FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1997
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 No. 0-15374
PENTECH INTERNATIONAL, INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 23-2259391
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
195 Carter Drive, Edison, New Jersey 08817
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code (732) 287-6640
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
(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 5, 1997 was approximately
$12,485,018 based on the average of the bid and asked quotations of the
registrant's Common Stock, par value $.01 share, as reported by NASDAQ on
December 5, 1997.
On December 5, 1997 there were outstanding 12,504,258 shares of the
registrant's Common Stock.
The Proxy Statement of the registrant to be filed on or before January
29, 1998 is incorporated herein by reference.
<PAGE>
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., to
manufacture certain of the Company's writing instruments. In
October 1993, the Company formed another wholly-owned subsidiary,
Pentech Cosmetics, Inc., to manufacture and distribute a line of
cosmetic products. During the fiscal year ended September 30,
1997 ("Fiscal 1997"), the Company decided to dispose of this
product line. 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, children's activity kits and related
products, 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, other writing instruments, children's activity kits and
related 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 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 powerful consumer appeal.
(d)(i) The Company markets a variety of pens, markers,
pencils, other writing instruments, children's activity kits and
related products 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 to include mass merchants, chain drug stores,
grocery stores, warehouse clubs, and office supply super stores.
The Company also has limited sales to the stationery, military
and college store markets and some sales go through distributors
and wholesalers. Additionally, the Company sells its products in
Canada, Europe, Mexico and other selected countries 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:
Miscellaneous
Other Writing Cosmetics
Instruments and Products
Pens Markers Pencils Related Products(Discontinued)
FY 1995 18.6% 23.0% 34.1% 20.3% 4.0%
FY 1996 21.1% 21.7% 36.4% 16.0% 4.8%
FY 1997 27.8% 19.2% 33.4% 14.4% 5.2%
(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 Pencil Company ("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 Fiscal
1997, the Company manufactured approximately $23,788,000
wholesale value of products at Sawdust, which represents 69% of
its current capacity and approximately 39% of the Company's
current requirements. During its fiscal year ended September 30,
1996 ("Fiscal 1996"), the Company manufactured 38% 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 pens, markers, pencils, other writing
instruments, children's activity kits and related products that
it sells throughout the United States. 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
generally acquires its imported products pursuant to purchase
orders, which typically provide for delivery within 60 days to 90
days after the order. Historically, the Company has financed a
large percentage of its purchases pursuant to letters of credit.
The present policy is to establish with a majority of its
accounts 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, nor is it likely to become 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 manufacturers
of Chinese pencils were dumping these pencils in the United
States, the Company has been required to pay "Dumping Duties" to
acquire pencils and related pencils from certain of its Chinese
suppliers of pencils and related products. The Company has also
been developing additional sources for its supply of certain of
its pencils, which, to date, it has been successful in doing. 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.
(iv) The Company markets its products under the individual
product's name and the Company's name. 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 segment 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
any 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 The Walt Disney Company, the NBA (National
Basketball Association), NHL (National Hockey League), Coca-Cola
Company, Dilbert, and WWF (World Wildlife Fund), using these
trademark names on the Company's products. In most situations,
the licensor requires an advance royalty, a royalty against net
sales for the licensed product and a minimum royalty. Generally,
the Company satisfies the minimum royalty; occasionally it does
not. In such a case, 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 normally 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 this seasonality.
(vi) The Company maintains a warehouse in North Brunswick,
New Jersey where it stores its product until it ships them.
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, except for the Phar-Mor
bankruptcy in Fiscal 1992 and the Happiness Express bankruptcy in
Fiscal 1996, 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 functions.
(vii) The Company's primary customers include major mass
market retailers in the United States. In Fiscal 1997, one
customer accounted for 13% 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 - CVS Stores
- 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 no current plans for any other
major advertising campaign, however it is investigating
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 11, 1997 and December 31, 1996, the
Company's backlog of firm written orders was approximately
$2,100,000 and $1,900,000, respectively. This backlog is
comprised of the normal delay between receipt and 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 and Newell some of which may 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) and price.
(xiii) As of November 30, 1997, the Company had
approximately 209 employees, including Messrs. Norman Melnick,
David Melnick, John Linster and John F. Kuypers. 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 Pencil Co. ("Sawdust"), voted to join
Local 478 of the International Brotherhood of Teamsters (the
"Union"). In Fiscal 1996, Sawdust renewed its labor agreement
with the Union for the benefit of these employees which expires
August 31, 1999.
(e) The Company exports approximately 5.3% percent of its
sales, primarily to customers in Canada, Europe and Mexico.
Item 2. PROPERTIES
The Company's present offices are located at 195 Carter
Drive, Edison, New Jersey 08817, where it occupies general
office, sales and warehouse space of approximately 40,500 square
feet pursuant to a five year lease, with an unaffiliated party,
expiring March 1, 1998. In October 1997, the Company exercised
its option to renew this lease for an additional five years.
The Company extended its lease for five years commencing
June 1, 1995 (the "Sawdust Lease") with an unaffiliated company
for approximately 50,000 square feet for Sawdust's premises
located at 44 National Road, Edison, New Jersey 08817. The
Sawdust Lease, which is triple net, currently requires annual
rental payment of $173,376 with yearly moderate 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 1101 Corporate Road, North Brunswick, New Jersey (the
"Warehouse Lease") with an unaffiliated Company 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, which is with an unaffiliated party, is for approximately
1,885 square feet and commenced May 1, 1997. The Madison Lease
calls for annual rental of $25,541, which increases by 3.5
percent each subsequent lease year until termination.
Item 3. LEGAL PROCEEDINGS
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 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 (the "Initial Payment"); deliver its promissory note for
$3,000,000 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 a minimum royalty of $500,000
(the "Paradise Settlement"). During Fiscal 1997, Pentech paid
Paradise the Initial Payment, reduced the Note by $400,000, and
paid $100,000 of the minimum royalty. The Note requires $100,000
quarterly principal payments commencing January 1, 1998.
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 the Paradise litigation.
The Company is seeking damages of no less than $5,000,000,
additional compensatory damages, punitive damages, legal interest
and reimbursement of attorneys' fees, costs and expenses incurred
by the Company in the prosecution of this action. Presently,
this action is in the early stages of discovery.
There are no other 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 SHAREHOLDERS
Not applicable.
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
1996
1st Quarter 3 3/8 2
2nd Quarter 2 1/4 1 3/4
3rd Quarter 2 1/4 1 3/4
4th Quarter 2 3/16 5/8
1997
1st Quarter 1 3/16 21/32
2nd Quarter 1 3/4 1 1/16
3rd Quarter 2 7/16 1 3/8
4th Quarter 3 1/16 2 5/16
On December 5, 1997, the closing "bid" and "ask" prices for
the Common Stock were $2.8125 and $2.9375 respectively, as
reported by NASDAQ.
(b) On December 5, 1997, the number of shareholders of
record of the Common Stock was 468.
(c) The Company has not declared a cash dividend in the
past and is not permitted to do so without the consent of its
lenders. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Item 6. SELECTED FINANCIAL DATA
The following summary of financial information should be
read in conjunction with the Financial Statements and notes
thereto included elsewhere in this Form 10-K.
STATEMENT OF OPERATIONS DATA
Fiscal Years Ended September 30,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
($ 000s omitted except per share amounts)
Net
sales $60,806 $61,679 $54,892 $62,136 $51,321
Net income
(loss) 600 (5,317) (1,059) 4,701 3,986
Net income
(loss)
per share $.05 ($.51) ($.10) $.40 $.34
Weighted
average
number
of shares
outstanding
including
common
stock
equi-
valents 12,297 10,497 10,661 11,855 11,876
Dividends _ - - - -
<PAGE>
BALANCE SHEET DATA
September 30,
Fiscal Years Ended September 30,
-------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
($ 000s omitted)
Working
capital $15,452 $13,676 $16,928 $21,451 $18,490
Total
assets $42,503 48,189 44,518 42,558 42,130
Notes and bankers'
acceptances payable
(included
in current
liabil-
ities) $17,238 22,841 17,011 11,023 13,538
Long-
term
debt 2,300 2,300 - - -
Share-
holders'
equity $17,591 16,028 21,345 26,479 23,502
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Net sales for Fiscal 1997 were $60,806,386 as compared to
$61,679,499 for Fiscal 1996, reflecting a decrease of $873,113 or
approximately 1.4%. Sales for the company were relatively flat
due primarily to the Company's continuing efforts to consolidate
its product offering. Sales of the Company's children's activity
and licensed products lines grew, but this was offset by declines
in sales in some of its older product lines which the Company had
been de-emphasizing. The Company increased its sales through the
office superstore channel which were offset by some softness with
its traditional mass merchandiser channel.
In Fiscal 1997, the Company had income from operations of
$2,155,227 as compared to a loss from operations of $872,603 in
Fiscal 1996. The Company's gross profit of 34.3% in Fiscal 1997
increased from 30.2% in Fiscal 1996. The Company's gross profit
increased primarily due to improved product mix featuring less
slower moving items, improved manufacturing costs, improved
profitability of its cosmetic line (now discontinued), and higher
gross profit on its licensed items.
The Company's selling, general and administrative ("SG&A")
expenses decreased during Fiscal 1997 to $17,988,791 from
$19,521,690 in Fiscal 1996, reflecting a decrease of $1,532,899.
SG&A as a percentage of sales also decreased from 31.7% to 29.6%.
This decrease was primarily related to certain non-recurring
expenses from the prior year including higher legal and
consulting fees due to the Paradise matter, the bankruptcy of
Happiness Express, higher warehouse costs due to relocation costs
of its distribution center and certain relocation costs of key
new hires. Offsetting these decreases were higher royalty fees
for sales of licensed products and higher software costs used for
the Company's internal operating system.
In the second quarter of Fiscal 1997, the Company recorded a
$687,000 write-down of its cosmetic line to its net realizable
value. This was due to the Company's decision to dispose of this
product line and focus on its core stationery line of products.
As discussed in a subsequent section, the Company reached an
agreement to sell this line of business in November 1997.
During Fiscal 1997, the Company decreased its short-term
borrowings to an average level of $16,080,000 from $18,507,000 in
Fiscal 1996. This decrease was due to the decrease in the
Company's inventory levels as well as the improved profitability.
Offsetting the decline in average borrowings was an increase in
interest rates under the terms of the Company's new financing
arrangement which began in January of 1997. The Company's
effective interest rate increased from 7.8% to 8.7%. In
addition, the Company incurred higher interest costs due to
interest on the settlement note payable resulting from the
Paradise matter. As a result, the Company's interest expense
increased during Fiscal 1997 to $1,583,750 from $1,447,499.
During Fiscal 1997, as a result of its profitability, the
Company reduced its valuation allowance against its deferred tax
assets $277,626 from $1,243,191 to $965,565 resulting in a net
benefit from income taxes.
Based on the above, the Company recognized net income of
$600,014 in Fiscal 1997 as compared to a net loss of $5,317,408
in Fiscal 1996.
Fiscal 1996 Compared to Fiscal Year Ended September 30, 1995
("Fiscal 1995").
Net sales for Fiscal 1996 were $61,679,499 as compared to
$54,891,592 for Fiscal 1995, reflecting an increase of $6,787,907
or approximately 12.4%. The increase in sales was primarily due
to the growth in the Company's licensed products.
In Fiscal 1996, the Company incurred a loss from operations
of $872,603 as compared to a loss from operations of $474,368 in
Fiscal 1995. The Company's gross profit of 30.2% in Fiscal 1996
was up from 28.8% in Fiscal 1995. The Company's gross profit
increased primarily due to absence of the $1.3 million reserve
established the prior year for slow-moving inventory, an increase
in gross profit associated with its new licensed products and an
improvement in the sell-through of its product line which reduced
the overall return rates. Offsetting these improvements were
higher costs incurred at the Company's manufacturing facility,
higher costs associated with its cosmetics business (now
discontinued) and aggressive efforts to close-out slow-moving
inventory.
The Company's SG&A expenses increased during Fiscal 1996 to
$19,521,690 from $15,871,636 in Fiscal 1995, reflecting an
increase of $3,650,054. SG&A expenses as a percentage of sales
increased to 31.7% from 28.9%. The increase was primarily
related to higher royalty costs associated with many of the
Company's licensed products. In addition, the Company incurred
higher variable costs such as freight, distribution and
commission costs associated with higher sales. The Company also
incurred higher legal and expert fees during the trial leading up
to the Paradise Settlement. The Company incurred higher bad debt
expense due to the bankruptcy of Happiness Express and incurred
additional royalty costs relating to its termination of several
license agreements. The Company also incurred higher costs
relating to its establishment of a warehouse/distribution center
and the establishment of an expanded marketing department. The
Company also hired a new President, human resource manager,
purchasing manager and an assistant controller.
The Company incurred a significant loss of $4,433,920
associated with the Paradise Settlement. This loss included the
cost of the Paradise Settlement, the legal and consulting fees
associated with the Paradise Settlement and the bank debt
refinancing which occurred as a result of the material adverse
effect on the Company from the Paradise Settlement.
During Fiscal 1996, the Company increased its short-term
borrowings to an average level of $18,507,000 from $15,618,000 in
Fiscal 1995. The increase was primarily due to the stock-buy-
back program completed in January 1995 and the higher cash
position maintained by the Company in August 1996 and September
1996 as a result of the bank refinancing activities. The
Company's effective interest rate decreased slightly from 8.1% to
7.8% due to a slight decline in short-term interest rates. As a
result, the Company's interest expense increased during Fiscal
1996 to $1,447,499 from $1,259,145.
During Fiscal 1996, the Company established a valuation
allowance against its deferred tax assets in the amount of
$1,243,191 which reduced its income tax benefit for the year.
Based on the above factors, the Company incurred a loss of
$5,317,408 in Fiscal 1996 as compared to a net loss of $1,058,946
in Fiscal 1995.
(b) Liquidity and Capital Resources
Cash and cash equivalents decreased to $648,812 at September
30, 1997 from $7,063,808 at September 30, 1996. Generally, the
Company uses its cash to reduce its outstanding borrowings in
order to reduce interest costs. At September 30, 1996, due to
the status of the refinancing of the Company's borrowing
facilities, the Company maintained a high level of cash.
Accounts receivable increased to $16,293,286 at September 30,
1997 from $14,537,500 at September 30, 1996, primarily due to
increased sales in the fourth quarter. 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 $18,480,924 at September 30,
1997 from $18,728,008. This decrease was due to the Company's
decision to eliminate items from its product line and to move
aggressively to close-out excess and slow-moving inventory. The
decrease to $3,963,831 for equipment at September 30, 1997 from
$4,368,477 at September 30, 1996 primarily reflects a portion of
the write-down from the Cosmetics operation. Notes payable at
September 30, 1997 were $17,238,066 as compared to $21,532,498 at
September 30, 1996. This decrease was primarily due to the
Company's decision to reduce its cash position at September 30,
1997.
Net cash used in operating activities for the year ended
September 30, 1997 was $2,352,104 as compared to cash provided by
operating activities for Fiscal 1996 of $1,489,465. This change
was primarily due to the decrease in bankers' acceptances payable
and the settlement note payments during Fiscal 1997. In
addition, there was an increase in accounts receivable at
September 30, 1997 that was due to higher fourth quarter sales.
Cash used in investing activities during Fiscal 1997 of
$911,897 was higher than the prior year due to the increase in
fixed asset additions.
The cash used in financing activities during Fiscal 1997 was
$3,150,995 as compared to cash provided by financing activities
of $6,183,395 in Fiscal 1996. The decrease in cash provided by
financing activities was primarily due to the Company's decision
to reduce its cash balance at September 30, 1997 as compared to
1996. As a result of these activities, cash and cash equivalents
decreased $6,414,996 during Fiscal 1997 as compared to an
increase of $7,063,808 during Fiscal 1996.
The Company's working capital increased to $15,452,308 at
September 30, 1997 from $13,675,828 at September 30, 1996. This
increase was primarily due to the net income earned during Fiscal
1997 as well as the proceeds from the private offering discussed
below.
In January 1997, the Company entered into a three year
$30,000,000 revolving credit facility with BankAmerica Business
Credit, Inc. (the "New Banking Agreement"). The amount of
drawings under the facility is subject to limitations based upon
eligible inventory and accounts receivable as described in the
New Banking Agreement. The New Banking Agreement is
collateralized by a security interest in substantially all of the
assets of the Company. In addition, in accordance with the New
Banking Agreement, the Company has agreed, among other things, to
the maintenance of certain minimum amounts of tangible net worth
and minimum interest coverage ratios.
The Note issued in connection with the Paradise Settlement
requires $100,000 quarterly principal payments commencing January
1, 1998.
The Company continued several actions to increase its
liquidity during Fiscal 1997. It established a policy of
obtaining 30 to 60 days vendor credit to finance a majority of
its purchases that historically have been financed pursuant to
letters of credit.
In the second quarter of Fiscal 1997, the Board of Directors
voted to dispose of its Cosmetics product line and to focus its
efforts primarily on its writing instruments business. The main
reason for this decision was to better utilize the Company's cash
flow towards its stationery line of business. It is not
anticipated that the disposition of this line of business will
have a material impact on sales or net income in the future.
In November 1997, the Company reached an agreement to sell
the fixed assets and inventory of its Cosmetics subsidiary to an
outside company (significantly owned by a former employee) for
its net book value. In December 1997, $100,000 was received as a
down payment, $150,000 is to be received at closing and a note
will be issued for the balance due bearing interest at a rate of
9% per annum. The terms of the note provide that the principal
be reduced by $150,000 per month commencing February 1998, until
fully repaid. No further write-downs relative to the Cosmetics
operation are anticipated in the year ended September 30, 1998
("Fiscal 1998").
In December 1996 and 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 had net proceeds of $963,437
from the Private Offering. Officers and directors of the Company
acquired 52.5% of the Units sold in the Private Offering. They
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 "Item 3. Legal Proceedings" and to enable the Company to
fund its requirements for capital expenditures.
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 New Banking 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. The Company believes these
resources are sufficient to support its operating expenses.
The Company is exploring its options with respect to
software in order to be in compliance with year 2000. The
Company does not expect the costs associated with this to be
material.
(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 lenders.
Item 8. FINANCIAL STATEMENTS
This information is contained on pages F-1 through F-24
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,
1998.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
Page
Independent Auditors' Report............................ F-1
Consolidated Balance Sheets as of September 30, 1997 and
1996.................................................... F-2-3
Consolidated Statements of Operations for the
years ended September 30, 1997, 1996 and 1995 .......... F-4
Consolidated Statements of Shareholders' Equity for
the years ended September 30, 1997, 1996 and 1995....... F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 1997, 1996, and 1995.......... F-6-7
Notes to Consolidated Financial Statements.............. F-8-23
(a) (2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves............................................... F-24
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 the
Registration Statement No. 33-27009 ("Form S-8").
10.2 1993 Stock Option Plan incorporated by reference
to the 1992 Form 10-K.
10.3 Employment Agreement dated November 3, 1995, between
the Company and John W. Linster incorporated by
reference to the 1995 10-K.
10.4 1995 Stock Option Plan is incorporated by reference to
the Registration Statement No. 333-30595 filed on Form
S-8.
10.5 Settlement Agreement dated December 9, 1996, among the
Company, Leon Hayduchok, All-Mark Corporation, Inc.,
Paradise Creations, Inc. and Norman Melnick
incorporated by reference to Exhibit 10.6 of the 1996
Form 10-K.
10.6 Loan and Security Agreement dated as of January 13,
1997, among the Company, Pentech Cosmetics, Inc.,
Sawdust Pencil Co. and Bank America Business Credit,
Inc. incorporated by reference to Exhibit 10.7 of the
1996 Form 10-K.
10.7 Settlement Letter dated November 15, 1996 from Fisher-
Price to the Company incorporated by reference to
Exhibit 10.8 of the 1996 Form 10-K.
10.8 Settlement Agreement dated December 27, 1996, between
the Company and Pentel Co., Ltd. incorporated by
reference to Exhibit 10.9 of the 1996 Form 10-K.
10.9 Form of Subscription Agreement connected with the
Company's Private Offering Memorandum dated December
10, 1996 incorporated by reference to Exhibit 10.10 of
the 1996 Form 10-K.
10.10 Form of Registration Rights Agreement connected with
the Company's Private Offering Memorandum dated
December 10, 1996 incorporated by reference to Exhibit
10.11 of the 1996 Form 10-K.
10.11 Agreement for Sale and Purchase of Assets dated as of
November 1997, among the Company, Pentech Cosmetics,
Inc., Fun Cosmetics, Inc. and David Blau.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
<PAGE>
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 19, 1997 By: s/ John W. Linster
John W. Linster,
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/ Norman Melnick Chairman of the Board December 19, 1997
Norman Melnick of Directors
s/ John W. Linster President and Chief Executive December19,1997
John W. Linster Officer (principal executive
officer)
s/ David Melnick Chief Operating Officer and December 19, 1997
David Melnick Director (principal operating
officer)
s/ John F. Kuypers Executive Vice President-
John F. Kuypers Sales and Director December 19, 1997
s/ Richard S. Kalin Secretary and Director December 19, 1997
Richard S. Kalin
Director
Jerry Della Femina
s/ Roy L. Boe Director December 19, 1997
Roy L. Boe
s/ William Visone Treasurer (principal December 19, 1997
William Visone accounting officer)
s/ Robert Semel Director December 19, 1997
Robert Semel
ptk\10K.97
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,
1997 and 1996 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 1997. 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, 1997 and 1996, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended September 30, 1997,
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
ERNST & YOUNG LLP
MetroPark, New Jersey
December 5, 1997
F-1
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Assets (Note 3)
September 30,
1997 1996
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 648,812 $ 7,063,808
Accounts receivable, net
of allowance for doubtful
accounts ($30,087 and $402,513
in 1997 and 1996, respect-
ively) 16,293,286 14,537,500
Inventory (Note 2) 18,480,924 18,728,008
Income taxes receivable 422,446 1,146,414
Deferred tax assets (Note 5) 271,180 618,929
Prepaid expenses and other 1,648,035 1,042,807
---------- ----------
Total current assets 37,764,683 43,137,466
---------- ----------
Equipment:
Equipment and furniture 8,895,443 8,030,387
Less accumulated depreciation (4,931,612) (3,661,910)
---------- ----------
3,963,831 4,368,477
---------- ----------
Other assets:
Deferred tax assets, long term
(Note 5) 363,835 306,185
Trademarks, net of
amortization 269,708 267,742
Due from officer 141,512 109,511
---------- ----------
775,055 683,438
---------- ----------
$42,503,569 $48,189,381
========== ==========
See accompanying notes.
F-2
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
September 30,
1997 1996
----- ----
<S> <C> <C>
Current liabilities:
Notes payable (Note 3) $17,238,066 $21,352,498
Bankers' acceptances
payable (Note 3) - 1,488,757
Accounts payable 1,333,605 1,593,253
Accrued expenses (Note 11) 3,440,704 3,827,130
Settlement payable (Note 8) - 500,000
Settlement note payable (Note 8) 300,000 700,000
---------- ----------
Total current liabilities 22,312,375 29,461,638
---------- ----------
Other liabilities:
Royalty payable, long-term (Note 8) 300,000 400,000
Settlement note payable,
long-term (Note 8) 2,300,000 2,300,000
---------- ----------
2,600,000 2,700,000
---------- ----------
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
12,504,258 and 10,496,758 in
1997 and 1996, respectively 125,043 104,968
Capital in excess of par 6,789,143 5,845,781
Retained earnings 10,677,008 10,076,994
---------- ----------
17,591,194 16,027,743
---------- ----------
$42,503,569 $48,189,381
========== ==========
See accompanying notes.
F-3
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statements of Operations
Year ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 9) $60,806,386 $61,679,499 $54,891,592
Cost of sales 39,975,368 43,030,412 39,087,504
---------- ---------- ----------
Gross profit 20,831,018 18,649,087 15,804,088
Selling, general and
administrative expenses 17,988,791 19,521,690 15,871,636
Loss on Mexican
affiliate (Note 14) 406,820
Loss from Cosmetics
operation 687,000 - -
---------- ---------- ----------
Income (loss) from
operations 2,155,227 (872,603) (474,368)
---------- ---------- ----------
Other (income) expense:
Loss from litigation - 4,433,920 -
Interest expense 1,583,750 1,447,499 1,259,145
Interest income (9,660) (39,661) (35,215)
---------- ---------- ----------
1,574,090 5,841,758 1,223,930
---------- ---------- ----------
Income (loss) before
taxes 581,137 (6,714,361) (1,698,298)
Income tax (benefit)
expense (Note 5) (18,877) (1,396,953) (639,352)
---------- ---------- ---------
Net income (loss) $ 600,014 $ (5,317,408) $(1,058,946)
========== ========== =========
Primary and fully-diluted
earnings (loss) per common
and common equivalent
shares (Note 1) $.05 ($.51) ($.10)
========== ========== ==========
See accompanying notes.
F-4
<PAGE>
Pentech International, Inc. and Subsidiaries
<CAPTION>
Consolidated Statements of Shareholders' Equity
Years ended September 30, 1997, 1996 and 1995
Common Stock
Capital
Number of Shares in Treasury Stock
Excess Retained
Authorized Issued Amount of Par Earnings Shares Amount
---------- ------ ------ ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1994 20,000,000 11,692,958 $116,930 $6,512,044 $20,893,681 196,800 $1,043,268
Retirement of
common stock
options (7,500)
Purchase of Treas-
ury Stock 999,400 4,067,790
Retirement of
Treasury Stock (1,196,200) (11,962) (666,263) (4,432,833)(1,196,200) (5,111,058)
Net loss (1,058,946)
--------- --------- ------ --------- --------- --------- ---------
Balance, September
30, 1995 20,000,000 10,496,758 104,968 5,845,781 15,394,402 - -
Net loss (5,317,408)
---------- ---------- ------- --------- ---------- --------- ---------
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
---------- ---------- ------- --------- ---------- --------- ---------
Balance, September
30, 1997 20,000,000 12,504,258 $125,043 $6,789,143 $10,677,008 - -
========== ========== ======= ========= ========== ========= =========
See accompanying notes.
F-5
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statements of Cash Flows
Year ended September 30,
1997 1996 1995
-------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating
activities
Net income (loss) $ 600,014 $(5,317,408) $(1,058,946)
Adjustments to reconcile
net income (loss) to net cash
(used in) provided by
operating activities:
Depreciation and amortiza-
tion 1,099,627 1,044,920 939,505
Provision for losses on
accounts receivable 15,401 401,620 62,467
Paradise Settlement - 4,000,000
Provision for slow-moving
inventory 1,286,000
Benefit (provision) for
deferred income taxes 290,099 (699,701) (565,515)
Provision for loss from
Cosmetics operation 687,000
Change in assets and
liabilities:
(Increase) decrease in
accounts receivable (1,771,187) (2,488,160) 616,415
(Increase) decrease in
inventory (152,916) 4,116,474 (2,803,788)
(Increase) decrease in
prepaid expenses and other (605,228) 184,622 80,587
(Increase) in due from
officer (32,001) (30,999)
(Decrease) in bankers'
acceptances payable (1,488,757) (353,228) (18,211)
(Decrease) increase in
accounts payable (331,698) (789,706) 957,793
(Decrease) increase in
accrued expenses (386,426) 713,405 81,742
(Decrease) in settlement
payables (1,000,000) - -
Change in income
taxes payable/
receivable 723,968 676,627 (1,453,922)
---------- --------- ---------
Net cash (used in) provided
by operating
activities (2,352,104) 1,489,465 (1,906,872)
See accompanying notes.
F-6
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statements of Cash Flows (cont'd)
Year ended September 30,
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing
activities
Purchase of equipment and
furniture (793,006) (488,176) (652,037)
Increase in trademarks (118,891) (120,876) (69,725)
--------- --------- --------
Net cash used in investing (911,897) (609,052) (721,762)
activities
Cash flows from financing
activities
Net (decrease) increase in
notes payable (4,114,432) 6,183,395 6,006,379
Proceeds from the issuance
of common stock 963,437
Payments to acquire
treasury stock (4,067,790)
Payments to acquire
common stock options (7,500)
Net cash (used in) provided
by financing ---------- --------- ---------
activities (3,150,995) 6,183,395 1,931,089
Net (decrease) increase --------- --------- ---------
in cash and cash equi-
valents (6,414,996) 7,063,808 (697,545)
Cash and cash equivalents,
beginning of year 7,063,808 0 697,545
Cash and cash equivalents, --------- --------- -------
end of year $ 648,812 $7,063,808 $ -0-
========= ========= =======
Supplemental disclosures
of cash flow information
Non-cash investing activities:
Purchase of fixed assets by
capital lease $ 72,050
Retirement of treasury
stock $ 5,111,058
Cash paid during the
year for:
Interest 1,773,920 $1,319,958 1,259,145
Income taxes 30,931 140,000 1,380,085
See accompanying notes.
F-7
</TABLE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
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, children's activity kits and related
products, 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
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
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.
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.
Earnings (Loss) Per Common and Common Equivalent Shares
Primary and fully diluted earnings (loss) per share are
computed on the basis of the weighted average number of shares
outstanding plus the common stock equivalents which would arise
from the exercise of stock options and warrants.
The average number of shares used was:
Primary Fully Diluted
------- -------------
Year ended September 30, 1997 12,297,124 12,491,167
Year ended September 30, 1996 10,496,758 10,496,758*
Year ended September 30, 1995 10,660,988 10,660,988*
- -------
* In 1996 and 1995 fully diluted was anti-dilutive.
F-9
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
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.
2. Inventory
1997 1996
---- ----
Raw materials $ 6,245,696 $ 6,732,751
Work-in-process 1,579,274 1,265,795
Finished goods 11,865,954 12,115,462
Allowance for slow-
moving items (1,210,000) (1,386,000)
---------- ----------
$18,480,924 $18,728,008
========== ==========
3. Notes and Bankers' Acceptances Payable
September 30, September 30,
Interest 1997 Interest 1996
-------- ------------- -------- -------------
Notes payable 8.128% $ 13,000,000 8.25% $11,725,000
Notes payable 9.00 % 4,238,066 8.25% 9,627,498
---------- ----------
Total $ 17,238,066 $21,352,498
========== ==========
Bankers'
acceptances
payable - None $ 1,488,757
========== ==========
Notes and bankers' acceptances payable as of September 30,
1996 were initially advanced under a $34,000,000 line of credit
which was available at the banks' discretion and subject to
F-10
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
3. Notes and Bankers' Acceptances Payable (cont'd)
limitations based upon eligible inventory and accounts receivable
as defined by that agreement. In December 1996, the Company's
original line of credit was restructured by the Banks through
January 31, 1997.
In January 1997, the Company entered into a new three year
$30,000,000 Revolving Credit Agreement with BankAmerica Business
Credit, Inc. (the "New Credit Agreement"). Borrowings under the
New Credit Agreement are subject to limitations based upon
eligible inventory and accounts receivable as defined in the New
Credit Agreement.
The New Credit Agreement is collateralized by a security
interest in substantially all of the assets of the Company. In
connection with the New Credit Agreement, the Company has agreed,
among other things, to the maintenance of certain minimum amounts
of tangible net worth and interest coverage ratios.
The weighted average interest rate during the periods on the
outstanding short-term borrowings was 8.7% and 7.8% for fiscal
year ended September 30, 1997 and 1996, 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,
175,000 shares were cancelled.
During Fiscal 1996, the Company granted options covering in
the aggregate 175,000 shares of common stock at an exercise price
of $3.125 per share (representing fair market value at date of
grant). During Fiscal 1995, there were no options granted.
During these periods, no options were exercised. At September 30,
1997, 195,000 options remain outstanding at prices ranging from
$1.19 to $3.125 per share, of which all are presently
exercisable.
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
F-11
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
4. Shareholders' Equity (cont'd)
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 will terminate on January 5, 1999.
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-12
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
4. Shareholders' Equity (cont'd)
<TABLE>
<CAPTION>
The table below presents option information for the 1989 Plan:
Year ended Year ended Year ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1995
Price range Shares Price range Shares Price Range Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $3.125-7.875 351,000 $4.00-$7.875 392,000 $4.00-$7.875 397,000
Options granted 0.75 285,600 3.125 180,000
Cancelled 3.125-7.875 (351,000) 4.00-6.50 (221,000) 6.50 (5,000)
Exercised
----------- ------- ----------- ------- ---------- -------
Outstanding,
end of year 0.75 285,600 $3.125-7.875 351,000 $4.00-7.875 392,000
----------- ------- ----------- ------- ---------- -------
Eligible for
exercise
currently - - $4.50-7.875 118,600 $4.00-7.875 267,000
=========== ======= =========== ======= ========== =======
F-13
</TABLE>
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
4. Shareholders' Equity (cont'd)
<TABLE>
<CAPTION>
The table below presents option information for the 1993 Plan:
Year ended Year ended Year ended
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1995
Price range Shares Price range Shares Price Range Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $3.125-6.125 647,500 $4.50-6.125 668,750 $4.50-6.125 678,750
Options
granted 0.75 -0.875 385,500 3.125 20,000
Cancelled 3.125-6.125 (592,500) 4.50-6.125 (41,250) 5.25 (10,000)
Exercised
---------- ------ --------- ------- ---------- -------
Outstanding,
end of year 0.75 -5.50 440,500 $3.125-6.125 647,500 $4.50-6.125 668,750
=========== ======= ========== ======= ========== =======
Eligible for
exercise
currently $4.50 -5.50 43,000 $4.50-6.125 301,500 $4.50-6.125 273,000
=========== ======= ========== ======= ========== =======
F-14
</TABLE>
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1995 Plan:
Year Ended Year Ended
Sept. 30, 1997 Sept. 30, 1996
Price range Shares Price range Shares
----------- ------ ----------- ------
Outstanding,
beginning of
year $3.00 10,000 -
Options granted 0.75-2.9375 123,000 $3.00 10,000
Cancelled 3.00 (10,000)
Exercised
----------- ------- ----- ------
Outstanding,
end of year $0.75-2.9375 123,000 $3.00 10,000
=========== ======= ===== ======
Eligible for
exercise
currently 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.
F-15
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
4. Shareholders' Equity (cont'd)
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 6.65%
Expected dividend yield 0%
Expected stock price volatility .663%
Expected life of options 3-5 years
The weighted average fair value of options granted during Fiscal
1997 and Fiscal 1996 is $.78 and $1.92 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):
Sept. 30, 1997 Sept. 30, 1996
As reported Pro forma As reported Pro forma
Net income (loss) $ 600 $ 491 $ (5,317) $(5,354)
Earnings (loss)
per share $ .05 $ .04 $ (.51) $ (.51)
F-16
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
5. Income Taxes
1997 1996 1995
---- ---- ----
(Benefit)/Expense
Federal:
Current $ (309,276) $ (697,252) $ (73,837)
Deferred 273,730 (421,047) (503,308)
State:
Current 300 - -
Deferred 16,369 (278,654) (62,207)
------- --------- --------
$ (18,877) $(1,396,953) $ (639,352)
======= ========= ========
Reconciliations of the statutory federal income tax rate of
34% to the effective tax rates are as follows:
1997 1996 1995
---- ---- ----
Statutory tax rate 34.00% (34.00%) (34.00%)
State income taxes, net
of federal tax (benefit)
expense 1.86 (6.00) (3.63)
IRS audit adjustment 5.32
Permanent timing differences 9.99
(Decrease) increase in
valuation allowance (47.77%) 18.5%
Other (6.65%) .7%
----- ----- -----
Effective tax rate ( 3.25%) (20.80%) (37.63%)
===== ===== =====
F-17
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
5. Income Taxes (cont'd)
Significant components of the Company's deferred tax assets and
liabilities as of September 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
September 30,
1997 1996
---- ----
<S> <C> <C>
Current deferred tax liability:
State taxes on deferred
federal items $ ( 149,823) $(224,935)
------- -------
Current deferred tax assets:
Bad debts 12,938 231,392
Inventory reserve 520,300 595,980
Reserve for returns and 313,042 369,017
allowances
Unicap 12,813 33,110
Reserve for restructuring - 129,000
Cosmetics fixed asset reserve 123,410 -
Total current deferred ------- ---------
tax assets 982,503 1,358,499
Valuation allowance on current
deferred tax assets (561,500) (514,635)
------- ---------
421,003 843,864
------- ---------
Net current deferred tax assets $ 271,180 $ 618,929
======= =========
Long-term deferred tax liabilities:
Depreciation $ (832,800) $(888,450)
------- ---------
Long-term deferred tax assets:
Reserve for litigation 1,290,000 1,720,000
State net operating loss
carryforwards 310,700 203,191
--------- ---------
Total long-term deferred
tax assets 1,600,700 1,923,191
Valuation allowance on
long-term deferred
tax assets (404,065) (728,556)
--------- ---------
1,196,635 1,194,635
--------- ---------
Net long-term deferred tax
assets $ 363,835 $ 306,185
========= =========
F-18
</TABLE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
5. Income Taxes (cont'd)
The Company has generated state net operating loss carryforwards of
$3,452,227, which expire in varying amounts beginning on September 30,
2001.
In 1996, the Company recorded a valuation allowance of $1,243,191
against deferred tax assets due to the uncertainty of its ability to
recognize a full tax benefit for future payments against the litigation
reserve and its ability to fully utilize the state net operating loss
carryforwards. In 1997, approximately $277,000 of the valuation
allowance was recognized as a tax benefit.
6. Commitments and Contingencies
Letters of Credit
The Company was contingently liable for outstanding letters of
credit of $350,062 at September 30, 1997.
Leases
Rent expense for the years ended September 30, 1997, 1996 and 1995
amounted to $498,126, $480,563 and $487,959, 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. In March 1993, the Company exercised
its first option and extended the lease for an additional 60 months.
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.
F-19
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
6. Commitments and Contingencies (cont'd)
Future minimum rental payments under operating leases are as
follows:
1998 $ 764,262
1999 767,739
2000 699,323
Thereafter 345,743
---------
$2,577,067
==========
7. Loss from Cosmetics operation:
During the second quarter of 1997, the Board of Directors
determined to discontinue its Cosmetics subsidiary and focus its efforts
primarily on its writing instruments business. The loss from Cosmetics
operation reported in the second quarter reflects the write-down of
certain assets of this operation to their estimated net realizable value
(Note 16). At September 30, 1997, the net book value of such assets
approximated $1,100,000.
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 for the five year period, 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 a minimum royalty of $500,000 (the
"Paradise Settlement"). The Company paid Paradise $400,000 in February
1997, $500,000 in January 1997, and $100,000 of the minimum royalty in
December 1996. The Note requires $100,000 quarterly principal payments
commencing January 1, 1998.
F-20
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
9. Major Customer and Concentration of Credit Risk
For the years ended September 30, 1997, 1996 and 1995, the Company
had one customer who accounted for 13%, 11% and 9%, 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 adopted a defined contribution 401(k) plan effective
April 1, 1993, 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. During
1995 and 1994 the Company did not make 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 Fiscal 1997 and Fiscal 1996, the Company contributed $36,273 and
$16,941, respectively.
11. Accrued Expenses
September 30,
1997 1996
---- ----
Accrued returns and advertising
rebates $1,833,450 $1,552,204
Accrued legal/consulting fees - 579,550
Accrued royalties 637,477 776,132
Other accrued expenses 969,777 919,244
--------- ---------
$3,440,704 $3,827,130
========= =========
12. New Authorative Accounting Pronouncement:
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings Per Share, which is required to be adopted
by the Company in the quarter ending December 31, 1997. At that time,
the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. Under the
new requirements for calculating primary earnings per share, the
dilutive effect of stock options will be excluded. There is no impact
on primary earnings per share for the years ended September 30, 1997 and
1996, respectively. The impact of Statement 128 on the calculation of
fully diluted earnings per share for these years is not expected to be
material.
F-21
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
13. Unaudited Summarized Quarterly Information
Unaudited summarized quarterly financial information for the years
ended September 30, 1997 and 1996 are as follows:
(000's except for per share information)
Three Months Ended
December March June September
31, 1996 31, 1997(b) 30, 1997 30, 1997
-------- -------- -------- ---------
Net sales $12,540 $10,852 $21,333 $16,081
Gross profit 4,493 3,734 7,426 5,178
Net income/(loss) 54 (661) 911 296
Earnings (loss)
per common share .01 (.05) .07 .02
December March June September
31, 1995 31, 1996 30, 1996 30, 1996(a)
-------- -------- -------- ---------
Net sales $11,892 $10,410 $21,976 $17,401
Gross profit 4,236 3,458 6,994 3,961
Net income/(loss) 130 (703) 617 (5,361)
Earnings (loss)
per common share .01 (.07) .06 (.51)
(a) In the fourth quarter of Fiscal 1996, the Company settled the
Paradise litigation (Note 8).
(b) In the second quarter of Fiscal 1997, the Company wrote-down its
Cosmetics operation (Note 7).
14. Loss on Mexican Affiliate
In 1992, the Company began an affiliation with a Mexican
distributor to sell its products in Mexico. As a result of the Pesos
devaluation and the eventual termination of the relationship in Fiscal
1995, the Company incurred a loss of $407,000.
15. 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
F-22
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
15. Private Placement (cont'd)
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.
16. Subsequent Event
In November 1997, the Company entered into an agreement to sell the
fixed assets and inventory of its Cosmetics subsidiary to an outside
company (significantly owned by a former employee) for its book value.
In December 1997, $100,000 was received as a down payment, $150,000 is
to be received at closing and a note is to be issued for the balance due
bearing interest at a rate of 9% per annum. The terms of the note
provide that the principal be reduced by $150,000 a month commencing
February 1998, until repaid.
F-23
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1997, 1996 and 1995
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Charged
Balance at to Costs Balance
Beginning and End of
Description of Period Expenses Deductions(1) Period
<S> <C> <C> <C> <C>
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
========= ========= ======= =========
Year ended September
30, 1996
Allowance for doubtful
accounts $ 70,314 $ 401,620 $ 69,421 $ 402,513
========= ========= ======= =========
Allowance for slow
moving items $1,386,000 - - $1,386,000
========= ========= ======= =========
Valuation allowance
for deferred taxes $ - $1,243,191 $ - $1,243,191
========= ========= ======= =========
Year ended September
30, 1995
Allowance for doubtful
accounts $ 54,565 $ 62,467 $ 46,718 $ 70,314
========= ========= ======= =========
Allowance for slow
moving items $ 100,000 $1,286,000 - $1,386,000
========= ========= ======= =========
(1) Amount represents various accounts written off during the year, net
of recoveries.
</TABLE>
F-24
EXHIBIT INDEX
Exhibit 10.11. Agreement for Sale and Purchase of Assets dated as
of November 1997, among the Company, Pentech
Cosmetics, Inc., Fun Cosmetics, Inc. and David
Blau.
Exhibit 21 Subsidiaries of the Company.
Exhibit 23.1 Consent of Ernst & Young LLP.
<PAGE>
EXHIBIT 21
Subsidiaries of Pentech International, Inc.
Jurisdiction of
Name Incorporation
Sawdust Pencil Co. Delaware
Pentech Cosmetics, Inc. Delaware
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in (i) the Registration
Statement (Form S-8 No. 33-27009) dated February 28, 1989 pertaining
to the 1989 Stock Option Plan of Pentech International, Inc.
("Pentech"); (ii) the Registration Statement (Form S-8 No. 33-67802)
dated August 23, 1993 pertaining to the 1993 Stock Option Plan of
Pentech and (iii) the Registration Statement (Form S-8, No. 333-30595)
dated July 2, 1997 pertaining to the 1995 Stock Option Plan of
Pentech, of our report dated December 5, 1997 with respect to the
consolidated financial statements and schedule of Pentech
International, Inc. included in this Annual Report (Form 10-K) for the
year ended September 30, 1997.
ERNST & YOUNG LLP
By: /s/ Ernst & Young LLP
MetroPark, New Jersey
December 17, 1997
WPDOCS\PTK\10K97
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 648,812
<SECURITIES> 0
<RECEIVABLES> 16,323,373
<ALLOWANCES> 30,087
<INVENTORY> 18,480,924
<CURRENT-ASSETS> 37,764,683
<PP&E> 8,895,443
<DEPRECIATION> 4,931,612
<TOTAL-ASSETS> 42,503,569
<CURRENT-LIABILITIES> 22,312,375
<BONDS> 0
0
0
<COMMON> 125,043
<OTHER-SE> 17,466,151
<TOTAL-LIABILITY-AND-EQUITY> 42,503,569
<SALES> 60,806,386
<TOTAL-REVENUES> 60,806,386
<CGS> 39,975,368
<TOTAL-COSTS> 17,988,791
<OTHER-EXPENSES> 687,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,574,090
<INCOME-PRETAX> 581,137
<INCOME-TAX> (18,877)
<INCOME-CONTINUING> 600,014
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 600,014
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
EXHIBIT 10.11
AGREEMENT FOR SALE AND PURCHASE OF ASSETS
This AGREEMENT (the "Agreement") made as of this __ day of
November, 1997, by and between PENTECH INTERNATIONAL, INC., a
Delaware corporation whose principal place of business is 195
Carter Drive, Edison, NJ 08817 (hereinafter referred to as
"Parent"), PENTECH COSMETICS, INC., a Delaware corporation whose
principal place of business is 195 Carter Drive, Edison, New
Jersey 08817 (hereinafter referred to as "Cosmetics") (Parent and
Cosmetics are hereinafter collectively referred to as "Pentech"),
FUN COSMETICS, INC., a Delaware corporation whose principal place
of business is 195 Carter Drive, Edison, New Jersey 08817 or its
assignee (hereinafter referred to as "Purchaser") and DAVID BLAU,
whose residence is 2077 Center Avenue, 4G, Fort Lee, NJ 07024
("Blau").
1. Subject Matter of and Consideration for Sale.
1.1 Assets to be Transferred. Upon the terms and subject to all
of the conditions herein contained and upon the performance by
each of the parties hereto of its obligations hereunder,
Cosmetics agrees on the Closing Date (as hereinafter defined) to
sell, convey, transfer, assign and deliver to Purchaser and
Purchaser agrees that on the Closing Date it will purchase,
acquire and accept, all of Cosmetics' backlog, inventory, raw
materials, customer lists, equipment, purchase orders, trade
names, copyrights and trademarks used by it in connection with
the sale of cosmetics (all of such assets are hereinafter
referred to as the "Assets"). A list of the Assets is set forth
on Schedule 1.1(a) hereto. Backlog is defined as current,
unfinished, unbilled jobs in progress as of the Closing Date
(defined below). A list of the backlog as of the date hereof is
set forth on Schedule 1.1(b) hereto.
1.2 Liabilities and Obligations; Indemnification. On the
Closing Date, Purchaser shall not assume any of the liabilities
or obligations of Pentech, other than those set forth on Schedule
1.2 hereto. Pentech shall indemnify and hold Purchaser harmless
from and against any and all liabilities of Pentech that are not
assumed by Purchaser pursuant to this Agreement.
1.3 Instruments of Transfer. The transfer of the Assets shall
be effected by deeds, bills of sale, stock powers, endorsements,
assignments, drafts, checks and other instruments of transfer and
conveyance, in such form as is reasonably satisfactory to
Purchaser, Pentech and their respective counsel.
1.4 Consideration for Transfer. Purchaser, in consideration
for the purchase of the Assets and such other terms and
conditions hereof, shall pay Pentech the purchase price (the
"Purchase Price") which is comprised of the Cash Purchase Price
and the Stock Purchase Price, as follows:
1.4.1 Cash Purchase Price. The Cash Purchase Price shall equal
the net book value of the Assets as determined by Pentech, plus
the value of prepaid expenses, if any, on the Closing Date. It
is agreed that the net book value shall not be reduced by a
reserve in excess of Six Hundred Eighty-Seven Thousand ($687,000)
Dollars and that the equipment and store fixtures included in the
Assets shall have a net book value of Two Hundred Fifty Thousand
($250,000) Dollars.
(a) on the date hereof, Purchaser shall pay Pentech One
Hundred Thousand ($100,000) Dollars (the "Down Payment");
(b) on the Closing Date (defined below), Purchaser shall pay
Pentech One Hundred Fifty Thousand ($150,000) Dollars or the
remainder of the Cash Purchase Price, whichever is less;
(c) on the Closing Date, Purchaser shall execute a note for
the balance of the Cash Purchase Price, if any (the "Note"), a
copy of which is attached hereto as Exhibit 1.4.1(c)(1). The
terms of the Note shall provide that the principal thereof shall
be reduced by $150,000 per month commencing February 1, 1998
until fully repaid. The Note shall bear interest at a rate of 9%
per annum and shall be secured by all of the assets of Purchaser
pursuant to a Security Agreement (the "Security Agreement"), a
copy of which is attached hereto as Exhibit 1.4.1(c)(3), and a
pledge of 500,000 shares of Common Stock of the Purchaser
(representing approximately 7% of the outstanding capital stock
of Purchaser) by Blau pursuant to a Pledge Agreement (the "Pledge
Agreement"), a copy which is attached hereto as Exhibit
1.4.1(c)(3);
(d) on the Closing Date (or as otherwise agreed to by Drucker,
Math & Whitman, P.C. ("DM&W"), Purchaser shall pay DM&W to audit
Cosmetics' financial statements for its fiscal year ended
September 30, 1997, if any; and
(e) on the Closing Date, Purchaser shall pay Pentech One
Thousand Dollars ($1,000) for its occupancy of Pentech's premises
for up to 30 days from such date in accordance with the
provisions of Paragraph 7(f).
1.4.2 Stock Purchase Price. Purchaser shall issue and deliver
to Pentech 200,000 shares of Common Stock of the Purchaser (the
"Stock Purchase Price"). These shares shall be subject to a
lock-up similar to that of Blau with respect to his shares of
Common Stock of the Purchaser, but in no event in excess of two
years from the Closing Date. In the event Purchaser registers
its securities under the Securities Act of 1933 or participates
in a public offering of its securities, Purchaser shall offer
Pentech the opportunity to register the Stock Purchase Price on
the same terms and conditions as applicable to any other
shareholder participating in such registration. This
registration right shall not apply to any shares which may be
sold pursuant to Rule 144.
1.5 Closing Date. The closing under this Agreement (the
"Closing") shall take place at 10:00 A.M., on or before December
31, 1997 (the "Closing Date"), unless extended by mutual
agreement of the parties hereto.
2. Representations and Warranties of Pentech. Pentech hereby
warrants and represents to Purchaser and Blau as follows:
2.1 Organization and Good Standing of Pentech. Each of Pentech
and Cosmetics is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware, and
has the full corporate power to carry on its business as now
conducted. Cosmetics is entitled to own or lease and to operate
the Assets now owned or operated by it directly, and has the
requisite power and authority to consummate the transactions
contemplated by this Agreement. Pentech is duly qualified to do
business and is in good standing under the laws of each
jurisdiction in which its ownership of property or assets or the
nature of business conducted therein requires such qualification,
possesses all licenses and franchises required under Federal,
state or local law to conduct its businesses in the manner in
which it is presently conducted, all of which are freely
assignable to Purchaser without the consent of any other party.
2.2 No Breach. Except as set forth on Schedule 2.2, neither the
execution or delivery of this Agreement by Pentech, nor
performance hereunder will result in a violation or breach of any
term or provision, or constitute a default under any indenture,
mortgage, deed of trust or other contract, agreement,
authorization or permit to which Pentech or Cosmetics is a party
or is subject.
2.3 Litigation and Claims; Compliance with Applicable Law.
(i) There is no litigation, claim, governmental or other
proceeding or investigation pending or, to the knowledge of
Pentech, threatened or in prospect which will have an adverse
effect on (a) the Assets, or (b) the subject matter of this
Agreement or any action contemplated hereby or incidental hereto.
(ii) To the best of Pentech's knowledge, Pentech is not in
violation of any, and has been and will be as of the Closing Date
in compliance with, all provisions of any law, decree, order or
regulation applicable to the operation of its business,
including, without limitation those relating to environmental
requirements (such as air, water and noise pollution) and to
employment practices (such as discrimination, health and safety),
nor is Pentech subject to any requirements to take remedial
action by reason of any violation (or to avoid in the future a
violation) of any such provision relating to the Assets.
2.4 Properties and Assets.
Cosmetics has good and marketable title to the Assets subject to
no liens or adverse claims other than the lien of BankAmerica
Business Credit, Inc. (the "Bank"). Schedule 1.1(a) is a
complete list of all tangible properties and assets included
within the Assets. Purchaser shall have the right to inspect, at
reasonable times, the Assets during the period between execution
of this Agreement and the Closing Date. This Agreement is
subject to the Bank's consent to the transfer of the Assets to
Purchaser on the Closing Date.
2.5 List of Customer Accounts. Schedule 2.5 contains a true,
correct and complete list of all customers of Cosmetics.
2.6 No Defaults or Undisclosed Liabilities. Pentech is not in
default with respect to any material indebtedness or liability
and does not know of any event which has occurred which upon the
passage of time would result in any such default. There are no
facts in existence on the date hereof and known to the Pentech
which might reasonably serve as a basis for any material
liabilities or obligations not disclosed in this Agreement or in
schedules attached hereto, incorporated herein by reference or
previously delivered to Purchaser as herein provided. Except as
provided herein, in a schedule attached hereto or a document
delivered hereunder, no consent of any party to any agreement or
document is required for the execution, delivery or performance
of this Agreement, and the consummation of the transactions
contemplated hereby will not result in a breach of, or give rise
to the right of cancellation of, any such agreement or document.
2.7 Financial Condition. A copy of the unaudited financial
statements of Cosmetics for its fiscal years ended September 30,
1996 and September 30, 1997 are or will be attached hereto as
Schedule 2.7. Such financial statements were true and correct at
the dates thereof and were prepared in accordance with and on the
basis of the principles described therein.
2.8 Insurance. Pentech reasonably believes it maintains
adequate insurance on the Assets with respect to risks normally
insured against by companies similarly situated and engaged in
similar business with assets similar to the Assets. All
insurance policies maintained by Pentech and the amounts of
coverage and deductible or co-insurance provisions provided in
such policies, are listed in Schedule 2.8 attached hereto, are
currently in full force and effect and are not in default and
will be in effect on the Closing Date. To Pentech's knowledge,
there has been no failure to give any notice or present any claim
under such policies in timely fashion. Pentech has not received
any notice providing for the termination of such insurance or
that insurance upon terms substantially the same as those
currently in effect will not be reoffered to it. No claim
covered by such insurance policies has arisen prior to the date
hereof, the anticipated loss from which is not adequately insured
against (subject to any applicable deductible or co-insurance
provisions). If any of the Assets are lost, stolen or damaged on
or before Closing, which loss, theft, damage or destruction is
covered by insurance, Pentech will assign to Purchaser, at the
Closing, the right to receive such insurance proceeds, subject to
a required prepayment of the Note and any amounts otherwise owed
to Pentech.
2.9 Brokerage and Finder's Fees. Neither Pentech nor any
affiliate of Pentech has employed any broker, finder or agent,
nor has it otherwise dealt with or become in any way obligated
for any finder's, broker's, agent's or similar fee with respect
to the transactions referred to herein.
2.10 Material Misstatements or Omissions. No representations or
warranties by Pentech in this Agreement nor any document,
statement, certificate or schedule furnished or to be furnished
to Purchaser pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any
untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make the statements of facts
contained herein or therein not misleading.
2.11 Accounts Receivable of Cosmetics. Schedule 2.11 attached
hereto contains a true and correct statement of the accounts
receivable of Cosmetics as of the date hereof. The parties agree
that the accounts receivable schedule will be updated on the
Closing Date. Such receivables will be referred to herein as the
"Receivables". If a customer takes a credit, it shall be applied
against the Company that sold such customer the goods regardless
of when such payment is received. Each party shall cooperate
with the other in the proper collection of all such receivables,
with the first collections applied to the oldest receivables
unless it is clear that the party making such payment has a clear
reason not to pay such older Receivable.
2.12 Intangible Property. Schedule 2.12 attached hereto
contains a complete list of all of the patents, patent licenses,
patent applications, trademarks, trademark registrations, and
applications therefor, tradenames, copyrights and copyright
registrations and applications therefor of Cosmetics included in
the Assets (the "Intangible Property"). Specifically not
included in the Intangible Property is the trademark or right to
use the name "Pentech Cosmetics, Inc." or any variant thereof.
Included in such rights will be a perpetual royalty-free license
to manufacture and market so-called rubberized cosmetics pencils
to the extent of Cosmetics' proprietary rights to manufacture and
market such products. Pentech has not received any notice of
infringement or other complaint that its operations traverse or
infringe the rights of others under patents, trademarks,
tradenames, copyrights, or otherwise relating to the Assets. In
the event Purchaser's activities in manufacturing, selling or
otherwise exploiting the so-called rubberized cosmetics pencils
give rise to claims, suits, arbitrations or proceedings (the
"Claims"), Purchaser shall be solely responsible for defending
and, if required, satisfying such Claims. Purchaser shall defend
and indemnify and hold Pentech harmless from any claim, suit,
loss and/or damage and all expenses related thereto arising out
of alleged defects in the rubberized cosmetics pencils. In
connection with the defense of any such claim or suit, Purchaser
shall have the right to select counsel on behalf of Pentech
subject to the approval of Pentech, which approval shall not be
unreasonably withheld.
2.13 Conduct of the Business of Cosmetics Prior to the Closing
Date. Cosmetics agrees that at all times after the date hereof
and prior to the Closing Date:
(a) the business of Cosmetics shall be conducted in a limited
manner, as determined in Cosmetics' sole and absolute discretion;
(b) Cosmetics shall not (i) acquire any assets, other than in
the ordinary course of business; (ii) dispose of, encumber or
mortgage any assets or properties; (iii) incur any indebtedness
for borrowed money, discharge or satisfy any lien or encumbrance
or pay any obligation or liability (fixed or contingent), or
enter into any other material transaction, other than in the
ordinary course of business; (iv) waive, release, grant or
transfer any rights of value or modify or change in any material
respect any existing license, lease, contract or other document;
or (v) enter into any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(c) Cosmetics shall not (i) increase the compensation payable
or to become payable by it to any employee of Cosmetics, or (ii)
pay or provide for any bonus, profit sharing, stock option,
pension, retirement, deferred compensation, employment or other
payment plan, agreement or arrangement for the benefit of
employees of Pentech, except in the ordinary course of the
administration of its existing employment agreements and benefit
plans;
(d) the properties of Cosmetics shall be maintained in
customary repair, order and condition, reasonable wear and use
excepted, and insurance on such properties and with respect to
the conduct of the business of Cosmetics shall be maintained in
such amounts and of such kinds comparable to the insurance in
effect on the date hereof; and
(e) to the extent that Purchaser desires Cosmetics to make an
expenditure that would not be consistent with Pentech's operation
of Cosmetics in a limited manner as outlined above, Purchaser may
request Pentech to make such expenditure, and such expenditures,
if made, would be included as prepaid expenses that are to be
included in the Cash Purchase Price. Whether Pentech elects to
make any such expenditures will be determined solely by Pentech
in its sole and absolute discretion.
2.14 Representations and Warranties at Closing. Unless
expressly herein otherwise provided or contemplated, the
representations and warranties of Pentech set forth in this
Agreement shall be true on and as the Closing Date as though such
representations and warranties were made on and as of such date
and all such representations and warranties shall survive the
Closing. Nothing in this paragraph shall affect the obligations
and indemnities of the parties with respect to covenants and
agreements contained in this Agreement that are permitted or
required to be performed, in whole or in part, after the Closing
Date.
2.15 Indemnification. Subject to a limit of the Cash Purchase
Price, and provided any such claim arises on or before one year
from the Closing Date, Pentech agrees to indemnify, defend and
hold harmless Purchaser, its successors and legal
representatives, from all demands, claims, actions, or causes of
action, losses, damages, suits, judgments, costs and reasonable
attorneys' fees and expenses incurred by or asserted against
Purchaser by reason of any claims, obligations, debts, demands,
or liabilities arising from events occurring prior to the Closing
Date or a breach of any representations, warranties or covenants
contained in this Agreement.
2.16 Acquiring Shares for Investment. Pentech represents that it
is acquiring shares of Common Stock of Purchaser for investment
and not with a view toward the resale thereof.
3. Representations and Warranties of Purchaser and Blau.
Purchaser and Blau each hereby warrants and represents to and
agrees with Pentech as follows:
3.1 Organization and Good Standing of Purchaser. Purchaser is a
corporation duly organized, existing and in good standing under
the laws of the State of Delaware.
3.2 Authority of Purchaser. Purchaser and Blau, as the case
may be, have the full corporate authority to enter into the
Agreement, the Note, the Security Agreement, and the Pledge
Agreement and to carry out the terms of the Agreement, the Note,
the Security Agreement and the Pledge Agreement. Neither the
execution nor delivery of the Agreement, the Note, the Security
Agreement and the Pledge Agreement by the Purchaser or Blau, nor
performance hereunder will result in a violation or breach of any
term or provision nor constitute a default under any indenture,
mortgage, deed of trust or other contract or agreement to which
the Purchaser or Blau is a party. Except as provided herein or
in a schedule attached hereto, no consent of any party to any
such agreement or instrument is required for the execution,
delivery or performance of this Agreement, and the consummation
of the transactions contemplated hereby will not result in a
breach of, or give rise to a right of cancellation of, any such
agreement or instrument.
3.3 Material Misstatements or Omissions. No representations or
warranties by Purchaser or Blau in this Agreement, nor any
document, statement, certificate or schedule furnished or to be
furnished Pentech pursuant hereto, or in connection with the
transactions contemplated hereby, contains or will contain any
untrue statement of a material fact, or omits or will omit to
state a material fact necessary to make the statement of facts
contained herein or therein nor misleading.
3.4 Brokerage and Finder's Fees. Purchaser and Blau have not
employed any broker, finder or agent, nor has Purchaser become in
any way obligated for finder's, broker's, agent's or similar fee
with respect to the transactions referred to herein.
3.5 Representations and Warranties at Closing. Except as
expressly herein otherwise provided or contemplated, the
representations and warranties of Purchaser and Blau as set forth
in this Agreement shall be true on and as of the Closing Date as
though such representations and warranties were made on and as of
such date and all such representations and warranties shall
survive the Closing. Nothing in this paragraph shall affect the
obligations and indemnities of the parties with respect to
covenants and agreements contained in this Agreement that are
permitted or required to be performed, in whole or in part, after
the Closing Date.
4. Covenants of Pentech. Pentech hereby covenants to Purchaser
and Blau as follows:
4.1 Subject to Purchaser operating in compliance with the
provisions of this Agreement, Pentech covenants and agrees that
neither it nor any person, firm or corporation controlling,
controlled by, or under common control with it at any time during
the period of two years from and after the Closing Date within
any of the states or countries in which Pentech is doing business
on the Closing Date directly or indirectly, in any matter or
under any circumstances or conditions whatsoever, engage in any
activity in such areas which is the same or is directly
competitive with the marketing of cosmetics pencils as it was
done by Cosmetics on the Closing Date. This provision will be
null and void and of no further force and effect if Pentech or an
affiliate thereof is acquired, merged or involved in a similar
event with a company with consolidated revenues in excess of
$100,000,000 that in any way was engaged in the cosmetics
business prior to the date of any such event.
4.2 Pentech shall promptly notify Purchaser, as soon as Pentech
obtains knowledge thereof, of any fact, circumstances or
occurrences (including without limitation any actual or
threatened legal or other proceeding) which has materially
adversely affected or may materially adversely affect any of the
Assets or which might cause any of Pentech's warranties and
representations in this Agreement to be or become untrue.
4.3 Pentech shall arrange to deliver to the Purchaser unaudited
financials of Cosmetics for its fiscal years ended September 30,
1996 and September 30, 1997.
4.4 For one year from the Closing Date, provided Purchaser is
deemed a creditworthy customer, Pentech agrees to groove and
shape pencil slats for Purchaser at its cost plus 20%.
4.5 Pentech agrees to furnish Purchaser with open credit of
Fifty Thousand ($50,000) Dollars to purchase cosmetic pencils
from Pentech that Pentech purchases from Lapimex, subject to
ongoing credit review in the sole discretion of Pentech. Terms
will be sixty (60) days with interest accruing thereon at a rate
of 1% per month on the outstanding balance. This credit limit
shall be increased to the extent Pentech is able to obtain credit
insurance on such receivable provided Purchaser reimburses
Pentech for the cost of any such credit insurance. In the event,
in the sole judgment of Pentech, Purchaser pledges receivables to
Pentech that have not previously been pledged (to Pentech or
anyone else) then Pentech, at its option, may extend additional
credit up to 75% of such receivables up to a maximum of $150,000
subject to Pentech's receipt of documentation reasonably
satisfactory to it and its counsel.
4.6 Pentech agrees to use its best efforts to sell Purchaser
cosmetic pencils it acquires from Lapimex at Pentech's cost for
such pencils provided Purchaser is deemed a creditworthy customer
by Pentech. Other than in the event Purchaser is not deemed a
creditworthy customer by Pentech, if Pentech ceases to desire to
acquire such pencils from Lapimex, Pentech will use its best
efforts to transfer its cosmetic pencil relationship with Lapimex
to Purchaser and will not assign its agreement with Lapimex to
acquire cosmetic pencils to a third party without the consent of
Purchaser, which consent shall not unreasonably be withheld. In
the event Purchaser is not deemed a creditworthy customer by
Pentech, Pentech shall be entitled to take whatever actions it
desires with respect to its relationship with Lapimex.
5. Conditions Precedent to Purchaser's and Blau's Obligations.
5.1 The obligations of Purchaser and Blau to consummate this
Agreement shall be conditioned upon each of the following:
(i) Pentech's representations and warranties contained in this
Agreement shall be true at the Closing Date as though such
representations and warranties were made at such time.
(ii) Pentech shall have performed and complied with all
agreements, covenants and conditions required by this Agreement
to be performed or complied with prior to or at the Closing,
including furnishing the Schedules hereto specifically including
delivery of the financial statements required by Paragraph 4.3
hereof.
(iii) The fulfillment by Pentech of its obligations under
Section 6 required to be fulfilled on or before the Closing Date.
5.2 Prior to the Closing, Purchaser shall have the right to
inspect the books and records of Cosmetics relating to the Assets
being conveyed, transferred and delivered hereunder.
5.3 Prior to the Closing, Pentech shall use its best efforts to
obtain all consents necessary to consummate this transaction,
including the consent of the Bank, and shall have taken all other
action necessary to transfer, assign, set over and convey to
Purchaser all of the Assets free and clear of any and all claims,
liabilities, liens and encumbrances of any kind. There is no
assurance that Pentech shall be able to obtain the consent of the
Bank and if it does not obtain the consent of the Bank on or
before one month from the date hereof, this Agreement shall be
null and void, and this transaction shall terminate, in which
case, Pentech's sole obligation to Purchaser or Blau pursuant to
this Agreement shall be to return the Down Payment without
interest thereon or deduction therefrom.
6. Pentech's Obligations at Closing. At the Closing or
thereafter as herein required, Pentech shall deliver to Purchaser
the following:
(i) Deeds, bills of sale, assignments, and such other
instruments of transfer and conveyance as may be necessary or
appropriate to the sale and delivery of the Assets pursuant to
this Agreement, all free and clear of any encumbrances.
(ii) At any time and from time to time at Purchaser's request
(whether at or after the Closing and without further
consideration) such further assignments, powers of attorney, and
other instruments of conveyance and transfer as may reasonably be
required; and Pentech shall take such other action as Purchaser
may reasonably request to assign, grant, convey and transfer more
effectively to Purchaser any of the Assets to be sold, conveyed,
transferred and assigned to Purchaser hereunder.
7. Purchaser's and Blau's Obligations at Closing and Beyond.
(i) Purchaser shall deliver to Pentech the portion of the
Cash Purchase Price as specified in Paragraph 1.4(b) hereof.
(ii) Purchaser shall execute the Note as specified in
Paragraph 1.4(c) above.
(iii) Purchaser shall execute the Security Agreement in the
form attached hereto as Exhibit 1.4.1(c)(2). Purchaser agrees to
execute such additional documents as may be necessary to perfect
Pentech's security interest, including but not limited to
financing statements and continuation of financing statements.
(iv) Blau shall execute the Pledge Agreement in the form
attached hereto as Exhibit 1.4.1(c)(3). Purchaser agrees to
deliver a stock certificate representing 500,000 shares of Common
Stock of Purchaser with a signature guaranteed blank stock power,
and any such other documents as may be necessary from time to
time to perfect its pledge of such shares.
(v) Purchaser shall issue and deliver to Pentech the
certificate representing the Stock Purchase Price as specified in
Paragraph 1.4.2 hereof.
(vi) Pentech shall have received an opinion of counsel to the
Purchaser, dated the Closing Date and addressed to Pentech,
reasonably satisfactory in content and form to Pentech to the
effect that: (a) the Purchaser is a corporation duly organized,
validly existing and in good standing under the laws of its state
of incorporation; (b) the Board of Directors of the Purchaser has
duly approved this Agreement, the Note, the Security Agreement,
the Pledge Agreement and the transactions contemplated therein
and has authorized the execution and delivery of the Agreement by
a duly elected and acting officer, and that no further corporate
action on the part of the Purchaser is required for the approval
of the Agreement, the Note, the Security Agreement, and the
Pledge Agreement and the transactions contemplated hereby; (c)
the Agreement, the Note, the Security Agreement, and the Pledge
Agreement when executed in accordance with the terms thereof,
shall be legal and binding agreements enforceable against the
Purchaser (and any assignee) or Blau, as the case may be, except
to the extent limited by bankruptcy laws generally; (d) the
consummation of this Agreement will not result in a violation or
breach of any term or provision nor constitute a default under
any indenture, mortgage, deed or trust or other contract to which
the Purchaser (and any assignee) is a party of which said counsel
has knowledge; and (e) the shares of stock issued to Pentech as
payment of the Stock Purchase Price shall have been duly
authorized, validly issued, and fully-paid, and non-assessable
and shall have been issued in full compliance with any laws
applicable to such issuance.
(vii) At any time and from time to time at Pentech's
reasonable request (whether at or after the Closing and without
further consideration) Purchaser and Blau shall take such further
acts as may be required to more fully implement any of the
provisions of this Agreement.
(viii) Within 30 days after the Closing Date, Purchaser shall
relocate the Assets. Until such date, Purchaser shall pay
Pentech $1,000 for its occupancy of premises of Pentech.
8. Fees and Expenses. Each party hereto shall pay all fees and
expenses incurred by it incident to the preparation of this
Agreement, carrying this Agreement into effect, and the
consummation of the transaction contemplated hereby.
9. Notices. Any notice or communication given pursuant hereto
by any party to any party hereto shall be in writing and
delivered or mailed by registered or certified mail, postage
prepaid, as follows:
<PAGE>
If to Pentech, a copy to the following address:
Pentech International, Inc.
Pentech Cosmetics, Inc.
195 Carter Drive
Edison, New Jersey 08817
with a copy to:
Richard S. Kalin, Esq.
Kalin & Banner
757 Third Avenue
New York, New York 10017
If to Purchaser or Blau, a copy to the following:
Fun Cosmetics, Inc.
195 Carter Road
Edison, New Jersey 08817
Attn.: Mr. David Blau
with a copy to:
Joel Bernstein, Esq.
9701 Biscayne Blvd.
Miami, FL 33138
or at such other address as hereafter shall be furnished in
writing by either party to the other party hereto.
10. Entire Agreement. This Agreement and all schedules and
exhibits set forth herein, each of which is expressly
incorporated herein by this reference, constitutes the entire
agreement between the parties relating to the subject matter
hereof and supersedes and replaced all prior agreements or
understandings, whether written or oral, and sets forth all of
the representations, covenants and warranties upon which either
party is relying in entering into this transaction.
11. Original and Counterparts; Binding Effect. This Agreement
may be executed in counterparts, each of which shall be deemed an
original, and all of which together shall constitute one and the
same instrument and shall inure to the benefit of and shall be
binding upon the parties hereto and their respective legal
representatives, heirs, successors and assigns.
12. Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of New Jersey.
13. Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect the meaning or
interpretation of this Agreement.
14. Severability. If any provision of this Agreement is found
to be void or unenforceable by a court of competent jurisdiction,
the remaining provisions of this Agreement shall be binding upon
the parties with the same force and effect as though the
unenforceable part has been severed and deleted.
<PAGE>
IN WITNESS WHEREOF, the undersigned executed this agreement as of
the date first above written.
PENTECH INTERNATIONAL, INC.
By: s/John W. Linster
(Authorized Officer)
PENTECH COSMETICS, INC.
By: s/John W. Linster
(Authorized Officer)
FUN COSMETICS, INC.
By: s/David Blau
(Authorized Officer)
s/David Blau
David Blau
<PAGE>
LIST OF SCHEDULES AND EXHIBITS
Schedule 1.1(a) List of Assets
Schedule 1.1(b) List of Backlog as of Date of Agreement
Schedule 1.2 List of Assumed Liabilities
Schedule 1.4.1 Pricing Schedule for Inventory
Schedule 2.5 List of Customers
Schedule 2.7 Financial Statements
Schedule 2.8 Insurance
Schedule 2.11 Accounts Receivable
Schedule 2.12 Intangible Property
Exhibit 1.4.1(c)(1) Form of Promissory Note
Exhibit 1.4.1(c)(2) Form of Security Agreement
Exhibit 1.4.1(c)(3) Form of Pledge Agreement
PTK\EXH-10.11.D97
