<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):
October 11, 2000 (July 28, 2000)
JAKKS PACIFIC, INC.
(Exact name of registrant as specified in its charter)
Delaware 0-28104 95-4527222
(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
22761 Pacific Coast Highway, Malibu, California 90265
(Address of principal executive offices ) (Zip Code)
Registrant's telephone number, including area code: (310) 456-7799
<PAGE> 2
THIS FORM 8-K/A IS AN AMENDMENT TO THE REGISTRANT'S CURRENT REPORT ON FORM
8-K FILED ON AUGUST 11, 2000 (RELATING TO THE REGISTRANT'S ACQUISITION OF
PENTECH INTERNATIONAL INC.) TO FILE THE FINANCIAL STATEMENTS AND PRO FORMA
FINANCIAL INFORMATION OMITTED FROM THE INITIAL FILING OF THE CURRENT REPORT, IN
ACCORDANCE WITH ITEMS 7(a)(4) AND (b)(2), RESPECTIVELY.
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
For a description of the Registrant's acquisition of Pentech International
Inc. ("Pentech"), refer to Item 2 of the Registrant's Current Report on Form
8-K, filed on August 11, 2000, which Item 2 is incorporated in its entirety
herein by this reference.
2
<PAGE> 3
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
1. Pentech's consolidated financial statements as of
September 30, 1999 and 1998 and for the three years ended
September 30, 1999.
2. Pentech's condensed consolidated financial statements as of June
30, 2000 and September 30, 1999 and for the three and nine month
periods ended June 30, 2000 and 1999 (unaudited).
(b) Pro Forma Financial Information.
(c) Exhibits.
<TABLE>
<CAPTION>
Number Description
------- -----------
<S> <C>
2.1 Agreement of Merger dated as of May 22, 2000 among JAKKS
Pacific, Inc., JAKKS Acquisition II, Inc. and Pentech
International Inc.(1)
2.2 First Amendment dated as of July 13, 2000 to Agreement of
Merger(1)
2.3 Voting and Lock-Up Agreement dated May 22, 2000 among JAKKS
Pacific, Inc. and certain stockholders of Pentech International
Inc.(1)
10.1 Loan and Security Agreement dated as of January 13, 1997 among
Pentech International Inc., certain subsidiaries thereof and
Bank of America, N.A. (formerly BankAmerica Business Credit,
Inc.)(2)
10.2 Waiver and First Amendment dated as of January 11, 1999 to Loan
and Security Agreement(3)
10.3 Waiver, Consent and Second Amendment dated as of December 20,
1999 to Loan and Security Agreement(4)
10.4 Consent, Waiver and Third Amendment dated as of July 27, 2000 to
Loan and Security Agreement(1)
23.1 Consent of Ernst & Young LLP(5)
</TABLE>
---------------------
(1) Previously filed
(2) Incorporated by reference to exhibit 10.7 of the Annual Report on
Form 10-K of Pentech International Inc. for its fiscal year ended
September 30, 1996
(3) Incorporated by reference to exhibit 10.5 of the Annual Report on
Form 10-K of Pentech International Inc. for its fiscal year ended
September 30, 1998
(4) Incorporated by reference to exhibit 10.6 of the Annual Report on
Form 10-K of Pentech International Inc. for its fiscal year ended
September 30, 1999
(5) Filed herewith
3
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Financial Statements of Pentech
and Subsidiaries (Audited)
Report of Independent Auditors.............................................. F-1
Consolidated Balance Sheets as of September 30, 1999 and
1998........................................................................ F-2
Consolidated Statements of Operations for the
years ended September 30, 1999, 1998 and 1997 .............................. F-4
Consolidated Statements of Shareholders' Equity for
the years ended September 30, 1999, 1998 and 1997........................... F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 1999, 1998 and 1997............................... F-6
Notes to Consolidated Financial Statements.................................. F-8
Condensed Consolidated Financial Statements of Pentech
and Subsidiaries (Unaudited)
Condensed Consolidated Balance Sheets as of June 30,
2000 and September 30, 1999................................................. F-26
Condensed Consolidated Statements of Operations for
the three month periods and nine month periods
ended June 30, 2000 and 1999................................................ F-28
Condensed Consolidated Statements of Cash Flows for
the nine month periods ended June 30, 2000 and 1999......................... F-29
Notes to Condensed Consolidated Financial Statements........................ F-31
Unaudited Pro Forma Consolidated Financial Statements
Introduction................................................................ F-39
Unaudited Pro Forma Consolidated Balance Sheet as of June 30, 2000.......... F-40
Unaudited Pro Forma Consolidated Statements of Operations for the
year ended December 31, 1999 and the six month period ended
June 30, 2000............................................................... F-41
Notes to Unaudited Pro Forma Consolidated Financial Statements.............. F-42
</TABLE>
<PAGE> 5
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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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.
s/ERNST & YOUNG LLP
-------------------
ERNST & YOUNG LLP
MetroPark, New Jersey
December 8, 1999, except
for Note 3(c), as to which the
date is December 20, 1999
F-1
<PAGE> 6
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets (Note 3)
<TABLE>
<CAPTION>
September 30,
1999 1998
----------- -----------
<S> <C> <C>
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, respect-
ively) 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
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 7
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
<TABLE>
<CAPTION>
September 30,
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 8
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 9
Pentech International Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended September 30, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Common Stock Capital
Number of Shares in Accumulated
Excess Retained Comprehensive Other Comprehen-
Authorized Issued Amount of Par Earnings Income (loss) sive Income
---------- ---------- ------- --------- ---------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
========== ========== ======== ========== =========== ================
</TABLE>
See accompanying notes.
F-5
<PAGE> 10
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
----------- ------------ -----------
<S> <C> <C> <C>
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)
</TABLE>
See accompanying notes.
F-6
<PAGE> 11
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (cont'd)
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
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 (630,272) (9,643) (911,897)
activities
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 equi-
valents (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
</TABLE>
See accompanying notes.
F-7
<PAGE> 12
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.
F-8
<PAGE> 13
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
1. Summary of Significant Accounting Policies (cont'd)
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
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.
F-9
<PAGE> 14
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
1. Summary of Significant Accounting Policies (cont'd)
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
<S> <C> <C> <C>
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
=========== =========== ===========
</TABLE>
F-10
<PAGE> 15
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
1. Summary of Significant Accounting Policies (cont'd)
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.
F-11
<PAGE> 16
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
2. Inventory
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
F-12
<PAGE> 17
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
3. Notes Payable (cont'd)
(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.
F-13
<PAGE> 18
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
4. Shareholders' Equity (cont'd)
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.
F-14
<PAGE> 19
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1989 Plan:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
Price range Shares Price range Shares Price Range Shares
----------- ------- ----------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
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 - -
=========== ======= =========== ======= ============ =======
</TABLE>
F-15
<PAGE> 20
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1993 Plan:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
Price range Shares Price range Shares Price Range Shares
---------- ------- ---------- ------- ------------ -------
<S> <C> <C> <C> <C> <C> <C>
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
========== ======= ========== ======= =========== =======
</TABLE>
F-16
<PAGE> 21
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1999
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1995 Plan:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
Price range Shares Price range Shares Price range Shares
-------------- ------ ------------- ------ ------------ -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $ 0.75-2.9375 75,002 $ 0.75-2.9375 123,000 $ 3.00 10,000
Options granted - - 1.625-1.688 9,500 0.75-2.9375 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
============== ====== ============= ======= ============ =======
</TABLE>
F-17
<PAGE> 22
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
4. Shareholders' Equity (cont'd)
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):
F-18
<PAGE> 23
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
4. Shareholders' Equity (cont'd)
<TABLE>
<CAPTION>
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
-------------- -------------- --------------
As reported Pro forma As reported Pro forma As reported Pro forma
----------- --------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net (loss)
income ($334) ($404) ($3,504) ($3,594) $600 $491
(Loss) earn-
ings per
share ($.03) ($.03) ($ .28) ($ .29) $.05 $.04
</TABLE>
F-19
<PAGE> 24
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
5. Income Taxes
<TABLE>
<CAPTION>
1999 1998 1997
--------- ---------- ---------
<S> <C> <C> <C>
Expense/(Benefit)
Federal:
Current $ - $ - $(309,276)
Deferred - 349,002 273,730
State:
Current - - 300
Deferred - 286,013 16,369
--------- ---------- ---------
$ - $ 635,015 $ (18,877)
========= ========== =========
</TABLE>
Reconciliations of the statutory federal income tax rate of 34% to the
effective tax rates are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
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%)
====== ====== ======
</TABLE>
F-20
<PAGE> 25
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
5. Income Taxes (cont'd)
Significant components of the Company's deferred tax assets and liabilities
as of September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
September 30,
1999 1998
---------- ----------
<S> <C> <C>
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 carry-
forward 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 $ - $ -
========== ==========
</TABLE>
F-21
<PAGE> 26
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
5. Income Taxes (cont'd)
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 carry-forward
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 carry-forward. 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
carry-forwards.
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
F-22
<PAGE> 27
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
6. Commitments and Contingencies (cont'd)
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).
8. Paradise Settlement
In October 1987, the Company commenced an action against Leon
Hayduchok, All-Mark Corporation and Paradise Creations, Inc., (collectively,
"Paradise") in the United States District Court for the Southern District of New
York which resulted in an adverse multi-million dollar judgment against Pentech.
In December 1996, the parties to such litigation entered into a settlement
agreement providing, among other things, for Pentech to pay $500,000 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
F-23
<PAGE> 28
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
8. Paradise Settlement (Cont'd)
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
<TABLE>
<CAPTION>
September 30,
1999 1998
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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
F-24
<PAGE> 29
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
12. Private Placement (Cont'd)
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.
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 Cooper and Dunham
LLP and Lewis H. Eslinger (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.
F-25
<PAGE> 30
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(000's omitted)
(Substantially all pledged or assigned)
<TABLE>
<CAPTION>
June 30, September 30,
-----------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Current Assets:
Accounts Receivable, net of
allowances for doubtful
accounts of $90 at June 30, 2000 and
$36 at September 30, 1999,
respectively $ 21,307 $ 15,301
Inventories 14,215 15,415
Prepaid expenses and other 2,555 1,633
Joint venture receivable 1,225 --
Available-for-sale security 8 181
-----------------------
Total current assets 39,310 32,530
-----------------------
Furniture and equipment 8,452 9,472
Less accumulated depreciation (6,220) (6,318)
-----------------------
2,232 3,154
-----------------------
Other assets:
Investment in joint venture 150 --
Trademarks, net of accumulated amortization
of $836 at June 30, 2000 and $762 at
September 30, 2000 244 236
Due from officer 174 174
-----------------------
568 410
-----------------------
$ 42,110 $ 36,094
========================
</TABLE>
F-26
<PAGE> 31
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' EQUITY
(000's omitted)
<TABLE>
<CAPTION>
June 30, September 30,
-------------------------
2000 1999
---- ----
(unaudited)
<S> <C> <C>
Current liabilities:
Notes payable, banks $21,637 $13,882
Accounts payable 3,542 3,322
Accrued expenses 2,070 3,056
Settlement note payable 300 300
Deferred Income from joint venture 238 --
---------------------
Total current liabilities 27,787 20,560
---------------------
Other liabilities:
Royalty payable, long term 50 50
Settlement note payable, long term 1,300 1,500
---------------------
1,350 1,550
---------------------
Shareholders' equity:
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; 12,571,258 shares issued
and outstanding at June 30, 2000 and
September 30, 1999, respectively 125 125
Capital in excess of par 6,839 6,839
Retained earnings 6,001 6,839
Accumulated Other Comprehensive Income 8 181
---------------------
12,973 13,984
---------------------
$42,110 $36,094
=====================
</TABLE>
F-27
<PAGE> 32
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(000's omitted except for per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
-----------------------------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Sales $ 23,457 $ 25,472 $ 44,238 $ 45,228
Cost of Sales 15,533 16,976 29,662 30,361
----------------------------------------------------
Gross Profit 7,924 8,496 14,576 14,867
Selling, general and
administrative expenses 5,964 6,093 13,839 13,234
Plant relocation costs 52 -- 839 --
----------------------------------------------------
Income (loss) from operations 1,908 2,403 (102) 1,633
(Income) from joint venture (237) -- (237) --
Interest expense 387 358 973 1,042
----------------------------------------------------
Income (loss) before taxes 1,758 2,045 (838) 591
Income taxes -- -- -- --
----------------------------------------------------
Net income (loss) $ 1,758 $ 2,045 $ (838) $ 591
====================================================
Net income (loss) per share
fully diluted $ 0.14 $ 0.16 $ (0.07) $ 0.05
====================================================
</TABLE>
F-28
<PAGE> 33
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(000's omitted)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30,
---------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (838) $ 591
------- -------
Adjustments to reconcile net (loss) income to net cash provided
for operating activities:
Depreciation and amortization 784 788
(Increase) decrease in:
Accounts receivable (6,006) (6,975)
Inventories 705 3,605
Prepaid expenses and other (922) (224)
Income taxes receivable -- 448
Increase (decrease) in:
Accounts payable 220 1,073
Accrued expenses (986) (330)
Settlement payable (200) (450)
------- -------
Total adjustments (6,405) (2,065)
------- -------
Net cash (used in) operating activities (7,243) (1,474)
------- -------
Cash flows (used in) investing activities:
(Increase) in investment in joint venture (150) --
(Purchase) of furniture/equipment (280) (365)
(Increase) decrease in trademarks (82) 7
------- -------
Net cash (used in) investing activities (512) (358)
------- -------
</TABLE>
F-29
<PAGE> 34
PENTECH INTERNATIONAL, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(000's omitted)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended
June 30,
-----------------------
2000 1999
---- ----
<S> <C> <C>
Cash flows from financing activities:
Net increase in notes payable $ 7,755 $ 1,073
---------------------
Net cash provided by financing activities 7,755 1,073
---------------------
Net (decrease) in cash and cash equivalents -- (759)
Cash and cash equivalents, beginning of period -- 759
---------------------
Cash and cash equivalents, end of period $ -- $ --
=====================
Supplemental disclosures of cash flow information:
Non-cash operating activities:
(Increase) in joint venture receivable $(1,225)
Increase in deferred revenue from joint venture $ 238
Decrease in fixed assets due to transfer to joint venture $ 491
Decrease in inventory due to transfer to joint venture $ 495
Non-cash investing activities:
(Decrease) in fair value of available-for-sale security $ (173) $ (297)
Cash paid during the period for:
Interest $ 936 $ 1,142
</TABLE>
F-30
<PAGE> 35
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 2000 and 1999 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. 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
business is subject to certain seasonal conditions in which sales
tend to be concentrated in the third and fourth quarters of the
fiscal year. 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 Overdraft:
Any bank overdrafts are included within accounts payable in the
accompanying consolidated balance sheet.
Unaudited Financial Statements:
The unaudited financial information includes adjustments
(consisting of normal recurring adjustments) which the Company
considers necessary for a fair presentation of the financial
position at June 30, 2000 and the results of operations for the
three and nine month periods ended June 30, 2000 and 1999 and
cash flows for the nine months ended June 30, 2000 and 1999.
F-31
<PAGE> 36
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 2000 and 1999 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 approximates
carrying amounts due to the short maturity of these instruments.
The fair value for notes payable approximates 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 amounts reported
in the financial statements and
F-32
<PAGE> 37
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 2000 and 1999 is unaudited.)
1. Summary of significant accounting policies (Cont'd):
accompanying notes. 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.
F-33
<PAGE> 38
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months
ended June 30, 2000 and 1999 is unaudited.)
1. Summary of significant accounting policies (Cont'd):
(Loss) Earnings per share:
The following table sets forth the computation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, June 30,
---------------------------- ------------------------------
2000 1999 2000 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net income(loss) $ 1,758,000 $ 2,045,000 $ (838,000) $ 591,000
=========== =========== ============ ===========
Denominator:
Denominator for basic
earnings per share -
weighted average
shares 12,571,258 12,570,258 12,571,258 12,570,258
Effect of dilutive
securities:
Employee stock
options -- -- -- 37,140
----------- ----------- ------------ -----------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions: 12,571,258 12,570,258 12,571,258 12,607,398
=========== =========== ============ ===========
Basic and diluted (loss)
per share $ .14 $ .16 $ (.07) $ .05
=========== =========== ============ ===========
</TABLE>
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 was amended by the
Statement of Financial Accounting Standards No. 137 "Accounting for
Derivative Instruments and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133" and 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.
F-34
<PAGE> 39
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 2000 and 1999 is unaudited.)
2. Inventory
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
------------ -------------
<S> <C> <C>
Raw materials $ 4,937,000 $ 4,262,000
Work-in-process 1,017,000 1,748,000
Finished goods 9,158,000 10,511,000
Allowance for slow-moving
items (897,000) (1,106,000)
------------ ------------
$ 14,215,000 $ 15,415,000
============ ============
</TABLE>
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- ------------
<S> <C> <C>
3. Notes Payable, bank:
Revolving line of credit with
interest payable monthly
at prime plus .5% (10.0%
at June 30, 2000 and
8.75% at September 30, 1999) $ 1,637,000 $ 1,882,000
Revolving line of credit with
interest payable at maturity
at libor plus 2.5% (9.18% at
June 30, 2000 and ranging
from 7.76% to 7.87% at
September 30, 1999) 20,000,000 12,000,000
----------- -----------
$21,637,000 $13,882,000
=========== ===========
</TABLE>
In January 1997, the Company entered into a three year 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. Borrowings under the Credit Agreement accrue
F-35
<PAGE> 40
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 2000 and 1999 is unaudited.)
interest, at the Company's option, at either prime plus .5% or libor plus 2.5%.
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 Renewal is collateralized by a security interest in substantially
all of the assets of the Company. In connection with the Renewal, the Company
has agreed to the maintenance of certain financial covenants and cannot declare
a cash divided without the consent of BABC.
4. Contingency:
At June 30, 2000, the Company was contingently liable for outstanding
letters of credit of $224,012.
5. Income Taxes:
Following is a reconciliation to income taxes at the statutory rate:
<TABLE>
<CAPTION>
Three months ended Nine months ended
June 30, 2000 June 30, 2000
------------- -------------
<S> <C> <C>
Income tax at Federal
statutory rate applied to
income before taxes $ 598,000 $(285,000)
State income taxes, net of
Federal tax benefit 54,000 (26,000)
(Decrease)increase in
valuation allowance (652,000) 311,000
--------- ---------
$ -- $ --
========= =========
</TABLE>
F-36
<PAGE> 41
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months ended
June 30, 2000 and 1999 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 have been made through
July 2000. The Company also paid $400,000 against the minimum royalty.
7. Available-for-Sale Security
The value of Fun Cosmetics, Inc. stock (based on quoted market prices)
as of June 30, 2000 was $.04 a share. However, due to the historically low level
of trading activity, the number of shares the Company owns, the shares are
unregistered and the Company has recently became aware that Fun has discontinued
active operations, there is no assurance the Company will realize the current
market value.
<TABLE>
<CAPTION>
Accumulated Other
Comprehensive Income
--------------------
June 30, June 30,
2000 1999
------- -------
<S> <C> <C>
Net (loss) income $ (838) $ 591
Unrealized loss on available-for-
sale security (173) (297)
------- -------
Comprehensive (loss) income $(1,011) $ 294
======= =======
</TABLE>
F-37
<PAGE> 42
PENTECH INTERNATIONAL INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(The information for the three and nine months
ended June 30, 2000 and 1999 is unaudited.)
8. Joint Venture
During the quarter ended December 31, 1999, the Company formed a
strategic partnership with a manufacturer in Shanghai, China with the purpose of
developing and manufacturing both existing products and many of the Company's
new products in development. The terms of the joint venture provide for Pentech
to receive cash for some of its manufacturing equipment and obtain a 50%
ownership in the new entity being formed in China. In addition, there are costs
associated with the relocation of the Company's domestic manufacturing facility.
As of June 30, 2000, the Company has shipped approximately $1,462,000 worth of
equipment and inventory and incurred relocating costs of approximately $839,000.
F-38
<PAGE> 43
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements as of
June 30, 2000 and for the six months ended June 30, 2000 and for the year ended
December 31, 1999 give effect to the acquisition of Pentech International. The
pro forma consolidated balance sheet presents our financial position as if the
acquisition of Pentech International had occurred on June 30, 2000. The pro
forma consolidated statements of operations present our results as if the
acquisition of Pentech International had occurred on January 1 of each period
presented. Our fiscal year end is December 31 and Pentech Internationals' fiscal
year end is September 30. Our second quarter for our current fiscal year ended
June 30, 2000, while the third quarter of Pentech Internationals' fiscal year
ended June 30, 2000. The pro forma consolidated balance sheet as of June 30,
2000 is based upon our historical balance sheet as of June 30, 2000 which has
been adjusted for the effects of the Pentech International acquisition. The pro
forma consolidated statement of operations for the six months ended June 30,
2000 is based upon our historical results and the pro forma statement of
operations for Pentech International for the six months ended June 30, 2000. The
pro forma consolidated statement of operations for the year ended December 31,
1999 is based on our historical statement of operations and the pro forma
statement of operations of Pentech International for the year ended December 31,
1999.
The pro forma consolidated financial statements include, in management's
opinion, all material adjustments necessary to reflect the acquisition of
Pentech International. The pro forma consolidated financial statements do not
represent the Company's actual results of operations, including the
acquisitions, nor do they purport to predict or indicate our financial position
or results of operations at any future date or for any future period. The pro
forma consolidated financial statements should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our consolidated financial statements and the related notes thereto
and Pentech Internationals' financial statements and the related notes thereto
included elsewhere herein.
F-39
<PAGE> 44
JAKKS PACIFIC, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
JAKKS ADJUSTMENTS BALANCE SHEET
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................. $ 65,777,215 $(30,704,896)(1) $35,072,319
Marketable securities..................... 28,045,705 -- 28,045,705
Accounts receivable, net.................. 45,253,165 21,307,000(2) 66,560,165
Inventory, net............................ 19,640,391 14,215,000(2) 33,855,391
Prepaid expenses and other current
assets................................. 3,214,020 3,780,000(2) 6,994,020
------------ ------------ ------------
Total current assets............. 161,930,496 8,597,104 170,527,600
------------ ------------ ------------
Property and equipment, at cost............. 21,736,186 2,232,000(2) 23,968,186
Less accumulated depreciation and
amortization.............................. 7,796,954 -- 7,796,954
------------ ------------ ------------
Property and equipment, net...... 13,939,232 2,232,000 16,171,232
------------ ------------ ------------
Notes receivables - Officers................ 3,250,000 -- 3,250,000
Goodwill, net............................... 45,190,119 8,157,896(3) 53,348,015
Trademarks, net............................. 12,368,897 -- 12,368,897
Investment in joint venture................. 2,358,885 150,000(4) 2,508,885
Other....................................... 1,153,741 -- 1,153,741
------------ ------------ ------------
Total assets..................... $240,191,370 $ 19,137,000 $259,328,370
============ ============ ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued expenses..... $ 34,605,966 $ 5,850,000(4) $ 40,455,966
Short term debt........................... -- 11,637,000(4) 11,637,000
Current portion of long term debt -- 300,000(4) 300,000
Income taxes payable...................... 3,669,104 -- 3,669,104
------------ ------------ ------------
Total current liabilities........ 38,275,070 17,787,000 56,062,070
------------ ------------ ------------
Long term debt.............................. -- 1,350,000(4) 1,350,000
Deferred income taxes....................... 826,020 -- 826,020
------------ ------------ ------------
Total liabilities................ 39,101,090 19,137,000 58,238,090
------------ ------------ ------------
Commitments
STOCKHOLDERS' EQUITY
Preferred stock........................... -- -- --
Common stock.............................. 19,413 -- 19,413
Additional paid-in capital................ 155,921,232 -- 155,921,232
Retained earnings......................... 45,149,635 -- 45,149,635
------------ ------------ ------------
Total stockholders' equity....... 201,090,280 -- 201,090,280
------------ ------------ ------------
Total liabilities and
stockholders' equity........... $240,191,370 $ 19,137,000 $259,328,370
============ ============ ============
</TABLE>
See notes to unaudited pro forma consolidated financial statements.
F-40
<PAGE> 45
JAKKS PACIFIC, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACTUAL COMBINED ADJUSTMENTS RESULTS
----------------------------
PENTECH
JAKKS INTERNATIONAL
(AUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales....................... $183,685,124 $60,666,084 $244,351,208 $ -- $244,351,208
Cost of sales................... 107,601,639 41,292,037 148,893,676 -- 148,893,676
------------ ----------- ------------ ----------- ------------
Gross profit.................... 76,083,485 19,374,047 95,457,532 -- 95,457,532
Selling, general and
administrative expenses....... 51,154,627 18,483,990 69,638,617 589,577 (5) 70,228,194
------------ ----------- ------------ ----------- ------------
Income from operations.......... 24,928,858 890,057 25,818,915 (589,577) 25,229,338
Other (income) expense.......... (5,374,835) 1,602,666 (3,772,169) (347,417)(6) (4,119,586)
------------ ----------- ------------ ----------- ------------
Income before provision for
income taxes.................. 30,303,693 (712,609) 29,591,084 (242,160) 29,348,924
Provision for income taxes...... 8,333,844 -- 8,333,844 (381,908)(7) 7,951,936
------------ ----------- ------------ ----------- ------------
Net income...................... $ 21,969,849 $ (712,609) $ 21,257,240 $ 139,748 $ 21,396,988
============ =========== ============ =========== ============
Basic earnings per share........ $ 1.51
============
Weighted average shares
outstanding................... 13,879,304
============
Diluted earnings per share...... $ 1.36
============
Weighted average shares and
equivalents outstanding....... 15,839,679
============
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 (UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
ACTUAL COMBINED ADJUSTMENTS RESULTS
------------------------------
PENTECH
JAKKS INTERNATIONAL
<S> <C> <C> <C> <C> <C>
Net sales........................ $101,359,796 $33,953,000 $135,312,796 $ -- $135,312,796
Cost of sales.................... 59,508,310 22,602,000 82,110,310 -- 82,110,310
------------ ----------- ------------ --------- ------------
Gross profit..................... 41,851,486 11,351,000 53,202,486 -- 53,202,486
Selling, general and
administrative expenses........ 31,131,931 10,104,000 41,235,931 294,789 (5) 41,530,720
------------ ----------- ------------ --------- ------------
Income from operations........... 10,719,555 1,247,000 11,966,555 (294,789) 11,671,766
Other (income) expense........... (7,873,050) 1,065,000 (6,808,050) (169,000)(6) (6,977,050)
------------ ----------- ------------ --------- ------------
Income before provision for
income taxes................... 18,592,605 182,000 18,774,605 (125,789) 18,648,816
Provision for income taxes....... 5,752,411 -- 5,752,411 22,484 (7) 5,774,895
------------ ----------- ------------ --------- ------------
Net income....................... $ 12,840,194 $ 182,000 $ 13,022,194 $(148,273) $ 12,873,921
============ =========== ============ ========= ============
Basic earnings per share......... $ 0.67
============
Weighted average shares
outstanding.................... 19,334,289
============
Diluted earnings per share....... $ 0.63
============
Weighted average shares and
equivalents outstanding........ 20,340,462
============
</TABLE>
See notes to unaudited pro forma consolidated financial statements
F-41
<PAGE> 46
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma consolidated financial statements have been
adjusted for the items relating to the acquisition of Pentech International as
set forth below:
BALANCE SHEET
(1) Cash paid on or about the closing of the Pentech International acquisition:
<TABLE>
<S> <C>
Cash paid to stockholders and option holders........... $20,429,896
Settlement of certain indebtedness..................... 10,000,000
Other acquisition costs................................ 275,000
-----------
$30,704,896
===========
</TABLE>
(2) Assets acquired in the Pentech International acquisition
(3) Excess of consideration paid over fair market value of Pentech International
assets acquired
(4) Liabilities assumed in the Pentech International acquisition
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, 1999 2000
<S> <C> <C>
(5) Selling, general and administrative
expenses are adjusted to reflect:
Fees payable pursuant to
supplemental and consulting
services agreements entered
into between certain sellers
of Pentech International and
JAKKS........................ $ 317,647 $ 158,824
Amortization of goodwill....... 271,930 135,965
----------- -----------
$ 589,577 $ 294,789
=========== ===========
(6) Other (income) expense is adjusted to
reflect the elimination of interest
expense related to borrowings made by
Pentech International as if they had
been repaid on January 1, 1999 $ 347,417 $ 169,000
=========== ===========
(7) Provision for income taxes is adjusted
to reflect the tax effect of the pro
forma adjustments..................... $ (381,908) $ 22,484
=========== ===========
</TABLE>
F-42
<PAGE> 47
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 hereunto duly authorized.
Dated: October 11, 2000
JAKKS PACIFIC, INC.
By: /s/ Joel M. Bennett
-----------------------------------
Joel M. Bennett
Executive Vice President
<PAGE> 48
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
2.1 Agreement of Merger dated as of May 22, 2000 among JAKKS
Pacific, Inc., JAKKS Acquisition II, Inc. and Pentech
International Inc.(1)
2.2 First Amendment dated as of July 13, 2000 to Agreement of
Merger(1)
2.3 Voting and Lock-Up Agreement dated May 22, 2000 among JAKKS
Pacific, Inc. and certain stockholders of Pentech International
Inc.(1)
10.1 Loan and Security Agreement dated as of January 13, 1997 among
Pentech International Inc., certain subsidiaries thereof and
Bank of America, N.A. (formerly BankAmerica Business Credit,
Inc.)(2)
10.2 Waiver and First Amendment dated as of January 11, 1999 to Loan
and Security Agreement(3)
10.3 Waiver, Consent and Second Amendment dated as of December 20,
1999 to Loan and Security Agreement(4)
10.4 Consent, Waiver and Third Amendment dated as of July 27, 2000 to
Loan and Security Agreement(1)
23.1 Consent of Ernst & Young LLP(5)
</TABLE>
---------------------
(1) Previously filed
(2) Incorporated by reference to exhibit 10.7 of the Annual Report on
Form 10-K of Pentech International Inc. for its fiscal year ended
September 30, 1996
(3) Incorporated by reference to exhibit 10.5 of the Annual Report on
Form 10-K of Pentech International Inc. for its fiscal year ended
September 30, 1998
(4) Incorporated by reference to exhibit 10.6 of the Annual Report on
Form 10-K of Pentech International Inc. for its fiscal year ended
September 30, 1999
(5) Filed herewith
