Gross profit as a percentage of net sales decreased in the three and nine months ended June 30, 1998 to 31.6% and 33.1% from 34.8% and 35%, respectively in the same 1997 periods. This was due to an increase in sales from its direct product offerings, which are sold at a lower gross profit. In addition, the Company had a lower percentage of its sales from licensed products, which historically offer higher gross profit margins. The Company also began an aggressive program to gain shelf space for some of its new products. Selling, general and administrative ("SG&A") expenses as a percentage of sales for the three months ended June 30, 1998 decreased to 23.8% from 25.9% in the same prior period. This was partially due to an aggressive cost reduction program begun in March 1998. This program has included reduced salaries at the senior management level and a reduction in the use of outside consultants. In addition, there was a decrease in royalty expenses associated with the lower sales volume of licensed products. SG&A expenses as a percentage of sales for the nine months ended June 30, 1998 increased to 31.4% from 29.9% in the same prior period. This was due to incurring a similar level of fixed costs as in the prior year over a lower sales volume. In addition, during the current nine month period the Company recorded a severance accrual associated with the termination of some high level employees. The Company also incurred a higher bad debt expense in the current nine month period as a result of the bankruptcies of two of its customers. For the three and nine months ended June 30, 1998, interest expense decreased as compared to the same periods a year ago. This was due to lower interest rates and a lower outstanding balance. For the three and nine months ended June 30, 1998, the net income was $844,000 or $.07 per share and $425,000 or $.03 per share, respectively, as compared to a net income of $911,000 or $.07 per share and $303,000 or $.03 per share for the same periods in the prior fiscal year. The decrease in income for the three months ended June 30, 1998 was primarily due to the lower gross profit. The increase in income for the nine months ended June 30, 1998 was due to the income from the lawsuit settlement and the absence of a loss on Cosmetics offset by higher SG&A expenses and a lower gross profit margin. (2) Material Changes in Financial Condition In January 1997, the Company entered into a three year Credit Agreement with BABC. The amount of drawings under the Credit Agreement are subject to limitations based upon eligible inventory and accounts receivable as described in the Credit Agreement. The Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In addition, in accordance with the Credit Agreement, the Company has agreed, among other things, to the maintenance of certain minimum amounts of tangible net worth and interest coverage ratios. The Company was in technical violation of its tangible net worth and interest coverage covenants at June 30, 1998, which violation was waived by BABC. The Paradise Settlement requires $100,000 quarterly principal payments commencing January 1, 1998, which payments were made. The Company does not foresee any difficulty meeting its obligations pursuant to the Paradise Settlement. In November 1997, the Company entered into an agreement to sell the fixed assets and inventory of its Cosmetics subsidiary to an outside company (significantly owned by a former employee) for its book value. In December 1997, $100,000 was received as a down payment, $150,000 was received at closing and a note was issued for approximately $508,000 bearing interest at a rate of 9% per annum. This note was paid in full in March 1998. In March 1998, the Company as part of the settlement of a lawsuit was awarded $965,000, net of legal fees. With respect to the Year 2000 issue, the Company is in the process of ensuring that all internal computer equipment, telecommunications equipment, computer applications, manufacturing, distribution and business equipment will be Year 2000 compliant. Upon completion of that review, the Company will make a full assessment of the risk associated with the Year 2000 issue and determine whether the consequences will have a material effect on the Company's business. In addition, if necessary, upon completion of the assessment, the Company will develop a complete contingency plan. The Company utilizes a third party software package to run its internal operating and accounting systems and has purchased the Year 2k compliant version of this software which should be operating by December 1998. The Company is also contacting its vendors and customers in order to assess any third party risk. The Company does not expect the costs associated with becoming year 2k compliant to be material and believes that it will be absorbed for the most part in its normal information technology budget. Working capital increased $560,000 to $16,011,000 during the nine months ended June 30, 1998. The Company anticipates that the Credit Agreement together with anticipated revenues from operations, will be sufficient to provide liquidity on both a short-term and long-term basis to finance its future operations. The Company believes these resources are sufficient to support its operating expenses. (3) Safe Harbor Statement Statements which are not historical facts, including statements about the Company's confidence and strategies and its expectations about new and existing products, technologies and opportunities, market and industry segment growth, demand and acceptance of new and existing products are forward looking statements that involve risks and uncertainties. These include, but are not limited to, product demand and market acceptance risks; the impact of competitive products and pricing; the results of financing efforts; the loss of any significant customers of any business; the effect of the Company's accounting policies; the effects of economic conditions and trade, legal, social, and economic risks, such as import, licensing, and trade restrictions; the results of the Company's business plan and the impact on the Company of its relationship with its lenders. PART II. OTHER INFORMATION Item 5. Other Information. Regarding the potential conflict of interest involving Mr. Norman Melnick, Chairman of the Board of Directors of the Company, that was disclosed in the Company's Form 10-Q Quarterly Report for the period ended March 31, 1998, the Company established a Special Committee comprised of disinterested directors (the "Committee") to conduct an independent investigation. The Committee appointed counsel to assist it in its investigation. During the quarter, counsel completed its review and reported its findings to the Committee. The Committee met with Mr. Melnick and advised him of counsel's recommendation that it found no impropriety, but it recommended that Mr. Melnick disassociate with his daughter's company to avoid any appearance of impropriety. Mr. Melnick has voluntarily agreed to do so. Counsel also recommended that the Company adopt and implement a formal policy designed to reduce potential conflicts of interest in the future. At a meeting of the Board held on August 5, 1998, the Company adopted such a policy, which has been circulated to employees and has been included in the Company's Employee Policy Manual. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 3.1 Certificate of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 to Registration Statement No. 2-95102-NY of the Company ("Form S-18"). 3.2 The Company's By-Laws are incorporated by referenced to Exhibit 3.2 of Form S-18. 10.1 The 1989 Stock Option Plan incorporated by reference to the Registration Statement No. 33-27009 ("Form S-8"). 10.2 The 1993 Stock Option Plan incorporated by reference to the 1992 Form 10-K. 10.3 The 1995 Stock Option Plan incorporated by reference to the Registration Statement No. 333-30595 filed on Form S-8. 27 Financial Data Schedule (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENTECH INTERNATIONAL, INC. Dated: August 12, 1998 By: /s/ William Visone William Visone, Vice-President, Finance and Administration (Duly authorized officer) WPDOCS\PTK\10Q-JUN.98 EX-27 2
5 1,000 9-MOS SEP-30-1998 JUN-30-1998 56 0 19,001 138 19,880 41,013 8,856 (5,128) 45,368 25,002 0 0 0 126 17,940 45,368 43,299 43,299 28,954 28,954 12,625 0 1,034 686 261 425 0 0 0 425 .03 .03
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