-----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, HZbRwerJ4rA0JBziEs1kDwAOpcKCcab9+Y/80BpYEjYOEWRzmJwP0Fdh0db4BMq0 DMqllGQEhddnfvL0EfFE9w== 0000806384-99-000033.txt : 19990513 0000806384-99-000033.hdr.sgml : 19990513 ACCESSION NUMBER: 0000806384-99-000033 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990512 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: 99618373 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, 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 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 The number of shares outstanding of each of the issuer's classes of common stock, as of May 4, 1999, was 12,570,258 shares of common stock, par value $.01 per share. Exhibit Index is located on Page 23. Page 1 of 23 INDEX Part I. Financial Information: Item 1. Financial Statements (Unaudited). Page Condensed Consolidated Balance Sheets as of March 31, 1999 and September 30, 1998 3-4 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 1999 and 1998 5 Condensed Consolidated Statements of Cash Flows for the three and six months ended March 31, 1999 and 1998 6-7 Notes to Condensed Consolidated Financial Statements 8-17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 18-20 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K. 21 Signatures 22 PART I. FINANCIAL INFORMATION PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) March 31, 1999 September 30, 1998 (unaudited) Current Assets: Cash $ 219 $ 759 Accounts receivable, net of allowances for doubtful accounts of $79 at March 31, 1999 and $30 at September 30, 1998 9,401 14,327 Inventories (Note 1) 18,875 20,015 Income taxes receivable - 448 Prepaid expenses and other 1,472 1,436 Deferred tax asset (Note 5) - - Available for-Sale Security (Note 7) 353 622 Total current assets 30,320 37,607 Furniture and equipment (Note 1) 9,269 8,934 Less accumulated depreciation (5,864) (5,372) 3,405 3,562 Other assets: Deferred tax assets, long-term (Note 5) - - Trademarks, net of amortization (Note 1) 224 240 Due from officer 174 174 398 414 $34,123 $41,583 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, 1999 September 30, 1998 (unaudited) Current liabilities: Notes payable, bank (Note 2) $14,783 $18,618 Accounts payable 2,385 2,455 Accrued expenses 1,770 3,352 Settlement note payable 300 300 Total current liabilities 19,238 24,725 Other liabilities: Royalty payable, long-term 50 100 Settlement note payable, long-term 1,800 2,000 1,850 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 March 31, 1999 and September 30, 1998, respectively 125 125 Capital in excess of par 6,838 6,838 Retained earnings 5,719 7,173 Unrealized gain on available-for- Sale Security (Note 7) 353 622 13,035 14,758 $34,123 $41,583 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, 1999 1998 1999 1998 Net sales $9,187 $10,480 $19,755 $21,368 Cost of sales 6,088 7,312 13,385 13,958 Gross profit 3,099 3,168 6,370 7,410 Selling, general and administrative expenses 3,603 4,515 7,141 8,377 (Income) from Lawsuit Settlement (Note 9) - (965) - (965) (Income) from Sale of Security (Note 7) (14) - (14) - Interest expense 324 332 700 681 Interest (income) (1) (8) (3) (9) 3,912 3,874 7,824 8,084 (Loss) before taxes (813) (706) (1,454) (674) Income tax (benefit) - (268) - (256) Net (loss) $ (813) $ (438) $(1,454) $ (418) Net (loss) per share $ (.06) $ (.03) $ (.12) $ (.03) 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, 1999 1998 Cash flows from operating activities: Net (loss) $(1,454) $ (418) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 492 466 Sale of Cosmetic assets - 758 (Increase) decrease in: Accounts receivable 4,926 5,993 Settlement receivable - (965) Inventories 1,140 (1,054) Prepaid expenses and other (36) (122) Income taxes receivable 448 (814) Due from officer - (32) Deferred tax asset - 557 Increase (decrease) in: Accounts payable (70) 1,074 Accrued expenses (1,582) (1,828) Settlement payable (250) (300) Total adjustments 5,068 3,733 Net cash provided by operating activities 3,614 3,315 Cash flows (used in) investing activities: (Purchase) of furniture/equipment (335) (394) Decrease in trademarks 16 35 Net cash (used in) investing activities (319) (359) 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, 1999 1998 Cash flows (used in) financing activities: Net (decrease) in notes payable $ (3,835) $ (3,624) Increase in additional paid in capital - 19 Net cash (used in) financing activities (3,835) (3,605) Net (decrease) in cash and cash equivalents (540) (649) Cash and cash equivalents, beginning of period 759 649 Cash and cash equivalents, end of period $ 219 $ - Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 782 $ 686 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, 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 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, 1999 and the results of operations for the three and six month periods ended March 31, 1999 and 1998 and cash flows for the six months ended March 31, 1999 and 1998. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 31, 1999 and 1998 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 and six months ended March 31, 1999 and 1998 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. 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 earning per share excludes 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. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 31, 1999 and 1998 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 Six months ended March 31, March 31, 1999 1998 1999 1998 Numerator: Net (loss) $ (813,000) $ (438,000) $(1,454,000) $ (418,000) Numerator for basic and diluted earnings per share $ (813,000) $ (438,000) $(1,454,000) $ (418,000) Denominator: Denominator for basic earnings per share - weighted average shares 12,570,258 12,530,258 12,570,258 12,517,592 Effect of dilutive securities: Employee stock options - - - - Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions: 12,570,258 12,530,258 12,570,258 12,517,592 Basic and diluted (loss) per share $(.06) $(.03) $(.12) $(.03) PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 31, 1999 and 1998 is unaudited.) March 31, September 30, 1999 1998 2. Notes Payable bank: Revolving line of credit interest payable monthly at prime plus .5% (8.25% at March 31, 1999 and 9% at September 30, 1998) $ 783,000 $ 4,618,000 Revolving line of credit interest payable at maturity at libor plus 2.5% (ranging from 7.43% to 7.75% at March 31, 1999 and 7.813% to 8.188% at September 30, 1998) 14,000,000 14,000,000 $14,783,000 $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 and six months ended March 31, 1999 and 1998 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, 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 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, 1999, the Company was contingently liable for outstanding letters of credit of $164,072. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 31, 1999 and 1998 is unaudited.) 5. Income Taxes: Three Months Ended Six Months Ended March 31, 1999 March 31, 1999 Federal: Current $ (252,000) $ (450,000) Deferred 252,000 450,000 State: Current (73,000) (131,000) Deferred 73,000 131,000 $ - $ - Income tax at Federal statutory rate applied to income before taxes $ (276,000) $ (494,000) Add: state income taxes (73,000) (131,000) Less: effect of deduction of state income taxes for Federal purposes 24,000 44,000 Less: effect of increase in valuation allowance 325,000 581,000 $ - $ - PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 31, 1999 and 1998 is unaudited.) 5. Income taxes (Cont'd): Significant components of the Company's deferred tax assets and liability as of March 31, 1999 and September 30, 1998 are as follows: March 31, September 30, 1999 1998 Current deferred tax asset (liability): State taxes on deferred federal items $ 207,336 $ (68,687) Current deferred tax assets: Bad debts 33,942 55,390 Inventory reserve 477,300 477,300 Reserve for returns and allowances 156,453 303,528 Unicap 7,787 7,787 Total current deferred tax assets 675,482 844,005 Valuation allowance on current deferred tax assets (882,818) (775,318) (207,336) 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 946,000 1,053,500 State net operating loss carryforwards 608,598 535,598 Federal net operating loss carry forward 1,434,076 1,182,076 Total long-term deferred tax assets 2,988,674 2,771,174 Valuation allowance on long-term deferred tax assets (2,056,384) (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 and six months ended March 31, 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 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 and April 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 March 31, 1999 was $1.8125 a share. As of January 1999 the Company has the right to sell its shares in Fun. 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. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three and six months ended March 31, 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 (14,000) Net unrealized loss (254,000) Ending balance $353,000 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. 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 primary 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. 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, 1999 12.3% and 7.5%, respectively, from the same periods a year ago. These decreases were primarily due to sales from its discontinued line of cosmetics products in the year ago period. In addition, there was an increase in sales of the Company's Color Club Line 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 increased for the three months ended March 31, 1999 to 33.7% from 30.2% in the same 1998 period. This was due to an aggressive program by the Company to gain shelf space for some of its new products in the prior year. Gross profit as a percentage of net sales decreased for the six months ended March 31, 1999 to 32.2% from 34.7% in the same 1998 period. 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 in the first six months came from basic commodity items and direct import programs, which generate lower gross profit margins. Selling, general and administrative ("SG&A") expenses as a percentage of sales for the three and six month periods ended March 31, 1999 decreased to 39.2% and 36.1%, respectively, from 43.1% and 39.2% in the same prior periods. This was due to the Company's cost reduction program. In addition, royalty costs declined due to the decrease in sales of licensed products. Finally, in the prior year the Company recorded a severance accrual associated with the termination of some high level employees. For the three months ended March 31, 1999, interest expense decreased as compared to the same period a year ago. This was due to lower interest rates. For the six months ended March 31, 1999, interest expense increased as compared to the same period a year ago. This was due to a higher average outstanding loan balance this year. For the three and six months ended March 31, 1999, the net loss was $813,000 or $.06 per share and $1,454,000 or $.12 per share, respectively, as compared to a net loss of $438,000 or $.03 per share and $418,000 or $.03 per share for the same prior periods. Without inclusion of income from the lawsuit settlement recorded in the prior year, the Company's results for the current period reflect a reduced level of losses. This is largely due to increased gross profit in the second quarter of the current Fiscal year and reductions in 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 "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 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 entered into an agreement to amend 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 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 and are scheduled through April 1, 2004. Quarterly principal payments were made in December 1997, April, July, October 1998, and January and April 1999. 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 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. Working capital decreased $1,800,000 to $11,082,000 at March 31, 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 six months ended March 31, 1999 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 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 primary computer applications are Year 2000 compliant. The Company has also contacted its vendors and customers in order to assess any third party risk. The Company is prepared in cases where its main vendors cannot continue with its business due to Year 2000 problems to use alternate vendors. 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. 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. 33-16453 (the "Registration Statement"). 3.2 By-Laws of the Company incorporated by reference to Exhibit 3.2 of the Registration Statement. 27 Financial Data Schedule. (b) Reports on Form 8-K. During the quarter ended March 31, 1999, the registrant did not file any reports on Form 8-K. 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 12, 1999 By:s/William Visone William Visone, Vice President - Finance and Administration (Duly authorized officer and Chief Financial Officer) N:\RSKLAW\PTK\10Q-MAR.99 EXHIBIT INDEX Exhibit 27 Financial Data Schedule N:\RSKLAW\PTK\10Q-MAR.99 EX-27 2
5 1,000 6-MOS SEP-30-1999 MAR-31-1999 219 353 9,480 (79) 18,875 30,320 9,269 (5,864) 34,123 19,238 0 0 0 125 12,910 34,123 19,755 19,755 13,385 13,385 7,127 0 697 (1,454) 0 (1,454) 0 0 0 (1,454) (.12) (.12)
-----END PRIVACY-ENHANCED MESSAGE-----