-----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, Kf0NFPUOk5mph1E0doC55Hz8utmLaM34RfjRhmClTkWkW6YWTv8L/lgHbK4si4h5 8UVFgDleYrSf6ccCGPdDfg== 0000806384-99-000018.txt : 19990217 0000806384-99-000018.hdr.sgml : 19990217 ACCESSION NUMBER: 0000806384-99-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990216 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: 99540561 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 December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-15374 PENTECH INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 23-2259391 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 195 Carter Drive, Edison, New Jersey 08817 (Address of principal executive offices) (Zip Code) (732) 287-6640 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of December 31, 1998: 12,570,258 shares of common stock, par value $.01 per share. INDEX Part I. Financial Information: Item 1. Financial Statements (Unaudited). Page Condensed Consolidated Balance Sheets as of December 31, 1998 and September 30, 1998 3-4 Condensed Consolidated Statements of Operations for the three months ended December 31, 1998 and 1997 5 Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 1998 and 1997 6-7 Notes to Condensed Consolidated Financial Statements 8-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 19-21 Part II. Other Information: Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 PART I. FINANCIAL INFORMATION PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) December 31, 1998 September 30, 1998 (unaudited) Current Assets: Cash $ 345 $ 759 Accounts receivable, net of allowances for doubtful accounts of $35 at December 31, 1998 and $30 at September 30, 1998, respectively 9,626 14,327 Inventories (Note 1) 19,302 20,015 Income taxes receivable - 448 Prepaid expenses and other 1,542 1,436 Deferred Tax Asset (Note 5) - - Available-for-Sale Security (Note 7) 622 622 Total current assets 31,437 37,607 Furniture and equipment (Note 1) 8,980 8,934 Less accumulated depreciation (5,618) (5,372) 3,362 3,562 Other assets: Deferred tax assets, long-term (Note 5) - - Trademarks, net of amortization (Note 1) 236 240 Due from officer 174 174 410 414 $ 35,209 $ 41,583 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS LIABILITIES AND SHAREHOLDERS' EQUITY (000's omitted) December 31, 1998 September 30, 1998 (unaudited) Current liabilities: Notes payable, bank (Note 2) $ 15,050 $ 18,618 Accounts payable 1,759 2,455 Accrued expenses 1,983 3,352 Settlement note payable (Note 6) 300 300 Total current liabilities 19,092 24,725 Other liabilities: Royalty payable, long-term (Note 6) 100 100 Settlement note payable, long-term (Note 6) 1,900 2,000 2,000 2,100 Commitments and contingencies (Note 4) Shareholders' equity (Note 3): Preferred stock, par value $.10 per share; authorized 500,000 shares; issued and outstanding none - - Common stock, par value $.01 per share; authorized 20,000,000 shares; 12,570,258 shares issued and outstanding at December 31, 1998 and September 30, 1998, respectively 125 125 Capital in excess of par 6,838 6,838 Retained earnings 6,532 7,173 Unrealized gain on available-for- sale security (Note 7) 622 622 14,117 14,758 $ 35,209 $ 41,583 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) Three Months Ended December 31, 1998 1997 Net sales $10,568 $10,888 Cost of sales 7,297 6,646 Gross profit 3,271 4,242 Selling, general and administrative expenses 3,538 3,862 Interest expense 376 349 Interest (income) (2) (1) 3,912 4,210 (Loss) income before taxes (641) 32 Income taxes - 12 Net (loss) income $ (641) $ 20 Net (loss) income per share-basic and diluted (Note 1) $ (.05) $ - See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended December 31, 1998 1997 Cash flows from operating activities: Net (loss) income $ (641) $ 20 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 246 234 Sale of Cosmetic assets - 758 (Increase) decrease in: Accounts receivable 4,701 5,582 Note receivable - (508) Inventories 713 (520) Prepaid expenses and other (106) 17 Income taxes receivable/ payable 448 (237) Increase (decrease) in: Accounts payable (696) (111) Accrued expenses (1,369) (1,587) Deferred income taxes payable/receivable - 249 Settlement payable (100) (100) Total adjustments 3,837 3,777 Net cash provided by operating activities 3,196 3,797 Cash flows from investing activities: (Purchase) of furniture/equipment (46) (145) Decrease in trademarks 4 16 Net cash (used in) investing activities (42) (129) See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Unaudited) Three Months Ended December 31, 1998 1997 Cash flows from financing activities: Net (decrease) in notes payable $ (3,568) $ (3,078) Proceeds from issuance of common stock - 2 Net cash (used in) financing activities (3,568) (3,076) Net (decrease) increase in cash and cash equivalents (414) 592 Cash and cash equivalents, beginning of period 759 649 Cash and cash equivalents, end of period $ 345 $ 1,241 Supplemental disclosures of cash flow information and non-cash financing activities: Cash paid during the period for: Interest $ 456 $ 345 See notes to condensed consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 1. Summary of significant accounting policies: Organization: Pentech International, Inc. (the "Company") was formed in April 1984. A wholly-owned subsidiary, Sawdust Pencil Company ("Sawdust"), was formed in November 1989 and commenced operations in January 1991. The Company and its subsidiary are engaged in the production, design and marketing of writing and drawing instruments. In October 1993, the Company formed a wholly-owned subsidiary, Pentech Cosmetics, Inc. to manufacture and distribute cosmetic pencils. During fiscal 1997 the Company decided to dispose of this product line. The Company primarily operates in one business segment: the manufacture and marketing of pens, markers, pencils and other writing instruments and related products to major mass market retailers located in the United States, under the "Pentech" name or licensed trademark brand. The Company's fiscal year ends September 30. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Cash Equivalents: The Company considers all time deposits with a maturity of three months or less to be cash equivalents. Unaudited financial statements: All unaudited financial information includes all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at December 31, 1998 and the results of operations and the statements of cash flows for the three month period ended December 31, 1998 and 1997. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 1. Summary of significant accounting policies (Cont'd): Inventory and Cost of Sales: Inventory is stated at the lower of cost or market (first-in, first-out). Interim inventories are based on an estimated gross profit percentage by product, calculated monthly. Cost of sales for imported products includes the invoice cost, duty, freight in, display and packaging costs. Cost of domestically manufactured products includes raw materials, labor, overhead and packaging costs. Equipment and depreciation: Equipment is stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, which range from five to ten years. Major improvements to existing equipment are capitalized. Expenditures for maintenance and repairs which do not extend the life of the assets are charged to expense as incurred. Trademarks: Costs related to trademarks are being amortized over a five year period on a straight-line basis. Revenue recognition: Revenue is recognized upon shipment of product to the customer. Fair Value of Financial Instruments: The fair value for cash and accounts receivable approximate carrying amounts due to the short maturity of these instruments. The fair value amounts for notes payable approximate carrying amounts due to the variable interest rates. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 1. Summary of significant accounting policies (Cont'd): disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Stock Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. (Loss) Earnings per share: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which was adopted by the Company in the quarter ended December 31, 1997. The Company is required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating basic earnings per share, the dilutive effect of stock options will be excluded. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 1. Summary of significant accounting policies (Cont'd): The following table sets for the computation of basic and diluted earnings per share: Three months ended December 31, 1998 1997 Numerator: Net (loss) income $ (641,000) $ 20,000 Numerator for basic and diluted earnings per share $ (641,000) $ 20,000 Denominator: Denominator for basic earnings per share - weighted average shares 12,570,258 12,504,925 Effect of dilutive securities: Employee stock options 0 484,810 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions: 12,570,258 12,989,735 Basic and diluted (loss) earnings per share $ (.05) $ - PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 1. Summary of significant accounting policies (Cont'd): Impact of Recently Issued Accounting Standards: In June 1997, the Financial Accounting Stands Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS No. 130"), which is effective for years beginning after December 15, 1997. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gain, and losses) in a full set of general purpose financial statements. This Statement requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The Company will adopt the new requirements in Fiscal 1999. For the quarter ended December 31, 1998 no additional comprehensive income was recognized (Note 7). In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" which is effective for years beginning after December 15, 1997 and in June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for years beginning after June 15, 1998. The Company has completed its review of both SFAS 131 and SFAS 133 and has concluded that the adoption of these statements would not have any effect on the Company and its reporting. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) December 31, September 30, 1998 1998 2. Notes Payable bank: Revolving line of credit interest payable monthly at prime plus .5% (8.25% at December 31, 1998 and 9% at September 30, 1998) $ 1,050,000 $ 4,618,000 Revolving line of credit interest payable at maturity at libor plus 2.5% (ranging from 7.563% to 7.938% at December 31, 1998 and 7.813% to 8.188% at September 30, 1998) 14,000,000 14,000,000 $15,050,000 $18,618,000 (a) In January 1997, the Company entered into a three year Revolving Credit Agreement with BankAmerica Business Credit, Inc. (the "Credit Agreement"). Borrowings under the Credit Agreement are subject to limitations based upon eligible inventory and accounts receivable as defined in the Credit Agreement. Borrowing under the Credit Agreement accrues interest, at the Company's option, at either prime plus .5% or libor plus 2.5%. The Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In connection with the Credit Agreement, the Company has agreed, among other things, to the maintenance of certain minimum amounts of tangible net worth, interest coverage ratios and cannot declare a cash divided without the consent of BankAmerica Business Credit, Inc. ("BABC"). The Company was in violation of its tangible net worth and interest rate coverage covenants at March 31, 1998, June 30, 1998 and September 30, 1998. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 2. Notes Payable Bank: (Cont'd) (b) On January 11, 1999, the Company and BABC amended the Credit Agreement (the "Amendment"). The Amendment, among other things, waived compliance with the aforementioned covenants, modified the financial covenants for Fiscal 1999 to allow the Company to be in compliance based upon its current operating plan, lowered the maximum inventory advance and allowed for a seasonal over-advance. 3. Shareholders' Equity: In December 1997, options to purchase an aggregate of 2,000 shares of common stock were exercised at $.75 per share resulting in the issuance of 2,000 shares of common stock and proceeds of $1,500. 4. Contingency: At December 31, 1998, the Company was contingently liable for outstanding letters of credit of $54,380. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 5. Income taxes: Three Months Ended December 31 1998 1997 Federal: Current $ (186,000) $ 1,000 Deferred 186,000 8,000 State: Current (58,000) 1,500 Deferred 58,000 1,500 $ - $ 12,000 Income tax at Federal statutory rate applied to income before taxes $ (218,000) $ 11,000 Add: state income taxes (58,000) 3,000 Less: effect of deduction of state income taxes for Federal purposes 32,000 (2,000) Less: effect of increase in valuation allowance 244,000 - Income taxes provided $ - $ 12,000 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 5. Income taxes (Cont'd): Significant components of the Company's deferred tax assets and liability as of December 31, 1998 and September 30, 1998 are as follows: December 31, September 30, 1998 1998 Current deferred tax asset (liability): State taxes on deferred federal items $ 99,848 $ (68,687) Current deferred tax assets: Bad debts 15,262 55,390 Inventory reserve 477,300 477,300 Reserve for returns and allowances 218,121 303,528 Unicap 7,787 7,787 Total current deferred tax assets 718,470 844,005 Valuation allowance on current deferred tax assets (818,318) (775,318) (99,848) 68,687 Net current deferred tax assets $ - $ - Long-term deferred tax liabilities: Depreciation $ (932,290) $ (932,290) Long-term deferred tax assets: Reserve for litigation 1,010,500 1,053,500 State net operating loss carryforwards 593,598 535,598 Federal net operating loss carry forward 1,368,076 1,182,076 Total long-term deferred tax assets 2,972,174 2,771,174 Valuation allowance on long-term deferred tax assets (2,039,884) (1,838,884) 932,290 932,290 Net long-term deferred tax assets $ - $ - PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 6. Paradise Settlement In Fiscal 1997, the Company entered into a settlement agreement with Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc., (collectively, "Paradise") providing, among other things, for Pentech to pay $500,000, deliver a $3,000,000 promissory note plus interest at the rate of 7% per annum (the "Note") and enter into a five year non-exclusive license to sell such products for a 10% royalty, with an aggregate minimum royalty of $500,000 (the "Paradise Settlement"). The Company paid $500,000 at the date of signing in January 1997 and a required payment against the Note of 400,000 in February 1997. In addition, the Note required $100,000 quarterly principal payments commencing January 1, 1998 Quarterly principal payments were made in December 1997, April, July and October 1998 and January 1999. The Company also paid $300,000 against the minimum royalty. 7. Sale of Cosmetic Assets/Available-for-Sale Security In November 1997, the Company entered into an Agreement to sell the fixed assets and inventory of its Cosmetics subsidiary to an outside company, Fun Cosmetics Inc. ("Fun") (significantly owned by a former employee) for its net book value of $758,000 plus 200,000 shares of Fun. In December 1997, $100,000 was received as a down payment, $150,000 was received at closing and a note was issued for approximately $508,000 bearing interest at a rate of 9% per annum. The terms of the note provided that the principal be reduced by $150,000 a month commencing February 1998, until paid. This note was paid in full in March 1998. At the time of sale, the Company assigned no value to the shares received since the acquiring company was a start-up company with minimal assets and was still seeking financing. Since November 1997, Fun has raised additional equity and funding and has become a non-reporting company whose shares are listed on the NASD Electronic Bulletin Board. The value of this stock (based on quoted market prices) as of January 29, 1999 was $3.125 a share. The Company has the right to begin selling its shares in Fun in January 1999. However, due to the historically low level of trading activity, the number of shares the Company owns and the fact that the shares are unregistered, there is no assurance the Company will realize the current market value. For the quarter ended December 31, 1998, the Company did not recognize any additional comprehensive income. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (The information for the three months ended December 31, 1998 and 1997 is unaudited.) 8. Impact of Year 2000 With respect to the Year 2000 issue, the Company is in the process of ensuring that all internal computer, manufacturing, distribution and business equipment will be Year 2000 compliant. Upon completion of that review, the Company will make a full assessment of the risk associated with the Year 2000 issue and determine whether the consequences will have a material effect on the Company's business. In addition, if necessary upon completion of the assessment, the Company will develop a contingency plan. The Company utilizes a third party software package to run its internal operating and accounting systems and has purchased and installed the Year 2000 compliant version of this software. In addition, all telecommunications equipment and computer applications are Year 2000 compliant. The Company is also contacting its vendors and customers in order to asses any third party risk. The Company does not expect the costs associated with becoming Year 2000 compliant to be material and believes that it will be absorbed, for the most part, in its normal information technology budget. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (1) Material Changes in Results of Operations Net sales decreased in the three months ended December 31, 1998 2.9% compared to the same period in 1997. This decrease was primarily due to sales from its discontinued line of cosmetics products in the year ago period. Sales from its continuing product lines were up 6.5%, due to increases in its Color Club and basic product lines offset by a decrease in sales of licensed products primarily due to the NBA strike. Gross profit as a percentage of net sales decreased in the three month period ended December 31, 1998 to 30.9% from 39.0% for the three months ended December 31, 1997. This was due to the decline in sales of licensed products for which the Company historically obtained higher gross margins. In addition, a greater percentage of sales this year came from basic commodity items and direct import programs, which generate lower gross profit margins. Selling, general and administrative ("SGA") expenses as a percentage of sales decreased to 33.5% from 35.5% in the three months ended December 31, 1998 compared to that of the prior period. This was due to the inception of a cost reduction program as well as including a reduction in the head count. In addition, royalty costs declined due to the decrease in sales of licensed products. In addition, interest expense increased compared to that of the same period a year ago due to a higher outstanding loan balance this year. During the three months ended December 31, 1998, the Company incurred a net loss of $641,000, or $.05 cents per share, as compared to net income of $20,000, or $.00 per share, for the three months ended December 31, 1997. This was due to the decline in gross profit margins referred to above. (2) Material Changes in Financial Condition In January 1998, the Company entered into a three year $30,000,000 revolving credit facility with BankAmerica Business Credit Inc. ("BABC") (the "New Credit Agreement"). The amount of drawings under the facility is subject to limitations based upon eligible inventory and accounts receivable as described in the New Credit Agreement. The New Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In addition, in accordance with the New Credit Agreement, the Company has agreed, among other things, to the maintenance of certain minimum amounts of tangible net worth and interest coverage ratios. In January 1999, the Company and BABC entered into an agreement to amend the original loan agreement (the "Amendment"). This Amendment, among other things, reduced the revolving credit facility to $25,000,000, modified the financial covenants, which it had violated during Fiscal 1998, for Fiscal 1999 to allow the Company to be in compliance based upon the Company's operating Plan, lowered the maximum inventory advance and allowed for a seasonal over-advance. The $3,000,000 note (the "Note") issued in connection with the Paradise Settlement requires $100,000 quarterly principal payments that commenced January 1, 1998 thru April 1, 2004. Quarterly principal payments were made in December 1997, April, July, October 1998 and January 1999. The Company does not anticipate any difficulty meeting this payment schedule. The Company continued several actions to increase its liquidity. It established a policy obtaining thirty to sixty day open credit to finance a majority of its purchases that historically have been financed pursuant to letters of credit. It continues to reduce the number of items held in inventory, it has reduced the level of capital expenditures and has begun a cost reduction program. In November 1997, the Company entered into an agreement to sell the fixed assets and inventory of its Cosmetics subsidiary to Fun Cosmetics, Inc. ("Fun") (significantly owned by a former employee) for its net book value of $758,000. This amount was paid in Fiscal 1998. The Company also received 200,000 shares of Common Stock of Fun. Working capital decreased $537,000 to $12,345,000 at December 31, 1998. As a result of the seasonal nature of the Company's business, the Company's use of its credit facility increases significantly in the months of May, June, July and August as the Company finances its inventory and receivables, and declines in September and October after the collections of receivables from its Back-to-School sales. The change in financial position during the quarter ended December 31, 1998 reflects primarily this seasonality due to the decrease in receivables from the collection of its Back- to-School sales and a decline in inventory. The Company anticipates that its revolving credit line under the Credit Agreement together with anticipated revenues from operations, will be sufficient to provide liquidity on both a- short-term and long-term basis to finance its future operations. The Company believes these resources are sufficient to support its operating expenses. With respect to the Year 2000 issue, the Company is in the process of ensuring that all internal computer equipment, manufacturing, distribution and business equipment will be Year 2000 compliant. Upon completion of that review, the Company will make a full assessment of the risk associated with the Year 2000 issue and determine whether the consequences will have a material effect on the Company's business. In addition, if necessary, upon completion of the assessment, the Company will develop a contingency plan. The Company utilizes a third party software package to run its internal operating and accounting systems and has purchased the Year 2000 compliant version of this software which was placed in operation in December 1998. In addition, all telecommunications equipment and computer applications are Year 2000 compliant. The Company is also contacting its vendors and customers in order to asses any third party risk. The Company does not expect the costs associated with becoming Year 2000 compliant to be material and believes that it will be absorbed, for the most part, in its normal information technology budget. (3) Safe Harbor Statement Statements which are not historical facts, including statements about the Company's confidence and strategies and its expectations about new and existing products, technologies and opportunities, market and industry segment growth, demand and acceptance of new and existing products are forward looking statements that involve risks and uncertainties. there include, but are not limited to, product demand and market acceptance risks; the impact of competitive products and pricing; the results of financing efforts; the loss of any significant customers of any business; the effect of the Company's accounting policies; the effects of economic conditions and trade, legal, social, and economic risks, such as import, licensing, and trade restrictions; the results of the Company's business plan and the impact on the Company of its relationship with its lenders. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.1 Certificate of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 to Registration Statement. Statement No. 2-95102- NY of the Company. 3.2 The Company's By-Laws incorporated by reference to Exhibit 3.2 to Form S-18. 27 Financial Data Schedule. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENTECH INTERNATIONAL, INC. Dated: February 16, 1999 By:/s/ William Visone William Visone, Treasurer and Chief Financial Officer N:\RSKLAW\PTK\10Q-DEC.98 EX-27 2
5 3-MOS SEP-30-1999 DEC-31-1998 345 0 9,661 (35) 19,302 31,437 8,980 (5,618) 35,209 19,092 0 0 0 125 13,992 35,209 10,568 10,568 7,297 7,297 3,538 0 374 (641) 0 (641) 0 0 0 (641) (.05) (.05)
-----END PRIVACY-ENHANCED MESSAGE-----