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