APPENDIX D
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES 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 CHARTER)
DELAWARE 00-0000000
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
000 XXXXXX XXXXX,
XXXXXX, XXX XXXXXX 00000
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(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (000) 000-0000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
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(TITLE OF CLASS)
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant on December 16, 1999, was approximately
$5,296,933 based on the average of the closing bid and asked quotations of the
registrant's Common Stock, par value $.01 share, as reported by NASDAQ on
December 16, 1999.
On December 16, 1999, there were outstanding 12,571,258 shares of the
registrant's Common Stock.
The Proxy Statement of the registrant to be filed on or before January 29,
2000 is incorporated herein by reference.
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D-1
PART I
ITEM 1. BUSINESS.
(a) Pentech International Inc. (the "Company") was formed in April 1984 to
design and market writing and drawing instruments and other stationery products.
In November 1989, the Company formed a wholly-owned subsidiary, Sawdust Pencil
Co. ("Sawdust"), to manufacture certain of the Company's writing instruments.
The Company and its wholly-owned subsidiaries are collectively referred to
herein as the "Company."
(b) The Company primarily operates in one business segment: the manufacture
and marketing of pens, markers, pencils, other writing instruments and activity
kits, primarily to major mass market retailers located in the United States,
under the "Pentech" name or licensed trademark brand. For financial information
relating to this business segment, please refer to the financial statements
contained elsewhere herein.
(c) The Company's product line consists of pens, markers, pencils, activity
products and miscellaneous products. These products compete on the basis of
special features, packaging design, quality and price, or a combination of these
characteristics. The Company believes its reputation and ability to develop
innovative products and marketing programs for its products, through the
industry experience and marketing expertise of its management, are principal
success factors.
The Company has also had an ongoing program to secure select license
agreements with licensors of established trademarks to utilize with certain of
the Company's products. The Company views its licenses as an important
ingredient in offering a strong product line with strong consumer appeal.
(i) The Company markets its product line on a direct basis as well as
through approximately 100 independent, nonexclusive, sales representatives
throughout the United States. Generally sales initiated by the sales
representatives are made directly to retail chains including mass
merchants, chain drug stores, grocery stores, warehouse clubs, and office
supply super stores. The Company also has limited sales to the stationary,
military and college store markets and some sales through distributors and
wholesalers. Additionally, the Company sells its products in Canada,
Europe, Mexico and other selected countries, generally through a variety of
distribution arrangements.
The percentages of revenues contributed by the following classes of
products over the Company's last three fiscal years are as follows:
ACTIVITY
PENS MARKERS PENCILS PRODUCTS MISCELLANEOUS
----- ------- ------- -------- -------------
FY 1997....................................... 27.8% 19.2% 33.4% 14.4% 5.2%
FY 1998....................................... 18.8% 26.5% 42.0% 11.7% 1.0%
FY 1999....................................... 13.6% 27.6% 45.3% 13.5% --
(ii) The Company conducts market research to stay abreast of consumer
trends and to gauge the demand for new writing instruments and related
products. Once the Company identifies a product for marketplace
introduction, it either selects a suitable overseas manufacturer to
manufacture the product or elects to manufacture the product itself.
The Company's domestic pencil and marker manufacturing facility,
Sawdust, is presently being utilized by the Company to manufacture a
significant portion of the Company's writing instruments. Sawdust's
capacity (on a two shift basis) is approximately $34,500,000 (wholesale
value) of pencils, markers and other writing instruments. During the
Company's fiscal year ended September 30, 1999 ("Fiscal 1999"), the Company
manufactured approximately $28,200,500 (wholesale value) of products at
Sawdust, which represents 81.7% of its current capacity and approximately
44.2% of the Company's current sales requirements. During its fiscal year
ended September 30, 1998 ("Fiscal 1998"), the Company manufactured 42% of
the wholesale value of the products it sold.
An important part of the product development process is packaging. The
Company leverages its unique packaging style to reinforce its image as a
marketer of modern, well-designed, high quality, and reasonably priced
writing instruments and children's activity products.
(iii) The Company utilizes foreign manufacturers to supply a large
percentage of the products it sells. It acquires a majority of its products
from contract manufacturers located in Taiwan, China, Korea, Italy, India
and other foreign countries. Such products are manufactured to the
Company's order. The Company
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generally acquires its imported products pursuant to purchase orders, which
typically provide for delivery within 60 to 90 days after the order. The
present policy is to establish with a majority of its vendors payment terms
ranging from 30 to 60 days and finance the remainder pursuant to letters of
credit.
To date, the Company has experienced limited supply shortages with
respect to these imported products. The Company has occasionally incurred
additional costs by shipping goods into its warehouse via airfreight, as
opposed to by ship when the manufacturers did not timely deliver products
or the Company required faster delivery. The Company is unable to predict
whether it will experience similar or more severe product shortages in the
future. The Company has successfully developed alternative sources of
supply for virtually all of its important items to ensure timely deliveries
in the event of a disruption in deliveries due to a dispute with any
overseas manufacturer or any other reason. The Company has achieved this
through building Sawdust and developing multiple sources in Taiwan, China,
Korea, Italy, India and other foreign countries. As a result, the loss of
any one overseas manufacturer would probably not create any long-term
disruptions in the Company's ability to ship its goods to its customers on
a timely basis. Management believes that it is not now dependent, upon any
one manufacturer for its product lines. It believes that products of
quality comparable to its present products could, if necessary, be acquired
from a variety of overseas manufacturers at comparable rates.
The Company obtains raw materials for Sawdust from domestic and
foreign suppliers. It has not faced material supply shortages, and it
generally has multiple sources for most of its product requirements. Due to
a determination by the United States International Trade Commission that
certain Chinese manufacturers of pencils were dumping these pencils in the
United States, the Company has been required to pay "Dumping Duties" to
acquire pencils from certain of its Chinese suppliers of pencils. The
Company has also been successful in developing additional sources for its
supply of certain of its pencils. In some instances, this has resulted in
increased costs to the Company for the wood for its pencils. Recently,
certain of the Company's Chinese suppliers of pencils and related products
have been the subject of a redetermination which, in certain instances,
increased the amount of Dumping Duties the Company has or may be required
to pay. The Company has accrued for any additional duties which may arise
from this redetermination.
On September 26, 1999 the Company signed a letter of intent with a
Chinese manufacturer to establish a joint venture in Shanghai China for the
purpose of developing additional capability to manufacture pencils and
markers. The transaction is subject to the manufacturer's ability to
operate the Company's machinery and produce comparable product, approval of
the Company's bank, final approval of the Company's Board of Directors,
approval of the Chinese government, and approval of the final documents.
Accordingly, there is no assurance that the transaction will be completed,
or what, if any, impact this will have on the Company's current
manufacturing operations.
As of the September 30, 1999 the Company has not recorded any impact
of this transaction given the uncertainty of its successful completion,
however, if the transaction is successful there is the potential of some
costs associated with closing down the Company's domestic manufacturing
facility.
(iv) The Company generally markets its products under the individual
product's name and either the Company's name or the trademark of one of its
licensors. In the event opportunities present themselves which the Company
determines are advantageous for it to import certain products in bulk on a
private label basis (i.e., store brand), the Company may capitalize on such
opportunity. In such event, the Company may request an advance deposit from
the customer before effecting such transaction, depending on the credit
worthiness of the customer. This, historically, has been a small portion of
the Company's business.
The Company's marketing efforts include the development of special
promotions in connection with purchases of merchandise by certain major
chain stores. These promotions often feature advertising allowances, free
goods and free displays or permit the sale of several of the Company's
products at one favorable price. The funding for these special promotions
is substantially derived from the revenues to be received from the sales
themselves, and generally the Company is not required to allocate a large
portion of its working capital to such efforts. The Company also has
designed point of purchase product displays which it offers to its
customers.
The Company has entered into license agreements with entities such as
Lucasfilm, Ltd. (Star Wars), The Xxxx Disney Company (Mickey Mouse and
Winnie the Pooh), the NBA (National Basketball Association), the NHL
(National Hockey League), the NFL (National Football League), and Coca-Cola
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Company, using these trademark names on the Company's products. In most
situations, the licensor requires an advance royalty, a royalty against net
sales for licensed products and a minimum royalty. Generally, the Company
satisfies the minimum royalty; occasionally it does not. When the Company
is unable to meet the minimum sales levels required under a license, the
Company must pay the minimum royalty and possibly incur losses as a result
thereof. The Company evaluates its licenses carefully and attempts to
minimize such losses. These licenses have terms ranging from one to three
years and are renewed by mutual consent from both parties.
Except when the Company uses trademarks owned by others, the Company
follows a policy of registering with the U.S. Patent and Trademark Office
trademarks covering the names of items in its product line and proposed
names for new items. The Company has been awarded trademarks in the past.
There is no assurance that any pending trademarks will be registered.
(v) The business of the Company has certain seasonal aspects. Sales
tend to increase during the months of May through August, because retailers
buy in anticipation of fall school opening, and to decrease during the
months of September through December. The Company has been developing
marketing programs to reduce the impact of this seasonality.
(vi) The Company maintains a warehouse in North Brunswick, NJ, for a
portion of its inventory.
Generally, the Company does not require any of its customers to post
letters of credit or to advance any deposits on orders, except in certain
instances, depending upon the creditworthiness of the customer, for special
orders. The Company analyzes each special order customer independently to
determine whether any deposits should be paid. The Company considers credit
rating, location, and amount of order, among other factors, to determine
whether a deposit is required. Normal credit terms are "net 30 days." The
Company, in certain instances, follows the industry practice of "School
Dating," which is the shipment of products from May through August, for
which payment is not due until September or October. The Company reviews
its credit practices regularly and currently attempts to insure 80% of its
receivables through credit insurance. In the past, the Company has
experienced a limited amount of bad debts from its customers, usually as a
result of a bankruptcy. In such a case the Company's policy has been to
liquidate its claims as promptly as reasonable under the circumstances.
This has been further ameliorated since the Company obtained credit
insurance. The Company believes it has sufficient resources to manage its
credit function.
(vii) The Company's primary customers include major mass market
retailers in the United States. In Fiscal 1999, one customer accounted for
9% of the Company's revenues. While the loss of this customer could have a
material adverse impact upon the Company in the short-term, the Company
believes such impact would be minimized in the long-term since the Company
could either reduce its expenses related to this customer or sell all or a
portion of these products to other customers.
Certain of the Company's customers include:
-- Office Max -- Walgreen Drug
-- Walmart -- Eckerd
-- Target -- Staples
The above list of customers does not include independent distributors
nor products the Company sells to the stationery, military and college
store markets.
The Company advertises in trade journals on a limited basis and
maintains display booths for use at trade shows. It owns several booths
that attractively display its line of products for such trade shows. The
Company has developed a website to attractively display its products on the
world wide web located at "xxx.xxxxxxxxxxx.xxx." The Company has no current
plans for any other major advertising campaign, however it regularly
investigates additional advertising avenues.
The Company warrants its merchandise against manufacturing defects. In
the event of any such returns the Company evaluates the problem and
attempts to rectify the problem for the customer, if possible. The Company
believes it maintains adequate product liability insurance.
(viii) As of December 16, 1999 and 1998, the Company's backlog of firm
written orders was approximately $1,600,000 in each year. This backlog is
comprised of the normal delay between receipt and
D-4
processing of orders and orders for delayed delivery. All orders were
delivered or are expected to be filled within the applicable fiscal year.
(x) The industry in which the Company is engaged is highly
competitive. The Company competes with a large number of companies,
including such well-known companies as Bic Pen Company, Papermate, RoseArt
Industries, Inc. and Newell. Some of the Company's competitors have far
greater financial resources and sales. The Company generally competes on
the basis of the special features of its products, quality, packaging
design (which includes the individual product's name and the Company's name
and logo or the trademark of one of the Company's licensors) and price.
(xiii) As of December 16, 1999, the Company had approximately 146
employees. The Company's sales are made primarily by independent sales
organizations which are compensated exclusively on a commission basis with
commissions ranging from two and one half to seven percent. The Company
does not anticipate a substantial increase in the number of its employees
in the near future. The Company considers its relations with its employees
to be good. In December 1992, the production and maintenance employees of
the Company's wholly-owned subsidiary, Sawdust, voted to join Local 478 of
the International Brotherhood of Teamsters (the "Union"). In the Company's
fiscal year ended September 30, 1996 ("Fiscal 1996"), Sawdust renewed its
labor agreement with the Union for the benefit of these employees, which
agreement expired August 31, 1999. At present, the Union has agreed to work
under the terms and conditions of the expired contract until a new contract
is negotiated and a determination is made as to the impact of the Company's
investigation into moving a portion of its manufacturing operations
overseas.
(d) The Company exported approximately 6.3% of its sales, primarily to
customers in Canada, Europe and Mexico, during Fiscal 1999.
ITEM 2. PROPERTIES.
The Company's present executive offices are located at 000 Xxxxxx Xxxxx,
Xxxxxx, Xxx Xxxxxx 00000, where it occupies general office, sales and warehouse
space of approximately 40,500 square feet pursuant to a five year lease expiring
March 1, 2003.
The Company extended its lease for five years commencing June 1, 1995 (the
"Sawdust Lease") for approximately 50,000 square feet for Sawdust's premises.
These premises are located at 00 Xxxxxxxx Xxxx, Xxxxxx, XX 00000. The Sawdust
Lease, which is triple net, currently requires annual rental payment of $180,936
with yearly increment additions in each subsequent year of the Sawdust Lease's
term. The Sawdust Lease contains an option to renew on terms providing for
moderate increases in rent for up to an additional five years.
The Company entered into a five year lease for a warehouse at 0000
Xxxxxxxxx Xxxx, Xxxxx Xxxxxxxxx, Xxx Xxxxxx (the "Warehouse Lease") for
approximately 130,000 square feet, which commenced on September 1, 1995. The
Warehouse Lease provides for annual base rent of approximately $436,000 per
year.
The Company entered into a year-to-year lease for a sales office in
Madison, Wisconsin (the "Madison Lease"). The Madison Lease is for approximately
1,885 square feet and commenced May 1, 1997. The Madison Lease calls for annual
rental of $24,318, which increases by 3.5 percent each subsequent lease year
until termination.
The Company entered into a month-to-month lease for a studio at 00 Xxxxx
Xxxxxx, Xxx Bank, New Jersey for approximately 2,400 square feet which commenced
on April 1, 1997. The Studio Lease provides for monthly rent of $3,700.
ITEM 3. LEGAL PROCEEDINGS.
There are no legal proceedings to which the Company is a party or known to
be contemplated that are deemed material by the Company at the present time, and
the Company knows of no material legal proceedings pending or threatened, or
judgments entered, against any director or officer of the Company in his
capacity as such.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
D-5
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) The shares of Common Stock are traded on the National Association of
Securities Dealers Automatic Quotation System ("NASDAQ") National Market System
under the symbol PNTK. The following table shows the closing high and low "bid"
prices of these shares as reported by NASDAQ during the Company's last two
fiscal years presented on a calendar year basis. Such quotations represent
prices between dealers without retail markups, markdowns or commissions and may
not represent actual transactions.
HIGH LOW
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1999
1st Quarter........................................................................... 1 3/16 9/16
2nd Quarter........................................................................... 1 7/32 5/8
3rd Quarter........................................................................... 25/32 19/32
4th Quarter........................................................................... 1 15/32 3/4
1998
1st Quarter........................................................................... 3 1/16 2 1/2
2nd Quarter........................................................................... 2 31/32 1 1/8
3rd Quarter........................................................................... 2 1 1/8
4th Quarter........................................................................... 1 13/16 15/16
On December 16, 1999, the closing "bid" and "ask" prices for the Common
Stock were $ 11/16 and $ 25/32 respectively, as reported by NASDAQ.
(b) On December 16, 1999, the number of shareholders of record of the
Common Stock was 430. The Company is aware that it has a substantial number of
additional shareholders who hold their shares of Common Stock in "street name."
(c) The Company has not declared a cash dividend in the past and is not
permitted to do so without the consent of its lender. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA.
The following summary of financial information should be read in
conjunction with the Financial Statements and notes thereto included elsewhere
in this Form 10-K.
STATEMENT OF OPERATIONS DATA
FISCAL YEARS ENDED SEPTEMBER 30,
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1999 1998 1997 1996 1995
------- ------- ------- ------- -------
($000S OMITTED EXCEPT PER SHARE AMOUNTS)
Net sales................................................. $60,949 $57,485 $60,806 $61,679 $54,892
Net (loss) income......................................... (334) (3,504) 600 (5,317) (1,059)
Basic and diluted net (loss) income per share............. $ (.03) $ (.28) $ .05 $ (.51) $ (.10)
Weighted average number of shares outstanding............. 12,570 12,537 12,297 10,497 10,661
Dividends................................................. -- -- -- -- --
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BALANCE SHEET DATA
SEPTEMBER 30,
---------------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
($000S OMITTED)
Working capital............................................ $11,971 $12,883 $15,452 $13,676 $16,928
Total assets............................................... 36,094 41,583 42,503 48,189 44,518
Notes and bankers' acceptances payable (included in current
liabilities)............................................. 13,882 18,618 17,238 22,841 17,011
Long-term debt............................................. 1,500 2,000 2,300 2,300 --
Shareholders' equity....................................... 13,985 14,758 17,591 16,028 21,345
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
(a) Results of Operations
Fiscal 1999 compared to Fiscal 1998
Net sales for Fiscal 1999 were $60,949,084 as compared to $57,485,045 for
Fiscal 1998, reflecting an increase of $3,464,039 or approximately 6%. This was
the result of the success of the Company's new licenses and further market
penetration of the Company's childrens activity product line.
In Fiscal 1999, the Company had income from operations of $1,133,057 as
compared to a loss from operations of $2,339,443 in Fiscal 1998. The Company's
gross profit of 31.9% in Fiscal 1999 increased from 28.1% in Fiscal 1998 largely
in part to the increased sales from its three new licenses, which have higher
gross profit margins. In addition, the Company made an investment through
aggressive pricing to gain shelf space for its children's activity product line
in the prior year.
The Company's selling, general and administrative ("SG&A") expenses
decreased during Fiscal 1999 to $18,286,990 from $18,474,161 in Fiscal 1998,
reflecting an decrease of $187,171. SG&A as a percentage of sales also decreased
to 30% from 32.1%. This decrease was primarily related to the Company's cost
reduction program offset by the increase in royalty expenses associated with the
success of the Company's three new licenses. In addition, in the prior year, the
Company incurred higher promotional costs associated with the launch of its
activity product line.
During Fiscal 1999, the Company's average level of short-term borrowings
increased to $16,500,000 from $16,000,000 in Fiscal 1998. This was due to the
increased loan balance at the beginning of Fiscal 1999 resulting from the higher
inventory levels. These levels were reduced during the course of the year. The
Company's effective annual interest rate decreased from 8.4% to 8.0%. In
addition, interest incurred on the settlement note was lower from the prior year
as a result of quarterly principal payments. As a result, the Company's interest
expense decreased during Fiscal 1999 to $1,470,699 from $1,528,779.
During Fiscal 1999, the Company increased its valuation allowance against
all of its deferred tax assets from $2,614,202 to $2,670,714 due to the
uncertainty of the Company's ability to utilize its federal and state net
operating loss carryforwards.
As a result of the above, the Company recognized a net loss of $333,609, or
$.03 per share, in Fiscal 1999 as compared to a net loss of $3,504,303, or $.28
per share, in Fiscal 1998.
Fiscal 1998 Compared to Fiscal 1997
Net sales for Fiscal 1998 were $57,485,045 as compared to $60,806,386 for
Fiscal 1997, reflecting a decrease of $3,321,341 or approximately 5.5%. Sales
from three of the Company's licensed products were down from the previous year
as were sales from promotional and holiday programs. This was offset, in part,
by the success of the children's activity products as well as commodity
programs.
In Fiscal 1998, the Company had a loss from operations of $2,339,443 as
compared to income from operations of $2,155,227 in Fiscal 1997. The Company's
gross profit of 28.1% in Fiscal 1998 decreased from 34.3% in Fiscal 1997. The
Company's gross profit decreased principally due to the decline in licensed
products
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which historically are marketed at higher margins and, to a lesser extent, to an
inventory write-down and the impact of a large return of promotional
back-to-school products. The Company also made an investment to gain shelf space
for its activity product line through aggressive pricing and various other
promotions.
The Company's SG&A expenses increased during Fiscal 1998 to $18,474,161
from $17,988,791 in Fiscal 1997, reflecting an increase of $485,370. SG&A
expenses as a percentage of sales also increased from 29.6% to 32.1%. The
increase was primarily related to higher promotional costs associated with the
Company's launch of its activity product line to new retail stores. The Company
incurred higher bad debt expense as a result of bankruptcies of two customers.
The Company also incurred additional costs for the development of products for
two of its new licenses. Warehouse and freight expenses also increased as a
percentage of sales due to a decline in the average order size as a result of
increased sales to the office superstores. Finally, the percentage of SG&A
expenses to revenues increased as a result of higher levels of fixed costs
incurred but there was lower sales volume.
In the second quarter of Fiscal 1998, the Company as part of the settlement
of a lawsuit, was awarded $965,000, net of legal fees.
During Fiscal 1998, the Company's average level of short-term borrowings
remained unchanged from the prior year at approximately $16,000,000. This was
due to the sale of assets, related to the cosmetic product line, plus the
litigation settlement offset by an increase in inventory levels and the
operating loss. The Company's effective annual interest rate decreased from 8.7%
to 8.4%. In addition, interest incurred on the settlement note was lower than
the prior year as a result of quarterly principal payments, which began in
January 1998. As a result, the Company's interest expense decreased during
Fiscal 1998 to $1,528,779 from $1,583,750.
During Fiscal 1998, the Company increased its valuation allowance against
its deferred tax assets from $965,565 to $2,614,202. The increase of $1,648,637
was recorded due to the uncertainty of the Company's ability to fully utilize
federal and state net operating loss carryforwards.
Based on the above, the Company recognized a net loss of $3,504,303 in
Fiscal 1998 as compared to net income of $600,014 in Fiscal 1997.
(b) Liquidity and Capital Resources
Cash and cash equivalents decreased to $0 at September 30, 1999 from
$759,349 at September 30, 1998. Accounts receivable increased to $15,300,613 at
September 30, 1999 from $14,327,195 at September 30, 1998, primarily due to
higher sales volume. The Company believes that its allowance for doubtful
accounts and its accrual for returns and advertising allowances are adequate
given the Company's detailed review of its accounts receivable aging, its review
of subsequent cash receipts, its use of credit limits and its on-going credit
evaluation and account monitoring. In addition, the Company has credit insurance
on most of its major accounts receivable. Inventory decreased to $15,415,326 at
September 30, 1999 from $20,015,241 the year before due to the Company's
inventory reduction program. The decrease to $3,154,383 for equipment at
September 30, 1999 from $3,562,283 at September 30, 1998 primarily reflects a
reduction in the rate of equipment purchases. Notes payable at September 30,
1999 decreased to $13,881,901 from $18,618,186 at September 30, 1998 due
primarily to the decreased inventory levels.
Net cash provided by operating activities for the Fiscal 1999 was
$4,606,458 as compared to net cash used in operating activities of $1,309,440
for Fiscal 1998. This increase was primarily due to improved operating results,
the reduction in inventory, and to a lesser extent, the increase in accounts
payable offset by the increase in accounts receivable.
Xxxx used in investing activities during Fiscal 1999 of $630,272 was higher
than $9,643 in the prior year due to proceeds from the sale of the cosmetic
assets in the prior year.
The cash used in financing activities during Fiscal 1999 was $4,735,535 as
compared to cash provided by financing activities of $1,429,620 in Fiscal 1998.
The decrease in cash provided by financing activities was primarily due to the
decrease in notes payable. As a result of these activities, cash and cash
equivalents decreased $759,349 during Fiscal 1999 as compared to an increase of
$110,537 during Fiscal 1998.
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As a result of the above, the Company's working capital decreased to
$11,970,736 at September 30, 1999 from $12,882,941 at September 30, 1998.
In January 1997, the Company entered into a three year $30,000,000
revolving credit facility with BankAmerica Business Credit, Inc. now known as
Bank of America, N.A.("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 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 minimum interest coverage ratios. In January 1999, the
Company and BABC entered into an agreement to amend the Credit Agreement. This
amendment, among other things, modified certain financial covenants for Fiscal
1999, reduced the revolving credit facility to $25,000,000, lowered the maximum
inventory advance and allowed for a seasonal over-advance.
In December 1999, the Company and BABC entered into an agreement to renew
the Credit Agreement for an additional three years (the "Renewal"). The Renewal,
among other things, waives compliance with certain financial covenants violated
at September 30, 1999, modifies the financial covenants for the next three
fiscal years, increases the maximum inventory advance and allows for a seasonal
over-advance.
The note issued in connection with the legal settlement referred to above
requires $100,000 quarterly principal payments through April 1, 2004.
The Company continued several actions to increase its liquidity during
Fiscal 1999. It continued a policy of obtaining 30 to 60 days vendor credit to
finance a majority of its purchases; previously these purchases had been
financed pursuant to letters of credit. Actions were also taken to reduce the
number of items held in inventory as well as reduce its headcount.
On September 26, 1999 the Company signed a letter of intent with a Chinese
manufacturer to establish a joint venture in Shanghai China for the purpose of
developing additional capability to manufacture pencils and markers. The
transaction is subject to the manufacturer's ability to operate the Company's
machinery and produce comparable product, approval of the Company's bank, final
approval of the Company's Board of Directors, approval of the Chinese
government, and approval of the final documents. Accordingly, there is no
assurance that the transaction will be completed, or what, if any, impact this
will have on the Company's current manufacturing operations.
As of the September 30, 1999 the Company has not recorded any impact of
this transaction given the uncertainty of its successful completion, however, if
the transaction is successful there is the potential of some costs associated
with closing down the Company's domestic manufacturing facility.
As a result of the seasonal nature of the Company's business, the Company's
use of credit 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 collection of the invoices from its Back-to-School
sales.
The Company anticipates that its revolving credit line provided by the
Credit Agreement, together with anticipated cash flow from operations, will be
sufficient to provide liquidity on both a short-term and long-term basis to
finance current and future operations.
With respect to the Year 2000 issue, all internal computer equipment,
manufacturing, distribution and business equipment are Year 2000 compliant. The
Company utilizes a third party software package to run its internal operating
and accounting systems and purchased and installed the Year 2000 compliant
version in December 1998. In addition, all telecommunications equipment and
computer applications are Year 2000 compliant. The Company has, therefore, not
developed any contingency plans relating to Year 2000 issues. Year 2000 problems
involving third parties may have a negative impact on the Company's customers or
suppliers, the general economy or on the ability of businesses generally to
receive essential services (such as telecommunications, banking services, etc.).
Any such problem could have a material adverse effect on the Company's business
and financial condition. The Company has contacted its major suppliers and
customers in order to assess any third party risk, the majority of which has
stated that they are Year 2000 compliant, however, the Company is unable at this
time to assess the possible impact on its business of Year 2000 problems
involving
D-9
any third party. The costs associated with becoming Year 2000 compliant were not
material and, for the most part, were absorbed in the Company's normal
information technology budget. Although the Company believes that its systems
are Year 2000 compliant, there can be no assurance that unanticipated Year 2000
problems will not arise which, depending on the nature and magnitude of the
problem, could have a material adverse effect on the Company's business and
financial condition.
(c) Safe Harbor Statement
Statements which are not historical facts, including statements about the
Company's confidence and strategies and its expectations about new and existing
products, technologies and opportunities, market and industry segment growth,
demand and acceptance of new and existing products are forward looking
statements that involve risks and uncertainties. These include, but are not
limited to, product demand and market acceptance risks; the impact of
competitive products and pricing; the results of financing efforts; the loss of
any significant customers of any business; the effect of the Company's
accounting policies; the effects of economic conditions and trade, legal,
social, and economic risks, such as import, licensing, and trade restrictions;
the results of the Company's business plan and the impact on the Company of its
relationship with its lender.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
This information is contained on pages D-13 through D-28 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required by this section will be incorporated by reference
to the Proxy Statement of the Company to be filed with the Securities and
Exchange Commission on or before January 29, 2000.
D-10
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
PAGE
-------
Independent Auditors' Report............................................................................. D-13
Consolidated Balance Sheets as of September 30, 1999 and 1998............................................ D-14
Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997.............. D-15
Consolidated Statements of Shareholders' Equity for the years ended September 30, 1999, 1998
and 1997............................................................................................... D-16
Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998,
and 1997............................................................................................... D-17
Notes to Consolidated Financial Statements............................................................... D-18-27
(a) (2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves.............................................. D-28
All other schedules are omitted because they are not applicable, not
required, or because the required information is included in the financial
statements or notes thereto.
(a) (3) Exhibits
3.1 -- The Company's Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 to
Registration Statement No. 2-95102-NY of the Company ("Form S-18").
3.2 -- The Company's By-laws incorporated by reference to Exhibit 3.2 of Form S-18.
10.1 -- 1989 Stock Option Plan incorporated by reference to Exhibit 4.2 to the Registration Statement
No. 33-27009 on Form S-8.
10.2 -- 1993 Stock Option Plan incorporated by reference to Exhibit 4.1 to the Registration Statement
No. 33-67802 on Form S-8.
10.3 -- 1995 Stock Option Plan is incorporated by reference to Exhibit 4.1 to the Registration Statement
No. 333-30595 filed on Form S-8.
10.4 -- Loan and Security Agreement dated as of January 13, 1997, among the Company, Pentech Cosmetics, Inc.,
Sawdust Pencil Co. and BankAmerica Business Credit, Inc. incorporated by reference to Exhibit 10.7 of the
Company's Form 10-K Annual Report for its fiscal year ended September 30, 1996.
10.5 -- Waiver and First Amendment to Loan and Security Agreement among the Company, Pentech Cosmetics, Inc.,
Sawdust Pencil Co. and BankAmerica Business Credit, Inc. dated as of January 11, 1999 incorporated by
reference to Exhibit 10.5 of the Company's Form 10-K Annual Report for its fiscal year ended
September 30, 1998.
10.6 -- Waiver, Consent and Second Amendment to Loan and Security Agreement by and among Bank of America, N.A.,
the Company, Pentech Cosmetics and Sawdust Pencil Co. dated as of December 20, 1999.
10.8 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP dated December 28, 1999.
27 -- Financial Data Schedule.
D-11
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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.
December 27, 1999 By: /s/ XXXXX XXXXXXX
------------------------------------------
Xxxxx Xxxxxxx
President and Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
/s/ XXXXXX XXXXXXX Chairman of the Board of Directors December 27, 1999
------------------------------------------
Xxxxxx Xxxxxxx
/s/ XXXXX XXXXXXX President and Chief Executive Officer and December 27, 1999
------------------------------------------ Director (principal operating officer)
Xxxxx Xxxxxxx
/s/ XXXX X. XXXXXXX Director December 27, 1999
------------------------------------------
Xxxx X. Xxxxxxx
/s/ XXXXXXX X. XXXXX Secretary and Director December 27, 1999
------------------------------------------
Xxxxxxx X. Xxxxx
/s/ XXX X. XXX Director December 27, 1999
------------------------------------------
Xxx X. Xxx
/s/ XXXXXX X. XXXXX Director December 27, 1999
------------------------------------------
Xxxxxx Xxxxx
/s/ XXXXXXX XXXXXX Executive Vice President--Strategic Planning December 27, 1999
------------------------------------------ and Director (principal financial officer)
Xxxxxxx Xxxxxx
D-12
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pentech International Inc.
We have audited the accompanying consolidated balance sheets of Pentech
International Inc. and subsidiaries as of September 30, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. Our
audits also included the financial statement schedule listed in the Index at
Item 14(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Pentech
International Inc. and subsidiaries as of September 30, 1999 and 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended September 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
-------------------------
Xxxxx & Young LLP
MetroPark, New Jersey
December 8, 1999, except
for Note 3(c), as to which the
date is December 20, 1999
D-13
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
--------------------------
1999 1998
----------- -----------
ASSETS (NOTE 3)
Current Assets:
Cash and cash equivalents........................................................ $ -- $ 759,349
Accounts receivable, net of allowance for doubtful accounts $35,654 and $128,814
in 1999 and 1998, respectively)............................................... 15,300,613 14,327,195
Inventory (Note 2)............................................................... 15,415,326 20,015,241
Income taxes receivable (Note 5)................................................. 300 448,087
Prepaid expenses and other....................................................... 1,632,401 1,436,415
Available-for-Sale Security (Notes 1 and 13)..................................... 181,400 621,875
----------- -----------
Total current assets............................................................... 32,530,040 37,608,162
----------- -----------
Equipment:
Equipment and furniture.......................................................... 9,472,206 8,934,327
Less accumulated depreciation.................................................... (6,317,823) (5,372,044)
----------- -----------
3,154,383 3,562,283
----------- -----------
Other assets:
Trademarks, net of amortization of $762,388 and $666,766 in 1999 and 1998,
respectively.................................................................. 236,301 239,530
Due from officer................................................................. 173,512 173,512
----------- -----------
409,813 413,042
----------- -----------
$36,094,236 $41,583,487
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable (Note 3)........................................................... $13,881,901 $18,618,186
Accounts payable................................................................. 3,322,094 2,455,073
Accrued expenses (Note 11)....................................................... 3,055,309 3,351,962
Settlement note payable (Note 8)................................................. 300,000 300,000
----------- -----------
Total current liabilities.......................................................... 20,559,304 24,725,221
----------- -----------
Other liabilities:
Royalty payable, long-term (Note 8).............................................. 50,000 100,000
Settlement note payable, long-term (Note 8)...................................... 1,500,000 2,000,000
----------- -----------
1,550,000 2,100,000
----------- -----------
Commitments and contingencies (Note 6)
Shareholders' equity (Notes 1 and 4):
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;
issued and outstanding 12,571,258 and 12,570,258 in 1999
and 1998, respectively........................................................ 125,713 125,703
Capital in excess of par......................................................... 6,838,723 6,837,983
Retained earnings................................................................ 6,839,096 7,172,705
Accumulated other comprehensive income (Notes 1 and 13).......................... 181,400 621,875
----------- -----------
13,984,932 14,758,266
----------- -----------
$36,094,236 $41,583,487
=========== ===========
See accompanying notes.
D-14
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Net sales (Note 9).................................................. $60,949,084 $57,485,045 $60,806,386
Cost of sales....................................................... 41,529,037 41,350,327 39,975,368
----------- ----------- -----------
Gross profit................................................... 19,420,047 16,134,718 20,831,018
Selling, general and administrative expenses........................ 18,286,990 18,474,161 17,988,791
Loss from cosmetics operation (Note 7).............................. -- -- 687,000
----------- ----------- -----------
Income (loss) from operations.................................. 1,133,057 (2,339,443) 2,155,227
----------- ----------- -----------
Other (income) expense:
(Income) from litigation (Note 14)................................ -- (965,542) --
Interest expense.................................................. 1,470,699 1,528,779 1,583,750
Interest income................................................... (4,033) (33,392) (9,660)
----------- ----------- -----------
1,466,666 529,845 1,574,090
----------- ----------- -----------
(Loss) income before taxes.......................................... (333,609) (2,869,288) 581,137
Income tax expense (benefit) (Note 5)............................... -- 635,015 (18,877)
----------- ----------- -----------
Net (loss) income................................................... $ (333,609) $(3,504,303) $ 600,014
=========== =========== ===========
Basic and diluted (loss) earnings per common share (Note 1)......... $ (.03) $ (.28) $ .05
=========== =========== ===========
See accompanying notes.
D-15
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
COMMON STOCK ACCUMULATED
NUMBER OF SHARES CAPITAL OTHER
----------------------- IN EXCESS RETAINED COMPREHENSIVE COMPREHENSIVE
AUTHORIZED ISSUED AMOUNT OF PAR EARNINGS INCOME (LOSS) INCOME
---------- ---------- -------- ---------- ----------- ------------- -------------
Balance, September 30,
1996........................... 20,000,000 10,496,758 $104,968 $5,845,781 $10,076,994 --
Issuance of Common Stock....... 2,007,500 20,075 943,362
Net income..................... 600,014 $ 600,014
---------- ---------- -------- ---------- ----------- ----------- ---------
Balance, September 30,
1997........................... 20,000,000 12,504,258 125,043 6,789,143 10,677,008 --
Comprehensive (loss):
Net loss..................... (3,504,303) $(3,504,303)
Other comprehensive income:
Unrealized gain on available-
for-sale security.......... 621,875 $ 621,875
-----------
Comprehensive (loss)........... $(2,882,428)
Issuance of Common Stock....... 66,000 660 48,840
---------- ---------- -------- ---------- ----------- ----------- ---------
Balance, September 30,
1998........................... 20,000,000 12,570,258 125,703 6,837,983 7,172,705 621,875
Comprehensive (loss):
Net loss....................... (333,609) $ (333,609)
Other comprehensive (loss)
Unrealized loss on available-
for-sale security.......... (440,475) (440,475)
-----------
Comprehensive (loss)............. $ (774,084)
Issuance of Common Stock......... 1,000 10 740
---------- ---------- -------- ---------- ----------- ----------- ---------
20,000,000 12,571,258 $125,713 $6,838,723 $ 6,839,096 $ 181,400
========== ========== ======== ========== =========== =========
See accompanying notes.
D-16
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1999 1998 1997
---------- ----------- ----------
Cash flows from operating activities:
Net (loss) income.................................................... $ (333,609) $(3,504,303) $ 600,014
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation.................................................... 945,779 942,432 982,702
Amortization.................................................... 95,622 100,363 116,925
Provision for losses on accounts receivable..................... 95,753 134,974 15,401
Deferred income taxes........................................... -- 635,015 290,099
Provision for loss from cosmetics operation..................... -- -- 687,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable...................... (1,069,171) 1,746,117 (1,771,187)
Decrease (increase) in inventory................................ 4,599,915 (1,957,743) (152,916)
(Increase) decrease in prepaid expenses and other............... (195,986) 118,620 (605,228)
(Increase) in due from officer.................................. -- (32,000) (32,001)
(Decrease) in bankers' acceptances payable...................... -- -- (1,488,757)
Increase (decrease) in accounts payable......................... 867,021 1,121,468 (331,698)
(Decrease) in accrued expenses.................................. (296,653) (88,742) (386,426)
(Decrease) in settlement payables............................... (550,000) (500,000) (1,000,000)
Change in income taxes payable/receivable....................... 447,787 (25,641) 723,968
---------- ----------- ----------
Net cash provided by (used in) operating activities.................... 4,606,458 (1,309,440) (2,352,104)
Cash flows from investing activities:
Sale of cosmetics assets............................................. -- 758,426 --
Purchase of equipment and furniture.................................. (537,879) (697,884) (793,006)
Increase in trademarks............................................... (92,393) (70,185) (118,891)
---------- ----------- ----------
Net cash used in investing activities.................................. (630,272) (9,643) (911,897)
Cash flows from financing activities
Net (decrease) increase in notes payable............................. (4,736,285) 1,380,120 (4,114,432)
Proceeds from the issuance of Common Stock........................... 750 49,500 963,437
---------- ----------- ----------
Net cash (used in) provided by financing activities.................... (4,735,535) 1,429,620 (3,150,995)
---------- ----------- ----------
Net (decrease) increase in cash and cash equivalents................... (759,349) 110,537 (6,414,996)
Cash and cash equivalents, beginning of year........................... 759,349 648,812 7,063,808
---------- ----------- ----------
Cash and cash equivalents, end of year................................. $ -- $ 759,349 $ 648,812
========== =========== ==========
Supplemental disclosures of cash flow information:
Non-cash investing activities:
(Decrease) increase in fair value of available for sale equity
security.......................................................... $ (440,475) $ 621,875
Purchase of fixed assets by capital lease............................ -- -- $ 72,050
Cash paid during the year for:
Interest.......................................................... $1,557,011 $ 1,454,840 1,773,920
Income taxes...................................................... -- -- $ 30,931
See accompanying notes.
D-17
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Pentech International Inc. (the "Company") was formed in April 1984. A
wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), was formed in November
1989. The Company and its subsidiary are engaged in the production, design, and
marketing of writing and drawing instruments. In October 1993, the Company
formed another 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, other writing
instruments and activity kits, primarily 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.
Inventory and Cost of Sales
Inventory is stated at the lower of cost (first-in, first-out) or market.
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 between 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.
D-18
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(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 December 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 conform to the SFAS No. 128
requirements.
The following table sets forth the computation of basic and diluted
earnings per share:
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1999 1998 1997
----------- ----------- -----------
Numerator:
Net (loss) income................................................. $ (333,609) $(3,504,303) $ 600,014
=========== =========== ===========
Denominator:
Denominator for basic earnings per share-weighted average
shares......................................................... 12,570,508 12,537,258 12,297,124
Effect of dilutive securities:
Employee stock options............................................ 0 0 194,043
----------- ----------- -----------
Denominator for diluted earnings per share--adjusted weighted
average shares and assumed conversions............................ $12,570,508 $12,537,258 $12,491,167
=========== =========== ===========
Basic and diluted (loss) income per share........................... $ (.03) $ (.28) $ .05
=========== =========== ===========
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.
Other Recently Issued Accounting Standard
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,
2000. The Company has completed its review of SFAS 133 and has concluded that
the adoption of this statement would not have any effect on the Company and its
reporting.
D-19
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
2. INVENTORY
1999 1998
----------- -----------
Raw materials...................................................................... $ 4,261,866 $ 6,634,833
Work-in-process.................................................................... 1,748,504 1,641,162
Finished goods..................................................................... 10,510,956 12,849,246
Allowance for slow-moving items.................................................... (1,106,000) (1,110,000)
----------- -----------
$15,415,326 $20,015,241
=========== ===========
3. NOTES PAYABLE
1999 1998
----------- -----------
Revolving line of credit, interest payable monthly at prime plus .5%
(8.75% at September 30, 1999 and 9% at September 30, 1998)....................... $ 1,881,901 $ 4,618,186
Revolving line of credit, interest payable monthly at LIBOR plus 2.5%
(ranging from 7.76% to 7.87% at September 30, 1999 and 7.813% to 8.188% at
September 30, 1998).............................................................. 12,000,000 14,000,000
----------- -----------
$13,881,901 $18,618,186
=========== ===========
(a) In January 1997, the Company entered into a three year $30,000,000
Revolving Credit Agreement with BankAmerica Business Credit, Inc. now known as
Bank of America, N.A. ("BABC") (the "Credit Agreement"). Borrowings under the
Credit Agreement are subject to limitations based upon eligible inventory and
accounts receivable as defined in the Credit Agreement. Amounts borrowed under
the Credit Agreement accrue 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 and interest coverage ratios and
the Company cannot declare a cash divided without the consent of BABC.
(b) In January 1999, the Company and BABC entered into an agreement to
amend the Credit Agreement. This amendment, among other things, waived
compliance with the violated covenants, reduced the revolving credit facility to
$25,000,000, modified the financial covenants for Fiscal 1999, lowered the
maximum inventory advance and allowed for a seasonal over-advance.
(c) In December 1999, the Company and BABC entered into an agreement to
renew the Credit Agreement for an additional three years (the "Renewal"). The
Renewal, among other things, waives compliance with certain financial covenants
violated at September 30, 1999, modifies the financial covenants for the next
three fiscal years, increases the maximum inventory advance and allows for a
seasonal over-advance.
The weighted average annual interest rate during the periods on the
outstanding short-term borrowings was 8.0% and 8.4% for fiscal years ended
September 30, 1999 and 1998, respectively.
4. SHAREHOLDERS' EQUITY
Stock Options
During Fiscal 1997, the Company granted options (outside of the plans
discussed herein) covering in the aggregate 20,000 shares of common stock at an
exercise price of $1.19 per share (representing fair market value at date of
grant). In addition, options covering in the aggregate of 175,000 shares were
canceled.
D-20
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
4. SHAREHOLDERS' EQUITY--(CONTINUED)
Stock Option Plans
On January 5, 1989, the Company adopted a stock option plan ("1989 Plan").
The 1989 Plan provides for options and limited stock appreciation rights
("Limited SARs") to be granted in tandem to issue up to 600,000 shares of common
stock. Limited SARs may only be granted in conjunction with related options.
The exercise price of options granted may not be less than the fair market
value of the shares on the date of the grant (110% of such fair market value for
a holder of more than 10% of the Company's voting securities), nor may options
be exercised more than ten years from date of grant (5 years for a holder of
more than 10% of the Company's voting securities). No SARs have been granted.
The 1989 Plan was terminated on January 5, 1999. Outstanding options continue to
be exercisable according to their terms and remain subject to all the terms and
conditions of the 1989 Plan, however no more grants can be issued.
On April 14, 1993, the Company adopted a Stock Option Plan ("1993 Plan").
The 1993 Plan provides for the issuance of incentive and nonstatutory stock
options to employees, consultants, advisors and/or directors for a total up to
700,000 shares of common stock. The exercise price of options granted may not be
less than the fair market value of the shares on the date of grant (110% of such
fair market value for a holder of more than 10% of the Company's common stock),
nor may options be exercised more than five years from date of grant. The 1993
Plan will terminate on January 4, 2003.
On May 9, 1995, the Company adopted a Stock Option Plan ("1995 Plan"). The
1995 Plan provides for the issuance of incentive and nonstatutory stock options
to employees, consultants, advisors and/or directors for a total of up to
700,000 shares of Common Stock. The determination of the exercise price of the
options granted under the 1995 Plan are the same as those of the 1993 Plan. The
1995 Plan will terminate on January 4, 2005.
On November 26, 1996, the Board of Directors offered to cancel and reissue
certain options (at a reduced level) in the 1989 and 1993 Plans at the fair
market value of the Company's Common Stock on such date. Upon acceptance by the
option holders, the vesting period began one year from the date of the offer and
the options become exercisable ratably over a period of three years and expire
four years from the date of issuance.
The table below presents option information for the 1989 Plan:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
---------------------- ---------------------- ------------------------
PRICE RANGE SHARES PRICE RANGE SHARES PRICE RANGE SHARES
----------- ------- ----------- ------- ------------ --------
Outstanding, beginning of year.......... $0.75-2.875 270,600 $ 0.75 285,600 $3.125-7.875 351,000
Options granted......................... 1.50-2.875 105,000 0.75 285,600
Canceled................................ 0.75-2.875 (78,600) 0.75 (72,000) 3.125-7.875 (351,000)
Exercised............................... 0.75 (48,000)
----------- ------- ----------- ------- ------------ --------
Outstanding, end of year................ $0.75-2.875 192,000 $0.75-2.875 270,600 $ 0.75 285,600
=========== ======= =========== ======= ============ ========
Eligible for exercise currently......... $0.75-2.875 107,835 $ 0.75 51,200 -- --
=========== ======= =========== ======= ============ ========
The table below presents option information for the 1993 Plan:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
----------------------- ----------------------- ------------------------
PRICE RANGE SHARES PRICE RANGE SHARES PRICE RANGE SHARES
----------- -------- ----------- -------- ------------ --------
Outstanding, beginning of year......... $0.75-5.50 310,500 $0.75-5.50 440,500 $3.125-6.125 647,500
Options granted........................ 0.75-1.25 155,600 -- -- 0.75-0.875 385,500
Canceled............................... 0.75-5.50 (125,500) 0.75-4.50 (112,000) 3.125-6.125 (592,500)
Exercised.............................. 0.75 (1,000) 0.75 (18,000)
----------- -------- ----------- -------- ------------ --------
Outstanding, end of year............... $0.75-5.50 339,600 $0.75-5.50 310,500 $ 0.75-5.50 440,500
=========== ======== =========== ======== ============ ========
Eligible for exercise currently........ $0.75-5.50 133,500 $0.75-5.50 96,000 $ 4.50-5.50 43,000
=========== ======== =========== ======== ============ ========
D-21
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
4. SHAREHOLDERS' EQUITY--(CONTINUED)
The table below presents option information for the 1995 Plan:
YEAR ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------ ------------------------- ------------------------
PRICE RANGE SHARES PRICE RANGE SHARES PRICE RANGE SHARES
-------------- ------ -------------- ------- ------------- -------
Outstanding, beginning of year.... $ 0.75-2.9375 75,002 $ 0.750-2.9375 123,000 $ 3.00 10,000
Options granted................... -- -- 1.625-1.688 9,500 0.750-2.9375 123,000
Canceled.......................... 0.75-1.4375 (8,500) 1.4375-2.9375 (57,498) 3.00 (10,000)
Exercised......................... -- -- -- -- -- --
-------------- ------ -------------- ------- ------------- -------
Outstanding, end of year.......... $1.4375-2.9375 66,502 $ 0.75-2.9375 75,002 $ 0.75-2.9375 123,000
============== ====== ============== ======= ============= =======
Eligible for exercise currently... $1.4375-2.9375 49,002 $ 0.75-2.9375 29,750 $ 1.4375 12,000
============== ====== ============== ======= ============= =======
The Financial Accounting Standards Board has issued Financial Accounting
Standard No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123
took effect for transactions entered into during the fiscal year beginning
October 1, 1996; with respect to disclosures required for entities that elect to
continue to measure compensation cost using prior permitted accounting method,
such disclosures must include the effects of all awards granted in the fiscal
year beginning October 1, 1995. 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.
Pro forma information regarding net income and earnings per share is
required by Statement No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. This fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following assumptions:
Risk-free interest rate........................................................... 6.01%
Expected dividend yield........................................................... 0%
Expected stock price volatility................................................... .605%
Expected life of options.......................................................... 2-6 years
The weighted average fair value of options granted during Fiscal 1999 and
Fiscal 1998 is $.68 and $.74 per share, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can mutually affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. For purposes of
pro forma disclosures, the estimated fair value of the options is amortized to
expense over the options' vesting period. The Company's pro forma information is
as follows (in thousands except for earnings per share amounts):
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1997
------------------------ ------------------------ ------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
Net (loss) income.................... $(334) $(404) $(3,504) $(3,594) $ 600 $ 491
(Loss) earnings per share............ $(.03) $(.03) $ (.28) $ (.29) $ .05 $ .04
D-22
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
5. INCOME TAXES
1999 1998 1997
-------- -------- ---------
Expense/(Benefit)
Federal:
Current............................................................... $ -- $ -- $(309,276)
Deferred.............................................................. -- 349,002 273,730
State:
Current............................................................... -- -- 300
Deferred.............................................................. -- 286,013 16,369
-------- -------- ---------
$ -- $635,015 $ (18,877)
======== ======== =========
Reconciliations of the statutory federal income tax rate of 34% to the
effective tax rates are as follows:
1999 1998 1997
------ ------ ------
Statutory tax rate........................................................... (34.00)% (34.00)% 34.00%
State income taxes, net of federal tax expense (benefit)..................... 9.88 (4.84) 1.86
IRS audit adjustment......................................................... 5.32
Permanent differences........................................................ 10.04 1.37
Increase (decrease) in valuation allowance................................... 16.94 57.46 (47.77)
Other........................................................................ (2.86) 2.14 (6.65)
------ ------ ------
Effective tax rate........................................................... -- 22.13% (3.25)%
====== ====== ======
D-23
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
5. INCOME TAXES--(CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
as of September 30, 1999 and 1998 are as follows:
SEPTEMBER 30,
------------------------
1999 1998
---------- ----------
Current deferred tax liability:
State taxes on deferred federal items............................................... $ (51,957) $ (68,687)
---------- ----------
Current deferred tax assets:
Bad debts........................................................................... 15,331 55,390
Inventory reserve................................................................... 475,580 477,300
Reserve for returns and allowances.................................................. 267,018 303,528
Unicap.............................................................................. 8,364 7,787
---------- ----------
Total current deferred tax assets................................................... 766,293 844,005
Valuation allowance on current deferred tax assets.................................... (714,336) (775,318)
---------- ----------
51,957 68,687
---------- ----------
Net current deferred tax assets..................................................... $ -- $ --
========== ==========
Long-term deferred tax liabilities:
Depreciation........................................................................ $ (853,163) $ (932,290)
---------- ----------
Long-term deferred tax assets:
Reserve for litigation.............................................................. 817,000 1,053,500
State net operating loss carryforwards.............................................. 552,210 535,598
Federal net operating loss carryforward............................................. 1,440,331 1,182,076
---------- ----------
Total long-term deferred tax assets................................................... 2,809,541 2,771,174
Valuation allowance on long-term deferred tax assets.................................. (1,956,378) (1,838,884)
---------- ----------
853,163 932,290
---------- ----------
Net long-term deferred tax assets................................................... $ -- $ --
========== ==========
The Company has generated state net operating loss carryforwards of
$6,135,663, which will expire in varying amounts beginning on September 30,
2001. The Company has also generated a federal net operating loss carryforward
of $4,206,218, which will expire in varying amounts on September 30, 2013.
In 1997, approximately $277,000 of the valuation allowance was recognized
as a tax benefit. In 1998, the Company increased the valuation allowance to
$2,614,202 due to the uncertainty of its ability to fully utilize the federal
and state net operating loss carryforward. In 1999, there was a net increase in
the valuation allowance to $2,670,714. As in the prior year, in 1999 no tax
benefit was recognized due to the uncertainty of utilizing the net loss
carryforwards.
D-24
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
6. COMMITMENTS AND CONTINGENCIES
Letters of Credit
The Company was contingently liable for outstanding letters of credit of
$158,202 at September 30, 1999.
Leases
Rent expense for the years ended September 30, 1999, 1998 and 1997 amounted
to $1,022,852, $1,056,934 and $1,024,491, respectively.
In May 1990, the Company entered into a 60 month lease for manufacturing
space. The lease provides for all real estate taxes and operating expenses to be
paid by the Company and it contains options to renew for two 60 month periods.
The Company exercised its first option and extended the lease for an additional
60 months commencing in June 1995.
In March 1993, the Company entered into a 60 month lease for office,
warehouse and manufacturing space. The lease provides for all real estate taxes
and operating expenses to be paid by the Company and it contains an option to
renew for an additional 60 month period. In October 1997, the Company exercised
its option to renew.
In August 1995, the Company entered into a 60 month lease for its 130,000
square foot distribution center. The lease provides for all real estate taxes
and operating expenses to be paid by the Company and it contains two options to
renew for two five year periods.
Future minimum rental payments under operating leases are as follows:
2000............................................................. $ 744,932
2001............................................................. 177,743
2002............................................................. 141,375
2003............................................................. 82,469
----------
$1,146,519
==========
Concentration of Labor
In December 1992, the production and maintenance employees of the Company's
wholly owned subsidiary, Sawdust, voted to join local 478 of the International
Brotherhood of Teamsters (the "Union"). In the Company's fiscal year ended
September 30, 1996 ("Fiscal 1996"), Sawdust renewed its labor agreement with the
Union for the benefit of these employees, which agreement expired August 31,
1999. The Union has agreed to work under the terms and conditions of the expired
contract until a new contract is negotiated and a determination is made as to
the impact of the Company's investigation into moving a portion of its
manufacturing facility overseas. As of September 30, 1999, 47% of the Company's
employees were members of the Union. To date, the Company has maintained a
favorable relationship with the Union.
7. LOSS FROM COSMETICS OPERATION
During the second quarter of 1997, the Board of Directors determined to
discontinue its cosmetics operation and focus its efforts primarily on its
writing instruments business. The loss from cosmetics operation reported in the
second quarter of 1997 reflects the write-down of certain assets of this
operation to their estimated net realizable value (Note 13).
D-25
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
8. PARADISE SETTLEMENT
In October 1987, the Company commenced an action against Xxxx Xxxxxxxxx,
All-Mark Corporation and Paradise Creations, Inc., (collectively, "Paradise") in
the United States District Court for the Southern District of New York which
resulted in an adverse multi-million dollar judgment against Pentech. In
December 1996, the parties to such litigation entered into a settlement
agreement providing, among other things, for Pentech to pay $500,000 at the date
of signing, 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 Paradise the $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 have been made
through October, 1999. The Company also has paid $300,000 against the minimum
royalty.
9. MAJOR CUSTOMER AND CONCENTRATION OF CREDIT RISK
For the years ended September 30, 1999, 1998 and 1997, the Company had one
customer who accounted for 9%, 12% and 13%, respectively, of net sales.
Concentration of credit risk with respect to trade receivables is generally
limited due to the Company's use of credit limits, credit insurance and ongoing
credit evaluations and account monitoring procedures.
10. 401(K) PLAN
The Company has a defined contribution 401(k) plan, covering substantially
all employees not covered under a collective bargaining agreement. The plan
provides employees an opportunity to make pre-tax payroll contributions to the
plan. The plan was amended on April 1, 1996 to incorporate an employer
discretionary match of 1/3 of the first 6% of employee contributions. For the
years ended September 30, 1999, 1998, 1997 the Company contributed $37,500,
$32,558 and $36,273, respectively.
11. ACCRUED EXPENSES
SEPTEMBER 30,
-------------------------
1999 1998
---------- ----------
Accrued returns and advertising rebates............................................ $2,038,410 $1,878,847
Accrued royalties.................................................................. 430,000 346,940
Other accrued expenses............................................................. 586,899 1,126,175
---------- ----------
$3,055,309 $3,351,962
========== ==========
12. PRIVATE PLACEMENT
In January 1997, the Company completed a private offering of 20 Units, each
Unit consisting of 100,000 shares of Common Stock of the Company for $50,000 per
Unit (the "Private Offering"). The Company received net proceeds of $963,000
from the Private Offering. Officers and directors of the Company acquired 52.5%
of the Units sold in the Private Offering and participated on the same terms as
the other investors in the Private Offering. The terms of the Private Offering
were established by a Special Committee of the Board of Directors who did not
participate in the Private Offering. The Company was required by its banks (at
that time) to raise funds in the Private Offering in order to fund the $500,000
payment referred to in Note 8 and to enable the Company to fund its requirements
for capital expenditures.
D-26
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SEPTEMBER 30, 1999
13. 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. At September 30, 1999, the value of this stock
(based on quoted market prices) was $.907 a share. The Company has the right to
begin selling 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.
14. INCOME FROM LAWSUIT SETTLEMENT
In June 1997, the Company commenced an action against Xxxxxx and
Xxxxxx LLP and Xxxxx X. Xxxxxxxx (collectively, "Defendants") in the Supreme
Court of the State of New York and County of New York for legal malpractice,
gross negligence, misrepresentation and breach of contract in connection with
the adverse, multi-million dollar judgment resulting from a patent infringement
case which the defendants had been retained to pursue. On April 10, 1998, the
Company terminated this action and received a payment of $1,250,000. All actions
arising from the patent infringement case have now been discontinued with
prejudice.
D-27
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------------- ---------- ---------- ---------- ----------
CHARGED TO
BALANCE AT COSTS AND BALANCE AT
BEGINNING EXPENSES/ END OF
DESCRIPTION OF PERIOD OTHER DEDUCTIONS(1) PERIOD
-------------------------------------------------- ---------- ---------- ---------- ----------
Year ended September 30, 1999
Allowance for doubtful accounts................. $ 128,814 $ 95,753 $ 188,913 $ 35,654
========== ========== ========== ==========
Allowance for slow moving items................. $1,110,000 $ 213,000 $ 217,000 $1,106,000
========== ========== ========== ==========
Valuation allowance for deferred taxes.......... $2,614,202 $ 56,512 $ -- $2,670,714
========== ========== ========== ==========
Year ended September 30, 1998
Allowance for doubtful accounts................. $ 30,087 $ 134,974 $ 36,247 $ 128,814
========== ========== ========== ==========
Allowance for slow moving items................. $1,210,000 $ 300,000 $ 400,000 $1,110,000
========== ========== ========== ==========
Valuation allowance for deferred taxes.......... $ 965,565 $1,648,637 -- $2,614,202
========== ========== ========== ==========
Year ended September 30, 1997
Allowance for doubtful accounts................. $ 402,513 $ 15,401 $ 387,827 $ 30,087
========== ========== ========== ==========
Allowance for slow moving items................. $1,386,000 $ 400,000 $ 576,000 $1,210,000
========== ========== ========== ==========
Valuation allowance for deferred taxes.......... $1,243,191 $ 237,009 $ 514,635 $ 965,565
========== ========== ========== ==========
------------------
(1) Amount represents various accounts written off during the year, net of
recoveries.
D-28
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------------------------------------------------------------------------------------------
10.6 -- Waiver, Consent and Second Amendment to Loan and Security Agreement by and among Bank of
America, N.A., the Company, Pentech Cosmetics and Sawdust Pencil Co. dated as of
December 20, 1999.
21 -- Subsidiaries of the Company.
23.1 -- Consent of Ernst & Young LLP dated December 28, 1999.
27 -- Financial Data Schedule.
D-29
