-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MCk4nMppDP7P0jTMYGM32NJ0DPogY2atMtFkkASGXOnUitLHFHuVBDkM/klGU4rN p0LGSImvRPlgi1qrftwgJQ== 0000760461-97-000012.txt : 19971224 0000760461-97-000012.hdr.sgml : 19971224 ACCESSION NUMBER: 0000760461-97-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971223 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTECH INTERNATIONAL INC CENTRAL INDEX KEY: 0000760461 STANDARD INDUSTRIAL CLASSIFICATION: PENS, PENCILS & OTHER ARTISTS' MATERIALS [3950] IRS NUMBER: 232259391 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-15374 FILM NUMBER: 97742672 BUSINESS ADDRESS: STREET 1: 195 CARTER DRIVE CITY: EDISON STATE: NJ ZIP: 08817 BUSINESS PHONE: 9082876640 MAIL ADDRESS: STREET 2: 195 CARTER DR CITY: EDISON STATE: NJ ZIP: 08817 10-K 1 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. 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 $.34 Weighted average number of shares outstanding including common stock equi- valents 12,297 10,497 10,661 11,855 11,876 Dividends _ - - - - BALANCE SHEET DATA September 30, Fiscal Years Ended September 30, ------------------------------- 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- ($ 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. 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. 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
Consolidated Balance Sheets Assets (Note 3) September 30, 1997 1996 ---- ---- 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 PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Balance Sheets Liabilities and Shareholders' Equity September 30, 1997 1996 ----- ---- 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 PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Operations Year ended September 30, 1997 1996 1995 ---- ---- ---- 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 Pentech International, Inc. and Subsidiaries 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 ---------- ------ ------ ------- -------- ------ ------ 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 Consolidated Statements of Cash Flows Year ended September 30, 1997 1996 1995 -------- ---------- ---------- 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 PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (cont'd) Year ended September 30, 1997 1996 1995 ---- ---- ---- 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
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 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 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 ----------- ------ ----------- ------ ----------- ------ 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
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 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 ----------- ------ ----------- ------ ----------- ------ 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
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 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 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:
September 30, 1997 1996 ---- ---- 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
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 PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
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 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.
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. EXHIBIT 21 Subsidiaries of Pentech International, Inc. Jurisdiction of Name Incorporation Sawdust Pencil Co. Delaware Pentech Cosmetics, Inc. Delaware 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 EX-27 2
5 12-MOS SEP-30-1997 SEP-30-1997 648,812 0 16,323,373 30,087 18,480,924 37,764,683 8,895,443 4,931,612 42,503,569 22,312,375 0 0 0 125,043 17,466,151 42,503,569 60,806,386 60,806,386 39,975,368 17,988,791 687,000 0 1,574,090 581,137 (18,877) 600,014 0 0 0 600,014 .05 .05
EX-10 3 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: 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. 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 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 -----END PRIVACY-ENHANCED MESSAGE-----