-----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, PasYcNa5cbTyri0tb4NxM4zjizBCCxn0D31wNc0W78Gi532X+budsynouW5jgMd+ e3qopbBGspPMeVjyW8eTFA== /in/edgar/work/20000612/0001088127-00-000102/0001088127-00-000102.txt : 20000919 0001088127-00-000102.hdr.sgml : 20000919 ACCESSION NUMBER: 0001088127-00-000102 CONFORMED SUBMISSION TYPE: PREM14A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20000612 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENTECH INTERNATIONAL INC CENTRAL INDEX KEY: 0000760461 STANDARD INDUSTRIAL CLASSIFICATION: [3950 ] IRS NUMBER: 232259391 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: PREM14A SEC ACT: SEC FILE NUMBER: 000-15374 FILM NUMBER: 652937 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 PREM14A 1 0001.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 SCHEDULE 14A PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 Filed by the Registrant [X] Filed by a Party other than the Registrant [ ] Check the appropriate box: [X] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [ ] Definitive Proxy Statement [ ] Definitive Additional Materials [ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12 PENTECH INTERNATIONAL INC. (Name of Registrant as Specified In Its Charter) (Name of Person(s) Filing Proxy Statement if other than the Registrant) Payment of Filing Fee (Check the appropriate box): [ ] $125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2), or item 22(a)(2) of Schedule 14A. [ ] $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). [X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: Common Stock, par value $.01 per share (2) Aggregate number of securities to which transaction applies: 12,571,258 shares of Common Stock (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): $1.40 (4) Proposed maximum aggregate value of transaction: $17,599,761.20 (5) Total fee paid: $3,519.95 [ ] Fee paid previously with preliminary materials. [ ] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. (1) Amount Previously Paid: (2) Form, Schedule or Registration Statement No.: (3) Filing Party: (4) Date Filed: PENTECH INTERNATIONAL INC. 195 CARTER DRIVE EDISON, NEW JERSEY 08817 June , 2000 Dear Stockholder: You are cordially invited to attend a Special Meeting of Stockholders (the "Meeting") of Pentech International Inc. (the "Company"), which will be held on July__, 2000 at 10:00 A.M., local time, at the offices of Camhy Karlinsky & Stein LLP, 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315. At the Meeting, you will be asked to consider and vote upon a proposal to approve and adopt an Agreement of Merger, dated as of May 22, 2000 (the "Merger Agreement"), a copy of which is attached as Appendix A to the enclosed Proxy Statement, pursuant to and subject to the terms and conditions of which JAKKS Acquisition II, Inc. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of JAKKS Pacific, Inc., a Delaware corporation ("Parent"), will be merged with and into the Company (the "Merger"). Upon consummation of the Merger, the Company will become a wholly-owned subsidiary of Parent, and each outstanding share of the Company's Common Stock will be canceled and converted into the right to receive $1.40 in cash, without interest. The affirmative vote of the holders of a majority of the shares of the Company's Common Stock is required for the approval and adoption of the Merger Agreement. In connection with the execution of the Merger Agreement, Norman Melnick, Chairman of the Company, and David Melnick, President and a director of the Company, and their wives (collectively the "Melnick Family"), and Richard S. Kalin, Secretary and a director of the Company, and his wife, entered into a Voting and Lock-Up Agreement with Parent, dated as of May 22, 2000 (the "Voting Agreement"). Pursuant to the Voting Agreement, among other things, the Melnick Family and Mr. Kalin and his wife agreed to vote all of their shares (representing approximately 30.4% of the outstanding shares of the Company's Common Stock) in favor of the approval and adoption of the Merger Agreement. The Merger Agreement provides that the Merger shall be consummated as soon as practicable following the satisfaction or waiver of the closing conditions pertaining to the Merger, including approval by the requisite vote of the Company's stockholders and receipt of all regulatory approvals. The Board of Directors of the Company has received an opinion from its financial advisor, Business Valuation Services, Inc., to the effect that, on the date of such opinion, and based on assumptions made, procedures followed, matters considered and limitations on the review undertaken, as set forth in such opinion, the Merger Consideration pursuant to the Merger Agreement was fair from a financial point of view to the holders of shares of the Company's Common Stock. THE BOARD OF DIRECTORS HAS CAREFULLY CONSIDERED AND APPROVED THE PROPOSED MERGER AND THE MERGER AGREEMENT AS BEING IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS, BY THE UNANIMOUS VOTE OF ALL DIRECTORS, RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AT THE MEETING. Stockholders of the Company are entitled to statutory appraisal rights under Section 262 of the Delaware General Corporation Law ("Section 262"). Stockholders selecting such rights must carefully follow the procedures set forth in Section 262. See "PROPOSAL ONE--THE MERGER--Appraisal Rights." These steps include, but are not limited to, such stockholder not voting in favor of the Merger and delivering to the Company a written demand for statutory appraisal. The accompanying Proxy Statement provides a detailed description of the proposal regarding the Merger. You are urged to read the accompanying materials so that you may be informed about the business to come before the Meeting. Please sign, date and return the enclosed proxy card in the envelope provided. You may vote by signing the enclosed proxy card, whether or not you plan to attend the Meeting. If you attend the Meeting, you may vote in person, even if you have previously mailed in your proxy. We look forward to seeing you at the Meeting. Sincerely, NORMAN MELNICK Chairman PRELIMINARY COPY This Proxy Statement is dated June __, 2000, and is first being mailed to stockholders on or about June __, 2000. [LOGO OF PENTECH INTERNATIONAL INC.] 195 CARTER DRIVE EDISON, NEW JERSEY 08817 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY __, 2000 To the Stockholders of Pentech International Inc.: NOTICE IS HEREBY GIVEN that a special meeting (together with any adjournment(s) or postponement(s) thereof, the "Meeting") of the stockholders (the "Stockholders") of Pentech International Inc., a Delaware corporation (the "Company"), will be held on July __, 2000 at 10:00 A.M., local time at the offices of Camhy Karlinsky & Stein LLP, 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315. The Meeting is being held for the following purposes: 1. To consider and vote upon a proposal to approve and adopt the Agreement of Merger, dated as of May 22, 2000 (the "Merger Agreement"), a copy of which is attached as Appendix A to the accompanying Proxy Statement, providing for the merger (the "Merger") of JAKKS Acquisition II, Inc. ("Merger Sub"), a Delaware corporation and a wholly-owned subsidiary of JAKKS Pacific, Inc., a Delaware corporation ("Parent"), with and into the Company and which, among other things, provides that each outstanding share of the Company's Common Stock (other than shares of Common Stock owned by Parent or Merger Sub or any direct or indirect subsidiary of Parent or Merger Sub, or which are held in the treasury of the Company or by any of its subsidiaries, which will be canceled, or which are held by dissenting Stockholders) will be canceled and converted into the right to receive $1.40 per share in cash, without interest, all as more fully described in the accompanying Proxy Statement and Appendix A thereto; 2. To grant the Board of Directors of the Company discretionary authority to postpone or adjourn the Meeting in order to solicit additional votes to approve the proposal in paragraph 1 above; and 3. To transact such other business as may properly come before the Meeting or any adjournment or postponement thereof. Only holders of record of outstanding shares of Common Stock of the Company at the close of business on June 6, 2000 will be entitled to notice of, and to vote at, the Meeting or any adjournments or postponements thereof. A complete list of Stockholders entitled to vote at the Meeting will be available for examination by any Stockholder, for any purpose relevant to the Meeting, on and after June __, 2000 during ordinary business hours at the offices of Camhy Karlinsky & Stein LLP, 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315. This list will also be available at the Meeting. Your vote is important. To vote your shares, please mark, sign and date the enclosed proxy card and mail it promptly in the enclosed return envelope, which requires no postage if mailed in the United States. This Proxy is revocable and will not affect your right to vote in person or change your vote at any time before the Meeting. The Board of Directors of the Company, by the unanimous vote of all directors, recommends that Stockholders vote "for" the proposal to approve and adopt the Merger Agreement. BY ORDER OF THE BOARD OF DIRECTORS, RICHARD S. KALIN Secretary Edison, New Jersey June __, 2000 TABLE OF CONTENTS INTRODUCTION..............................................1 AVAILABLE INFORMATION.....................................5 FORWARD-LOOKING STATEMENTS................................6 QUESTIONS AND ANSWERS ABOUT THE MERGER....................8 SUMMARY...................................................13 The Parties.............................................13 The Meeting; Voting; Vote Required for Approval.........14 The Merger..............................................16 The Voting Agreement....................................16 Background of the Merger; Reasons for the Merger and Board of Directors' Recommendation.................17 Opinion of Business Valuation Services, Inc.............18 Conflicts of Interest and Interests of Certain Persons in the Merger..................................18 Financing the Merger ...................................20 Certain Tax Consequences to Stockholders................20 Options.................................................21 Conditions to the Merger................................22 Termination of Merger Agreement.........................23 Termination Fees........................................24 Regulatory Matters......................................25 Price Range of Common Stock.............................25 Appraisal Rights........................................26 Certain Effects of the Merger...........................27 SELECTED FINANCIAL DATA...................................27 CERTAIN INFORMATION REGARDING THE COMPANY.................30 THE MEETING...............................................30 THE MEETING DATE; LOCATION; SOLICITATION ................30 MATTERS CONSIDERED.......................................30 VOTING; REVOCATION OF PROXIES............................31 RECORD DATE; OUTSTANDING SECURITIES; QUORUM; VOTES REQUIRED...........................................33 PROPOSAL ONE--THE MERGER..................................34 General................................................34 Structure..............................................35 Merger Consideration...................................35 Effective Time.........................................36 Parties................................................36 BACKGROUND OF THE MERGER................................38 REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION.........................................43 OPINION OF BUSINESS VALUATION SERVICES, INC.............48 Income Approach........................................53 Public Market Analysis.................................53 Control Premium Approach...............................54 CONFLICTS OF INTEREST AND INTERESTS OF CERTAIN PERSONS IN THE MERGER..................................56 FINANCING OF THE MERGER.................................57 CERTAIN TAX CONSEQUENCES TO STOCKHOLDERS................58 THE MERGER AGREEMENT....................................59 Effective Time.........................................59 Certificate of Incorporation and Bylaws................60 Directors and Officers.................................60 Options................................................61 Exchange of Certificates...............................62 Representations and Warranties.........................63 Business of the Company Pending the Merger.............67 Stockholder Meeting....................................69 No Solicitation........................................71 Indemnification of Directors and Officers..............73 Supplemental Services Agreements and Other Arrangements...............................75 Conditions to Obligations of Each Party................77 Conditions to Obligations of JAKKS and Merger Sub......78 Conditions to Obligations of the Company...............80 Termination............................................81 Termination Fees.......................................82 Fees and Expenses......................................83 Amendment and Waivers..................................84 THE VOTING AGREEMENT....................................85 ACCOUNTING TREATMENT....................................86 REGULATORY MATTERS......................................87 Federal................................................87 PRICE RANGE OF COMMON STOCK; DIVIDENDS..................88 APPRAISAL RIGHTS........................................90 CERTAIN EFFECTS OF THE MERGER...........................97 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS AND DIRECTORS.....................97 INDEPENDENT ACCOUNTANTS...................................100 STOCKHOLDER PROPOSALS.....................................100 DOCUMENTS INCORPORATED BY REFERENCE.......................102 OTHER BUSINESS............................................103 MISCELLANEOUS.............................................104 Form of Proxy............................................. Appendix A Agreement of Merger........................... Appendix B Opinion of Business Valuation Services, Inc... Appendix C Section 262 of the Delaware General Corporation Law.............................. Appendix D Annual Report on Form 10-K for the Fiscal Year ended September 30, 1999......... Appendix E Quarterly Report on Form 10-Q for the Quarter ended March 31, 2000......... [LOGO OF PENTECH INTERNATIONAL INC.] 195 CARTER DRIVE EDISON, NEW JERSEY 08817 ______________ PROXY STATEMENT FOR A SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JULY __, 2000 ______________ INTRODUCTION This Proxy Statement (the "Proxy Statement") is being furnished to stockholders of Pentech International Inc., a Delaware corporation (the "Company"), in connection with the solicitation of proxies by the Board of Directors of the Company (the "Board of Directors") for use at the Special Meeting (together with any adjournment(s) or postponement(s) thereof, the "Meeting") of the stockholders of the Company (the "Stockholders") to be held on July __, 2000 at 10:00 A.M., local time, at the offices of Camhy Karlinsky & Stein LLP ("Camhy"), 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315. This Proxy Statement is dated June __, 2000 and is first being mailed to Stockholders along with the related form of proxy on or about June __, 2000. The mailing address of the Company's principal executive offices is 195 Carter Drive, Edison, New Jersey 08817. Only holders of record of outstanding shares of the Company's Common Stock, $0.01 par value per share (the "Common Stock"), at the close of business on June 6, 2000 will be entitled to vote at the Meeting. At the Meeting, the Stockholders will be asked to consider and vote upon a proposal to approve and adopt the Agreement of Merger, dated as of May 22, 2000 (the "Merger Agreement"), among JAKKS Pacific, Inc., a Delaware corporation ("JAKKS" or "Parent"), JAKKS Acquisition II, Inc., a Delaware corporation and a wholly-owned subsidiary of JAKKS ("Merger Sub"), and the Company providing for the merger of Merger Sub with and into the Company (the "Merger"). The affirmative vote of the holders of a majority of the shares of the outstanding Common Stock is required for the approval and adoption of the Merger Agreement. See "PROPOSAL ONE--THE MERGER." If the Merger Agreement is approved and adopted, the Merger will be consummated on the terms and subject to the conditions set forth in the Merger Agreement. Upon consummation of the Merger, the Company will become a private company and a wholly-owned subsidiary of JAKKS, and each outstanding share of Common Stock (other than shares of Common Stock owned by JAKKS or Merger Sub or by any direct or indirect subsidiary of JAKKS or Merger Sub or which are held in the treasury of the Company or by any of its subsidiaries, all of which will be canceled without any payment, or which are held by dissenting Stockholders, whose shares will be subject to their statutory appraisal rights) will be canceled and converted into the right to receive $1.40 per share in cash, without interest (the "Merger Consideration"). In connection with the execution of the Merger Agreement, Norman Melnick, Chairman of the Company, and David Melnick, President and a director of the Company, and their wives (collectively, the "Melnick Family"), and Richard S. Kalin, Secretary and director of the Company, and his wife, entered into a Voting and Lock-Up Agreement with JAKKS, dated as of May 22, 2000 (the "Voting Agreement"). Pursuant to the Voting Agreement, among other things, the Melnick Family and Mr. Kalin and his wife have agreed to vote all of their shares of Common Stock (3,823,465 shares representing approximately 30.4% of the outstanding shares of Common Stock) in favor of the approval and adoption of the Merger Agreement. In addition to any compensation Messrs. Norman Melnick, David Melnick and Kalin are to receive for their services as employees or consultants under their respective agreements, pursuant to the Merger Agreement, the Melnick Family and Mr. Kalin and his wife will receive approximately an aggregate of $5,400,000 for their shares of Common Stock and cancellation of their options to purchase Common Stock. See "PROPOSAL ONE--THE MERGER--THE VOTING AGREEMENT" and "--INTERESTS OF CERTAIN PERSONS IN THE MERGER." Concurrently with the effectiveness of the Merger or as soon thereafter as is practicable, JAKKS will pay to the Company's employees or others who hold stock options ("Options"), including Options granted under the Company's 1989 Stock Option Plan, 1993 Stock Option Plan and/or 1995 Stock Option Plan (collectively, the "Option Plans") or otherwise, in cancellation of their respective Options, an amount in cash (less applicable withholding taxes) equal to the product of the number of shares of the Common Stock subject to each such Option multiplied by the excess, if any, of the Merger Consideration over the exercise price for each share of the Common Stock subject to such Option. Messrs. Norman Melnick, David Melnick and Kalin will receive $36,000, $18,000 and $11,850, respectively, in connection with such cancellation. See "PROPOSAL ONE--THE MERGER--The Merger Agreement--Options." Stockholders are entitled to statutory appraisal rights under Section 262 of the Delaware General Corporation Law ("Section 262"). See "PROPOSAL ONE--THE MERGER--APPRAISAL RIGHTS." On May 22, 2000, the last full trading day prior to the announcement of the execution of the Merger Agreement, the closing bid price per share of Common Stock as reported on the Nasdaq National Market ("Nasdaq") was $.9375. The highest bid price per share on such date was $1.0625 and the lowest bid price per share on such date was $.8125. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR THE COMMON STOCK. A copy of the Merger Agreement is attached to this Proxy Statement as Appendix A. See "PROPOSAL ONE--THE MERGER--THE MERGER AGREEMENT." THE ABOVE MATTERS AND OTHER MATTERS RELATING TO THE MERGER ARE DISCUSSED IN MUCH GREATER DETAIL IN THE REMAINDER OF THIS PROXY STATEMENT. THE PROPOSED MERGER IS A COMPLEX TRANSACTION. STOCKHOLDERS ARE STRONGLY URGED TO READ AND CONSIDER CAREFULLY THIS PROXY STATEMENT IN ITS ENTIRETY. AVAILABLE INFORMATION The Company is subject to the periodic reporting and other information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy statements and other information with the U.S. Securities and Exchange Commission (the "Commission"). Such reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional Offices at 7 World Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a web site that contains reports, proxy and information statements and other information regarding issuers, such as the Company, that file electronically with the Commission, at http://www.sec.gov. Following the Merger, the Company will become a wholly-owned subsidiary of JAKKS, and there will be no public trading of shares of Common Stock. Accordingly, upon application to the Commission following the Merger, registration of the Common Stock, and the Company's obligation to file periodic reports, proxy statements and other information with the Commission, will be terminated. FORWARD-LOOKING STATEMENTS Cautionary Statement for Purposes of Private Securities Litigation Reform Act of 1995 This Proxy Statement, information included in filings by the Company with the Commission, and information contained in written material, press releases and oral statements issued by or on behalf of the Company contain, or may contain, certain "forward-looking statements," including statements concerning plans, objectives and future events or performance, and other statements which are other than statements of historical fact. Forward-looking statements also include the information concerning possible or assumed future results of operations of the Company and JAKKS set forth under "PROPOSAL ONE--THE MERGER--Background of the Merger," "--Reasons for the Merger and Board of Directors' Recommendation," "--Opinion of Business Valuation Services, Inc." and Appendices D and E and those preceded by, followed by or that include the words "believes," "expects," "anticipates" or similar expressions. For those statements, the Company claims protection of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. It should be understood that the following important factors, in addition to those discussed elsewhere in this document and in the documents incorporated by reference, could affect the future results of the Company, and could cause those results to differ materially from those expressed in such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to, the following: (i) business disruption related to the Merger (both before and after completion); (ii) litigation costs and delays; (iii) higher than anticipated costs in completing the Merger; (iv) unanticipated regulatory delays or constraints or changes in the proposed transaction required by regulatory authorities; (v) legislation or regulatory changes which adversely affect the business in which the Company is engaged; and (vi) other unanticipated occurrences which may delay or prevent the consummation of the Merger, increase the costs related to the Merger or decrease the expected financial benefits of the Merger. Additional information concerning factors that could cause actual results to differ materially from those contemplated by forward-looking statements is contained in Appendix D to this Proxy Statement, which reproduces the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999. QUESTIONS AND ANSWERS ABOUT THE MERGER Q: Why am I receiving these materials? A: The Company agreed to be acquired by JAKKS. As a result of the Merger, it will become a privately-held company wholly-owned by JAKKS. The Board of Directors has approved the Merger Agreement. To accomplish the Merger, the Company needs to obtain the approval of the holders of a majority of the outstanding shares of Common Stock as of June 6, 2000. Q: Who is JAKKS? A: JAKKS is a multi-line, multi-brand toy company that designs, develops, produces and markets toys and related products. Q: What will I receive in the Merger? A: Upon completion of the Merger, your shares of Common Stock will be canceled and you will be entitled to receive $1.40 in cash for each of your shares of Common Stock. Q: How is JAKKS going to get the money to pay for all of the shares? A: JAKKS has represented to us that it has the cash it needs to buy all of the shares of Common Stock. The cost to it for all of the shares is approximately $18,000,000. Q: When do we expect the Merger to be completed? A: We expect the Merger to be completed shortly following approval by the Stockholders at the Meeting scheduled for July ___, 2000 and receipt of necessary government approvals. Q: Does the Board of Directors recommend voting in favor of the Merger? A: Yes. After a comprehensive examination of the Company's business plan and a careful exploration of the Company's strategic alternatives, the Board of Directors has determined that the Merger is in the best interests of our Stockholders and recommends that Stockholders vote FOR approval and adoption of the Merger Agreement. Q: What are the tax consequences of the Merger to me? A: The Merger will be a taxable transaction to you. For United States federal income tax purposes, you will generally recognize gain or loss in the Merger in an amount determined by the difference between the cash you receive and your tax basis in the Common Stock. Because determining the tax consequences of the Merger can be complicated, you should consult your own tax advisor in order to understand fully how the Merger will affect you. Q: When and where is the Meeting? A: The Meeting will be held on July __, 2000 at 10:00 A.M., local time, at the offices of Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019-4315. Q: Who can vote on the proposals presented in this Proxy? A: You are entitled to vote at the Meeting if you owned shares of Common Stock at the close of business on June 6, 2000, the record date for the Meeting (the "Record Date"). On that date, 12,571,258 shares of Common Stock were outstanding. Q: What vote is required? A: The Merger Agreement must be approved by the affirmative vote of over 50% of the outstanding shares of Common Stock. Norman Melnick, Chairman of the Company, and David Melnick, President and a director of the Company and Richard S. Kalin, Secretary and a director of the Company, and their wives, have agreed to vote their shares of Common Stock in favor of the Merger. As of the Record Date, these Stockholders own a total of 3,823,465 shares of Common Stock, representing approximately 30.4% of our outstanding shares of Common Stock. (See "The Voting Agreement"). Q: What rights do I have if I do not want to vote for the Merger? A: Under Delaware law, you are entitled to what are known as appraisal rights. The applicable statute is attached as Appendix C to this Proxy Statement. If you wish to exercise your appraisal rights you should not vote in favor of the Merger. Q: What do I need to do now? A: Read this Proxy Statement and the attached appendices. Then, if you choose to vote by proxy, you can complete your proxy card and indicate how you want to vote. If you decide to vote by mail, sign and mail the proxy card in the enclosed return envelope as soon as possible. You should complete, sign and return your proxy card even if you currently expect to attend the Meeting and vote in person. Mailing in a proxy card now will not prevent you from voting in person at the Meeting or canceling or revoking your proxy right up to the day of the Meeting, and you will ensure that your shares get voted if you later find you are unable to attend. If you sign and send in the proxy card and do not indicate how you want to vote, your proxy will be voted FOR the approval and adoption of the Merger Agreement, and FOR the grant of discretionary authority to the Board of Directors to postpone or adjourn the Meeting. IF YOU DO NOT VOTE BY SENDING IN YOUR PROXY CARD OR VOTE IN PERSON AT THE MEETING, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. THIS IS WHY, IF YOU FAVOR THE MERGER, IT IS VERY IMPORTANT THAT YOU VOTE BY RETURNING YOUR PROXY CARD, AS SOON AS POSSIBLE. Q: If my broker holds my shares in "street name," will my broker vote my shares for me? A: Your broker will vote your shares only if you instruct the broker how to vote. To do so, follow the directions your broker provides. Without instructions, your broker will not vote your shares. Q: Can I change my vote after I have mailed my signed proxy card? A: Yes. You can change your vote at any time before your proxy is voted at the Meeting by delivering a signed notice of revocation, by delivering a later dated signed proxy card to our corporate secretary, or by attending the Meeting and voting. Q: Should I send in my stock certificates at this time? A: No. Once the Merger is closed you will receive written instructions from American Stock Transfer & Trust Company directing you where to deliver your shares to receive payment. If your shares are held in street name by your broker, your broker will arrange for you to receive payment for your shares of Common Stock. SUMMARY The following summary is intended to highlight certain information included elsewhere in this Proxy Statement. This summary does not purport to be complete and is qualified in its entirety by the more detailed information contained elsewhere in this Proxy Statement and the Appendices hereto. Stockholders are urged to read this Proxy Statement and the Appendices hereto in their entirety. The Parties The Company is a manufacturer and marketer of pens, markers, pencils, other writing instruments and activity kits, primarily to major mass market retailers located in the United States, marketed under the "Pentech" name or licensed trademark brands. The Company was formed in April 1984 to design and market writing and drawing instruments and other stationery products. In November 1989, the Company formed a wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), to manufacture certain of the Company's writing instruments. Where the context so requires, the "Company" also includes its wholly-owned subsidiaries. Consolidated revenues for the Company for the fiscal year ended September 30, 1999 ("Fiscal 1999") were approximately $60,949,000 and the Company incurred a net loss of $334,000, or $.03 per share. Consolidated revenues for the Company for the six months ended March 31, 2000 were $20,781,000 and the Company incurred a net loss of $2,596,000, or $.21 per share. The principal executive offices of the Company are located at 195 Carter Drive, Edison, New Jersey 08817, and its telephone number is (732) 287-6640. Merger Sub is a wholly-owned subsidiary of JAKKS that was formed by JAKKS in May 1999, but has not engaged in any business except for actions taken to effect the Merger. JAKKS is a multi-line, multi-brand toy company that designs, develops, produces and markets toys and related products. The principal executive offices of JAKKS and Merger Sub are located at 22761 Pacific Coast Highway, Malibu, California 90265-5064; and its telephone number is (310) 456-7799. The Meeting; Voting; Vote Required for Approval The Meeting will be held on July __, 2000 at 10:00 A.M., local time, at the offices of Camhy, 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315. At the Meeting, Stockholders will be asked to consider and vote upon (i) a proposal to approve and adopt the Merger Agreement; (ii) a proposal to grant the Board of Directors discretionary authority to postpone or adjourn the Meeting in order to solicit additional votes to approve the proposal in (i) above; and (iii) such other matters as may properly come before the Meeting. See "THE MEETING--Matters Considered." The Company has fixed the close of business on June 6, 2000 as the Record Date for determining holders of outstanding shares of Common Stock who are entitled to notice of and to vote at the Meeting. As of the Record Date, there were 12,571,258 shares of Common Stock issued and outstanding, each of which shares is entitled to one vote. The holders of a majority of the outstanding shares of Common Stock on the Record Date, which are present in person or by proxy at the Meeting, will constitute a quorum. The approval and adoption of the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock on the Record Date. Because approval of the Merger is determined by reference to the number of shares of Common Stock outstanding on the Record Date rather than on the number of shares of Common Stock voted at the Meeting, failure to vote your shares is effectively a vote against the Merger. In addition, although treated as shares that are present and entitled to vote at the Meeting for the purposes of determining whether a quorum exists, abstentions or properly executed broker non-votes will have the same effect as votes cast against approval of the Merger. Only record holders or their duly authorized proxies will be entitled to cast ballots at the Meeting. Proxy holders who wish to vote by ballot at the Meeting must provide the Secretary of the Company with evidence of their authority to act at least 30 minutes prior to the commencement of the Meeting. See "THE MEETING--VOTING; REVOCATION OF PROXIES." The Merger Pursuant to and subject to the terms and conditions set forth in the Merger Agreement and in accordance with applicable provisions of the Delaware General Corporation Law ("DGCL"), upon the effectiveness of the Merger the Company will become a wholly-owned subsidiary of JAKKS and each outstanding share of Common Stock (other than shares of Common Stock owned by JAKKS or Merger Sub or by any direct or indirect subsidiary of JAKKS or Merger Sub or which are held in the treasury of the Company or by any of its subsidiaries, all of which will be canceled, or which are held by dissenting Stockholders) will be canceled and converted into the right to receive $1.40 per share in cash, without interest. See "PROPOSAL ONE--THE MERGER." The Voting Agreement In connection with the execution of the Merger Agreement, Norman Melnick, Chairman of the Company, and David Melnick, President and a director of the Company and their wives (collectively, the "Melnick Family"), and Richard S. Kalin, Secretary and a director of the Company, and his wife, entered into a Voting and Lock-Up Agreement with JAKKS (the "Voting Agreement"). Pursuant to the Voting Agreement, among other things, the Melnick Family and Mr. Kalin and his wife have agreed to vote all of their shares of Common Stock (3,823,465 shares, representing approximately 30.4% of the outstanding shares of Common Stock on the Record Date) in favor of the approval and adoption of the Merger Agreement. See "PROPOSAL ONE--THE MERGER--THE VOTING AGREEMENT." Background of the Merger; Reasons for the Merger and Board of Directors' Recommendation After a comprehensive examination of the Company's business plan and a careful exploration of the Company's strategic alternatives (see "PROPOSAL ONE--THE MERGER--BACKGROUND OF THE MERGER"), the Board of Directors has determined that the Merger, the Merger Agreement, the Voting Agreement and the transactions contemplated thereby are in the best interests of the Company and its Stockholders and has, by the unanimous vote of all directors, recommended that the Stockholders vote "FOR" the approval and adoption of the Merger Agreement at the Meeting. In reaching its decision to approve the Merger Agreement and the Voting Agreement, as well as the transactions contemplated thereby, and to recommend that the Stockholders approve and adopt the Merger Agreement, the Board of Directors considered a number of factors, including the opinion of Business Valuation Services, Inc. ("BVS"), the Company's independent financial advisor, that the Merger Consideration was fair to the Stockholders from a financial point of view. See "PROPOSAL ONE--THE MERGER--REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION." Opinion of Business Valuation Services, Inc. BVS has delivered its written opinion to the Board of Directors, dated May 31, 2000, to the effect that, on the date of such opinion, and based on assumptions made, procedures followed, matters considered and limitations on the review undertaken, as set forth in the opinion, the Merger Consideration pursuant to the Merger Agreement was fair from a financial point of view to the Stockholders. See "PROPOSAL ONE--THE MERGER--OPINION OF BUSINESS VALUATION SERVICES, INC." BVS' written opinion dated May 31, 2000 is attached as Appendix B to this Proxy Statement. The Stockholders are urged to, and should, read the BVS opinion carefully and in its entirety. Conflicts of Interest and Interests of Certain Persons in the Merger In considering the recommendations of the Board of Directors that the Stockholders approve and adopt the Merger Agreement, Stockholders should be aware that certain officers and directors of the Company have certain interests in the Merger that are different from, or in addition to, the interests of the Stockholders. In particular, Stockholders should be aware that Norman Melnick, Chairman of the Company, and David Melnick, President and Chief Executive Officer and a director of the Company, and Richard S. Kalin, Secretary and a director of the Company, who each participated extensively in the negotiations with JAKKS with respect to the terms and conditions of the Merger Agreement, will be compensated by JAKKS following consummation of the Merger pursuant to a Supplemental Services Agreement or a Consulting Services Agreement. As a condition to the Merger, JAKKS (i) will enter into the Supplemental Services Agreements with each of Messrs. Norman Melnick and David Melnick providing for the payment to them of an aggregate of $125,000 and $216,000, respectively, for various consulting services and a covenant not to compete with JAKKS, and (ii) will enter into the Consulting Services Agreement with Mr. Kalin providing for the payment of $109,000 for various consulting services. In addition, Options which have been granted to them will be cashed out in connection with the consummation of the Merger. The Melnick Family and Mr. Kalin and his wife beneficially own an aggregate of 3,823,465 shares of Common Stock, representing approximately 30.4% of the outstanding shares of Common Stock on the Record Date. See "PROPOSAL ONE--THE MERGER--THE MERGER AGREEMENT--Options." In addition to any compensation Messrs. Norman Melnick, David Melnick and Kalin are to receive for their services as employees or consultants under their respective agreements, pursuant to the Merger Agreement, the Melnick Family and Mr. Kalin and his wife will receive approximately an aggregate of $5,400,000 for their shares of Common Stock and cancellation of their Options. In addition, it is expected that Messrs. Norman Melnick and David Melnick will each continue at the Effective Date (defined below) as employees of the Company at their current salaries of $150,000 per year. See "PROPOSAL ONE--THE MERGER CONFLICTS OF INTEREST AND INTERESTS OF CERTAIN PERSONS IN THE MERGER." Financing of the Merger At the closing of the Merger, JAKKS or Merger Sub expects to pay an aggregate purchase price of approximately $18,000,000 to the holders of shares of Common Stock and the holders of Options, assuming no Stockholders exercise the dissenter's statutory appraisal rights explained in this document. In addition, the parties anticipate that JAKKS or Merger Sub will require approximately $500,000 to pay other expenses and costs relating to the Merger, and up to $13,000,000 to refinance or repay indebtedness of the Company and to finance other general corporate purposes for a total cost of $31,500,000. JAKKS has represented to the Company that it has the cash it needs to complete the Merger and related transactions. See "PROPOSAL ONE--THE MERGER--FINANCING OF THE MERGER." Certain Tax Consequences to Stockholders The receipt of cash in exchange for Common Stock pursuant to the Merger will be a taxable transaction for federal income tax purposes and may also be a taxable transaction under applicable state, local and foreign tax laws. A Stockholder will generally recognize gain or loss for federal income tax purposes in an amount equal to the difference between such Stockholder's adjusted tax basis in such Stockholder's Common Stock and the Merger Consideration received by such Stockholder. Such gain or loss will be a capital gain or loss if such Common Stock is held as a capital asset and will be long-term capital gain or loss if, at the effectiveness of the Merger, such Common Stock has been held for more than one year. EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE EFFECTS OF APPLICABLE STATE, LOCAL OR OTHER TAX LAWS. See "PROPOSAL ONE--THE MERGER--CERTAIN TAX CONSEQUENCES TO STOCKHOLDERS." Options Concurrently with the effectiveness of the Merger or as soon thereafter as is practicable, each Option issued, awarded or granted pursuant to the Plans or otherwise to purchase shares of Common Stock will be canceled by the Company, and each holder of a canceled Option will be entitled to receive from JAKKS in consideration for the cancellation of such Option an amount in cash (less applicable withholding taxes) equal to the product of (i) the number of shares of Common Stock previously subject to such Option, and (ii) the excess, if any, of the Merger Consideration over the exercise price per share of Common Stock previously subject to such Option. See "PROPOSAL ONE--THE MERGER--THE MERGER AGREEMENT--Options." Conditions to the Merger The consummation of the Merger is subject to a number of conditions, including, but not limited to, the following: (a) the approval of the Merger Agreement by the requisite vote of the Stockholders shall have been obtained and be in effect; (b) the waiting period under the Hart-Scott-Rodino Antitrust improvements Act of 1976, as amended (the "HSR Act"), shall have expired or been terminated; (c) there shall have been no law enacted or injunction or other order entered which (i) makes illegal or prohibits continuation of the Merger or (ii) would have a Material Adverse Effect (defined below); (d) except for filing of the Certificate of Merger in accordance with the DGCL, each consent of or notice to any governmental authority required for the consummation of the Merger and for the Merger Sub to conduct the Company's business, including without limitation any order or other action by the New Jersey Department of Environmental Protection and Energy ("NJDEPE") under the New Jersey Environmental Cleanup Responsibility Act ("ECRA"), shall have been obtained or given; and (e) Messrs. Norman Melnick and David Melnick shall have entered into a Supplemental Services Agreement and Mr. Kalin shall have entered into the Consulting Services Agreement. See "PROPOSAL ONE--THE MERGER--THE MERGER AGREEMENT--Conditions to Obligations of Parent and Merger Sub," "--Conditions to Obligations of the Company" and "--Conditions to Obligations of Each Party." Termination of Merger Agreement The Merger Agreement may be terminated at any time prior to the effectiveness of the Merger whether before or after the approval by the Stockholders if any of the following occurs: (a) by the mutual agreement of JAKKS and the Company; (b) if the Merger is not consummated on or before November 30, 2000, or such later date to which JAKKS and the Company may agree upon written notice to such effect to the other; (c) by JAKKS or the Company at any time after the Meeting if the requisite approval of the Stockholders is not obtained at the Meeting; (d) by JAKKS, if (i) there shall be any material breach of any representation or warranty by, or any failure to perform any material covenant or other obligation of, the Company, and, unless such breach or failure is incapable of being cured within a period of 30 days after the giving of written notice thereof to the breaching or defaulting party, JAKKS gives such notice to such party and such breach or failure shall not be cured within 30 days of the giving of such notice, upon written notice of termination to the Company; or (ii) an Alternative Action (defined below in "PROPOSAL ONE -- THE MERGER -- THE MERGER AGREEMENT -- Termination") shall have been taken; or (e) by the Company, if (i) there shall be any material breach of any representation or warranty by, or any failure to perform any material covenant or other obligation of, JAKKS or Merger Sub, and, unless such breach or failure is incapable of being cured within a period of 30 days after the giving of written notice thereof to the breaching or defaulting party, the Company gives such notice to such party and such breach or failure shall not be cured within 30 days of the giving of such notice, upon written notice of termination to JAKKS; or (ii) an Alternative Action shall have been taken and the Termination Fee is paid. Termination Fees The Company has agreed to pay JAKKS a termination fee of $1,000,000 in the event of a termination of the Merger Agreement under certain circumstances. See "PROPOSAL ONE--THE MERGER--THE MERGER AGREEMENT--Termination Fees." Regulatory Matters Under the HSR Act, and the rules promulgated thereunder by the Federal Trade Commission (the "FTC"), the Merger may not be consummated until notifications have been given and certain information has been furnished to the FTC and the Antitrust Division of the Department of Justice and specified waiting period requirements have been satisfied. The Company and JAKKS filed their respective notification and report forms under the HSR Act on June 9, 2000 and jointly requested early termination of the waiting period. See "PROPOSAL ONE--THE MERGER--REGULATORY MATTERS." Price Range of Common Stock The Common Stock is traded in the over-the-counter market on the Nasdaq National Market System under the symbol "PNTK". During the period between October 1, 1997 and May 22, 2000, the highest bid price per share was $3.125 and the lowest bid price per share was $.59375. On May 22, 2000, the last full trading day prior to the announcement of the execution of the Merger Agreement, the closing sales price per share of Common Stock as reported by Nasdaq was $.9375. The highest bid price per share on such date was $1.0625, and the lowest bid price per share on such date was $.8125. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR THE COMMON STOCK. See "PROPOSAL ONE--THE MERGER--PRICE RANGE OF COMMON STOCK; DIVIDENDS." Appraisal Rights Stockholders of the Company are entitled to statutory appraisal rights under Section 262. The text of Section 262 is reprinted in its entirety as Appendix C to this Proxy Statement. Under Section 262, Stockholders who follow the procedures set forth in Section 262 and who have not voted in favor of the Merger will be entitled to have their shares of Common Stock appraised by the Court of Chancery of the State of Delaware and to receive, instead of the Merger Consideration, an amount determined by such court to be the "fair value" of their shares of Common Stock, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest. This right is known as an "appraisal right." If a Stockholder wishes to exercise his or her statutory appraisal right, he or she must not vote in favor of the Merger and must meet certain other conditions. These conditions are set out in full in Appendix C. Delaware law requires that the Company notify Stockholders not less than 20 days prior to the Meeting that they have a right of appraisal and provide Stockholders with a copy of Section 262. This Proxy Statement constitutes that notice. If a Stockholder does not follow the procedures set out below and in Appendix C, he or she will lose his or her statutory appraisal right and if the Merger occurs, will receive the Merger Consideration in respect of his or her shares of Common Stock. See "PROPOSAL ONE--THE MERGER--APPRAISAL RIGHTS." Certain Effects of the Merger If the Merger is consummated, holders of shares of Common Stock will not have an opportunity to continue their common equity interest in the Company as an ongoing operation and therefore will not have the opportunity to share in its future earnings and potential growth, if any. If the Merger is consummated, the Company plans to take all necessary actions (i) to de-register shares of its Common Stock under the Exchange Act and (ii) to terminate inclusion of the shares of its Common Stock in Nasdaq. See "PROPOSAL ONE--THE MERGER--CERTAIN EFFECTS OF THE MERGER." SELECTED FINANCIAL DATA Set forth below is certain selected consolidated financial information relating to the Company and its subsidiaries which has been excerpted or derived from the audited consolidated financial statements contained in the Company's Annual Reports on Form 10-K for the fiscal years ended September 30, 1999, 1998, 1997 and 1996 (the "Form 10-Ks"), and the unaudited consolidated financial statements contained in the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2000 (the "Form 10-Q"). More comprehensive financial information is included in the Form 10-Ks, the Form 10-Q and other documents filed by the Company with the Commission. The financial information that follows is qualified in its entirety by reference to such reports and other documents, including the financial statements and related notes contained therein. Such reports and other documents may be examined and copies may be obtained from the offices of the Commission in the manner set forth above under "AVAILABLE INFORMATION." OPERATIONS DATA ($000 OMITTED, EXCEPT PER SHARE DATA) SIX MONTHS ENDED MARCH 31, FISCAL YEARS ENDED SEPTEMBER 30, 2000 1999 1998 1997 1996 1995 Net sales $20,781 $60,949 $57,485 $60,806 $61,679 $54,892 Net (loss) income (2,596) (334) (3,504) 600 (5,317) (1,059) Basic and diluted net (loss) income per share (.21) ($.03) ($.28) $.05 ($.51) ($.10) Weighted average number of shares outstanding 12,571 12,570 12,537 12,297 10,497 10,661 Dividends - - - - - - BALANCE SHEET DATA ($000S OMITTED) March 31, SEPTEMBER 30, 2000 1999 1998 1997 1996 1995 Working capital $ 9,886 $11,971 $12,883 $15,452 $13,676 $16,928 Total assets 30,519 36,094 41,583 42,503 48,189 44,518 Notes and bankers' acceptances payable (included in current liabilities) 11,695 13,882 18,618 17,238 22,841 17,011 Long-term debt 1,400 1,500 2,000 2,300 2,300 - Shareholders' equity 11,217 13,985 14,758 17,591 16,028 21,345 CERTAIN INFORMATION REGARDING THE COMPANY Information regarding the Company's (i) business, (ii) properties, (iii) legal proceedings, (iv) financial statements for the three fiscal years ended September 30, 1999, and the six months ended March 31, 2000, and (iv) management's discussion and analysis of such financial statements, are contained in Appendix D to this Proxy Statement, which reproduces the Company's Annual Report on Form 10-K for Fiscal 1999, and in Appendix E to this Proxy Statement, which reproduces the Form 10-Q for the fiscal quarter ended March 31, 2000. THE MEETING THE MEETING DATE; LOCATION; SOLICITATION Each copy of this Proxy Statement mailed to a Stockholder is accompanied by a form of proxy solicited by the Board of Directors for use at the Meeting. The Meeting will be held at the offices of Camhy, 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315, on July __, 2000 at 10:00 A.M. local time. All expenses associated with soliciting proxies will be borne by the Company. MATTERS CONSIDERED At the Meeting, Stockholders will consider and vote upon the following matters: 1. A proposal to approve and adopt the Merger Agreement. See "PROPOSAL ONE--THE MERGER." 2. A proposal granting the Board of Directors discretionary authority to postpone or adjourn the Meeting in order to solicit additional votes to approve the matter set forth in proposal one. 3. Such other matters as may properly come before the Meeting. The Board of Directors has carefully considered the terms of the proposed Merger and believes that the Merger, the Merger Agreement and the transactions contemplated thereby are fair to and in the best interests of the Company and its Stockholders. THE BOARD OF DIRECTORS, BY THE UNANIMOUS VOTE OF ALL DIRECTORS, RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY VOTE "FOR" THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. See "PROPOSAL ONE--THE MERGER--REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION." VOTING; REVOCATION OF PROXIES Voting by those present at the Meeting will be by ballot. Only holders of record on the Record Date or their duly authorized proxies will be entitled to cast ballots at the Meeting. Proxy holders who wish to vote by ballot at the Meeting must provide the Secretary of the Company with evidence of their authority to act at least 30 minutes prior to the commencement of the Meeting. If a proxy in the accompanying form is properly executed and submitted to the Company no later than 30 minutes prior to the commencement of the Meeting and is not revoked prior to the time it is exercised, the shares represented by the proxy will be voted in accordance with the directions specified therein for the matters listed on the proxy card. Unless the proxy specifies that it is to be voted against or that voting authority is to be withheld on a proposal, proxies will be voted FOR approval of Proposal One regarding the approval and adoption of the Merger Agreement, FOR approval of Proposal Two regarding granting the Board of Directors discretionary authority to postpone or adjourn the Meeting in order to solicit additional votes to approve the matter set forth in Proposal One, and otherwise in the discretion of the proxy holders as to any other matter that may come before the Meeting. See "PROPOSAL ONE--THE MERGER." The persons named as proxies may propose and vote for one or more adjournments or postponements of the Meeting; provided, however, that no proxy that is voted against the proposal to approve and adopt the Merger Agreement will be voted in favor of any such adjournment or postponement unless specific authority is granted to vote in favor of such adjournment or postponement. Any Stockholder who is entitled to vote at the Meeting and who has given a proxy has the power to revoke such proxy at any time before it is voted by (i) filing a written revocation with Richard S. Kalin, Secretary of the Company, at 195 Carter Drive, Edison, New Jersey 08817, (ii) executing a later-dated proxy relating to the same shares and delivering it to the Secretary of the Company at the address set forth above or, if on the day of the Meeting, at the Meeting no later than 30 minutes prior to the commencement of the Meeting, or (iii) appearing at the Meeting and voting in person. Attendance at the Meeting will not in and of itself constitute the revocation of a proxy. The inspectors of the Meeting will canvass the Stockholders present at the Meeting, count their votes and count the votes represented by proxies which have been submitted to the Secretary of the Company no later than 30 minutes prior to the commencement of the Meeting. Abstentions and broker non-votes will be counted for purposes of determining the number of shares represented at the Meeting, but will be deemed not to have voted on any proposal. Broker non-votes occur when a broker nominee (which has voted on one or more matters at the Meeting) does not vote on one or more other matters at the Meeting because it has not received instructions to so vote from the beneficial owner of the shares and does not have discretionary authority to vote such shares. Because approval of the Merger is determined by reference to the number of shares of Common Stock outstanding on the Record Date rather than on the number of shares of Common Stock voted at the Meeting, such abstentions and non-votes are equivalent to a vote against the approval and adoption of the Merger Agreement. RECORD DATE; OUTSTANDING SECURITIES; QUORUM; VOTES REQUIRED The Company has fixed the close of business on June 6, 2000 as the Record Date for determining holders of outstanding shares of Common Stock who are entitled to notice of and to vote at the Meeting. As of the Record Date, there were 12,571,258 shares of Common Stock issued and outstanding, each of which shares is entitled to one vote. The holders of a majority of the outstanding shares of Common Stock, which are present in person or by proxy at the Meeting, will constitute a quorum. Any shares held in treasury or by a subsidiary of the Company are not considered to be outstanding for the purposes of determining a quorum. The approval and adoption of the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock. Accordingly, failure to vote your shares is effectively a vote against the Merger. The Stockholders have dissenters' statutory appraisal rights in connection with the proposal to approve and adopt the Merger Agreement. See "PROPOSAL ONE--THE MERGER--APPRAISAL RIGHTS." PROPOSAL ONE--THE MERGER GENERAL The Board of Directors has carefully considered and approved the Merger and the Merger Agreement as being in the best interests of the Company and the Stockholders and has, by the unanimous vote of all directors, recommended that the Stockholders vote "FOR" the approval and adoption of the Merger Agreement at the Meeting. This section of the Proxy Statement describes the proposed Merger, the Merger Agreement and certain other related matters. Structure Pursuant to and subject to the terms and conditions of the Merger Agreement, and in accordance with applicable provisions of the DGCL, at the Effective Time (as defined below), Merger Sub will merge with and into the Company, whereupon the separate corporate existence of Merger Sub will cease and the Company will continue as the surviving corporation in the Merger (the "Surviving Corporation") and as a wholly-owned subsidiary of JAKKS. Merger Consideration At the Effective Time, by virtue of the Merger and without any action on the part of JAKKS, Merger Sub, the Company, the Stockholders or holders of any shares of capital stock of Merger Sub, each share of Common Stock that is issued and outstanding prior to the Effective Time (other than shares of Common Stock owned by JAKKS or Merger Sub or by any direct or indirect subsidiary of JAKKS or Merger Sub or which are held in the treasury of the Company or by any of its subsidiaries, all of which will be canceled, or which are held by dissenting Stockholders) will be canceled and converted into the right to receive $1.40 in cash, without interest thereon (the "Merger Consideration"). Effective Time Pursuant to the Merger Agreement, the Merger will be consummated through the filing of a certificate of merger (the "Certificate of Merger"), in accordance with the requirements of the DGCL, as promptly as practicable after satisfaction or waiver (to the extent permitted by the Merger Agreement) of all conditions to each party's obligations to consummate the Merger contained in the Merger Agreement. The Merger will be effective at such time as the Certificate of Merger is duly filed with the Secretary of State of the State of Delaware in accordance with the DGCL or at such later time agreed to by the parties as specified in the Certificate of Merger (the "Effective Time"). The date on which the Effective Time will occur is referred to herein as the "Effective Date." Parties The Company. The Company is a manufacturer and marketer of pens, markers, pencils, other writing instruments and activity kits, primarily to major mass market retailers located in the United States, under the "Pentech" name or licensed trademark brands. The Company was formed in April 1984 to design and market writing and drawing instruments and other stationery products. In November 1989, the Company formed a wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), to manufacture certain of the Company's writing instruments. The Company and its wholly-owned subsidiaries are collectively referred to herein as the "Company." Consolidated revenues for the Company for Fiscal 1999 were approximately $60,949,000 from which the Company incurred a net loss of $334,000, or $.03 per share. Consolidated revenues for the six months ended March 31, 2000 were $20,781,000 from which the Company incurred a net loss of $2,596,000, or $.21 per share. The principal executive offices of the Company are located at 195 Carter Drive, Edison, New Jersey 08817, and its telephone number is (732) 287-6640. JAKKS and Merger Sub. The principal executive offices of JAKKS and Merger Sub are located at 22761 Pacific Coast Highway, Malibu, California 90265-5064, and their telephone number is (310) 456-7799. JAKKS is a multi-line, multi-brand toy company that designs, develops, produces and markets toys and related products. JAKKS' principal products are (1) action figures and accessories featuring licensed characters, principally from the World Wrestling Federation, (2) Flying Colors molded plastic activity sets, clay compound playsets and lunch boxes, (3) Road Champs die-cast collectible and toy vehicles, (4) Remco toy vehicles, role-play toys and accessories, (5) Child Guidance infant and pre-school electronic toys, toy foam puzzle mats and blocks, activity sets and outdoor products, and (6) fashion and mini dolls and related accessories. JAKKS is also a party to a joint venture that, under an exclusive license, develops, manufactures and markets video games based on World Wrestling Federation characters and themes. JAKKS focuses its business on evergreen brands, which are well-recognized trademarks or corporate, trade or brand names with long product histories, and relatively simple and inexpensive toy lines. JAKKS sells its products through its own in-house sales force and a network of independent commissioned sales representatives primarily to major U.S. toy and mass-market retail store chains, department stores, toy specialty stores, wholesalers, hobby shops and corporate accounts. Merger Sub is a wholly-owned subsidiary of JAKKS that was formed by JAKKS in May 1999, but has not engaged in any business except for actions taken to effect the Merger. BACKGROUND OF THE MERGER In late October 1999, Mr. Dan Topper of Goodrich Capital International (United States) L.P. ("Goodrich") contacted Mr. Norman Melnick to inquire whether the Company would have any interest in a transaction with JAKKS. After receiving a positive response, Mr. Topper contacted Mr. Jack Friedman, Chairman and Chief Executive Officer of JAKKS, by letter to see if JAKKS would have any interest in a transaction with the Company. On December 18, 1999, the Company formally engaged Goodrich to act as its investment banker in connection with a transaction with JAKKS. On January 3, 2000, Mr. William Visone, Executive Vice President - Strategic Planning and Chief Financial Officer of the Company, wrote to Mr. Friedman answering some general questions Mr. Friedman had about the Company. He explained various aspects of the Company's plans to increase its gross profit margins by the establishment of a joint venture in China to manufacture products for the Company and by reducing its manufacturing operations conducted in the United States. On February 8, 2000, Messrs. Topper, Norman Melnick, David Melnick, Visone, Friedman, Stephen G. Berman, President and Chief Operating Officer of JAKKS, and Mike Bianco, Vice President of JAKKS, met in Goodrich's New York offices for an exploratory meeting to introduce the parties and describe their respective businesses. On February 10, 2000, at a meeting of the Board of Directors, the idea of a potential transaction with JAKKS was briefly discussed. The Board authorized Messrs. Norman Melnick, David Melnick and Visone to proceed having preliminary discussions with representatives of JAKKS regarding a potential transaction. It also ratified the Company's engagement of Goodrich as the Company's investment banker in connection with a transaction with JAKKS. On February 14, 2000, a second exploratory meeting was held with the same participants as the February 8, 2000 meeting. At that meeting, a possible business combination was proposed. Following this meeting, Messrs. Visone and Friedman had several telephone conversations further discussing the possibility of a business combination. On February 29, 2000, Messrs. David Melnick and Visone visited with Messrs. Friedman, Berman, Joel M. Bennett, Chief Financial Officer of JAKKS, and Bianco at JAKKS' main offices in Malibu, California, to discuss their respective businesses. On March 14, 2000, the Company and JAKKS entered into a standstill letter granting JAKKS 14 days to conduct its due diligence and make a formal proposal to the Company during which period the Company agreed it would not seek a proposal from a third party. On March 20, 2000, Messrs. Bennett and Jack McGrath, Vice President-Operations of JAKKS, met at the offices of the Company to conduct on-site due diligence of the Company on behalf of JAKKS. On April 26, 2000, Mr. Murray Skala, counsel for and a director of JAKKS, contacted Mr. Kalin, counsel, Secretary and a director of the Company, to discuss a formal proposal for JAKKS to enter into a business combination with the Company. Messrs. Skala and Kalin met on May 1, 2000, to further discuss such a proposal. During the balance of the first week of May 2000, representatives of JAKKS, the Company and Goodrich had various conversations leading to JAKKS presenting the Company with the basis of a proposal for a wholly-owned subsidiary of JAKKS to merge with and into the Company for a merger consideration of $1.40 per share of Common Stock. As a result of such conversations, a preliminary understanding was reached, and JAKKS directed its counsel to draft a merger agreement. From May 8 through May 22, 2000, the parties and their advisors negotiated the Merger Agreement and the related documents and prepared the applicable schedules and exhibits. During April 2000, the Company, anticipating that it may complete a business combination with JAKKS, identified BVS as a reputable independent business valuation and financial consulting firm. On May 12, 2000, as the negotiations between the Company and JAKKS were nearing completion, the Company formally engaged BVS to render an opinion with respect to the value of the aggregate consideration to be received in the Merger, from a financial point of view, to the holders of the outstanding equity interests of the Company. On May 22, 2000 the Board of Directors met in New York with representatives of Camhy, its outside counsel, to discuss the Merger. At that meeting, a detailed presentation was given by management. Counsel reported on the significant terms of the transaction, including the structure, the non-solicitation provision, the conditions to closing, the termination fee, the Voting Agreement and the applicable regulatory requirements. Counsel also explained that since the fairness opinion was not yet received, the Merger Agreement provided that the Company had the right to terminate the Merger Agreement if the Company did not receive before July 31, 2000 a fairness opinion to the effect that the Merger Consideration is, as of May 22, 2000, fair from a financial point of view to the holders of outstanding shares of Common Stock (the "Fairness Opinion"). Counsel also reported on the results of JAKKS legal due diligence. Counsel advised the directors as to their duties in considering a transaction such as the Merger. Counsel also highlighted the various termination provisions including the Board of Directors "fiduciary out". Following this presentation, the Board of Directors approved the Merger Agreement and the Merger Agreement was executed later that day. On May 31, 2000, the Board of Directors again met in New York. At this meeting, in addition to representatives of Camhy, the Board met with Mr. David Fuller, a principal of BVS. Counsel for the Company reiterated to the Board of Directors that while the Company had entered into the Merger Agreement on May 22, 2000, the Merger Agreement was subject to the receipt by the Company by July 31, 2000 of a Fairness Opinion in form acceptable to the Board of Directors. Counsel also advised the directors as to their duties in considering whether to accept the Fairness Opinion. At this meeting, Mr. Fuller delivered written copies of the Fairness Opinion to the members of the Board of Directors. He reviewed with the Board of Directors his background and qualifications. He then summarized BVS' analytical process which culminated in its opinion that, as of May 31, 2000, the aggregate consideration to be received in the Merger was fair from a financial point of view, to the holders of the outstanding equity interests in the Company. After discussion amongst the Board of Directors and its advisors, the Board of Directors accepted the Fairness Opinion at its May 31, 2000 Meeting. See "PROPOSAL ONE--THE MERGER--OPINION OF BUSINESS VALUATION SERVICES, INC." The Board of Directors has given unqualified approval to the Merger Agreement. REASONS FOR THE MERGER AND BOARD OF DIRECTORS' RECOMMENDATION The Board of Directors believes that the terms of the Merger with JAKKS are fair from a financial point of view to, and in the best interest of, the Stockholders. The Board of Directors has unanimously approved the Merger, the Merger Agreement and the grant of discretionary authority to the Board of Directors to postpone or adjourn the Meeting. In reaching its determination to approve the Merger Agreement and the transactions contemplated by it, the Board of Directors considered the information presented to it by its management and its professional advisors. The principal factors considered by the Board of Directors are summarized below: - Structure of the Merger; Terms of the Merger Agreement. The Board of Directors considered the terms of the Merger Agreement and its legal, financial and tax implications, including the requirement that the Merger be submitted to a vote of the Stockholders and the Board of Directors' inability to terminate the Merger Agreement other than to accept a superior proposal. It also considered the Voting Agreement entered into by the Melnick Family and Mr. Kalin and his wife; - Merger Consideration. The Board of Directors considered the amount of Merger Consideration to be received by the Stockholders in the Merger, the premium over market represented thereby, and the volatility of the market price of the Common Stock on Nasdaq; - Continuing Business Risks. The Board of Directors considered the risks associated with a continuation of the Company's strategic plan or a variation thereof and other uncertainties with respect to the Company's ability to achieve and maintain substantial profitability in the future, including the on-going consolidation of the writing instrument industry, intensifying competition, deficiency in the Company's management information systems, the need for additional capital to finance expansion, and the Company's recent unsatisfactory results of operations; - Recent Financial Results. The Board of Directors considered the Company's results of operations for the six months ended March 31, 2000 and management's projection with respect to the profitability of the Company during the near and longer term; - Limited Liquidity of Common Stock. The Board of Directors considered the relative lack of liquidity and low trading volume of the Common Stock and the possible difficulty in maintaining inclusion of the Common Stock on Nasdaq which requires the Common Stock to maintain a trading price of at least $1.00, and the further decline in liquidity that failure to remain included in Nasdaq could cause. - Limited Banking Resources. The Board of Directors considered the limited availability under the Company's current line of credit, the existence of past defaults and the prospects for future defaults under this line of credit requiring modification of covenants contained in the line of credit and the limited access to other sources of capital (such as public or private equity or debt, strategic alliances or other financing plans); and - Opinion of Financial Advisor. The Board of Directors also considered the opinion of BVS, the Company's financial advisor in the Merger, which delivered its written opinion to the Board of Directors, dated May 31, 2000, to the effect that, as of the date of such opinion and based upon and subject to the assumptions, limitations and qualifications set forth therein, the consideration to be issued in the Merger was fair, from a financial point of view, to the holders of the outstanding equity interests in the Company; - Counterveiling Considerations. The Board of Directors also considered certain factors which may be characterized as counterveiling considerations, including: - The possibility that a public sale or auction process might have resulted in a higher per share price than a Merger Consideration of $1.40 per share (which was significantly offset by the risk that the conduct of such a public sale or auction could have materially and adversely affected the Company's continued operations); - The fact that the Stockholders will have no equity interest in the combined entity and therefor will not benefit from the potential synergies of the Merger; and - The fact that the Merger will result in a taxable transaction to the Stockholders. The foregoing discussion of the information and factors considered by the Board of Directors is not intended to be exhaustive but is believed to include all material factors considered. In reaching its determination to approve the Merger Agreement and the transactions contemplated by it, the Board of Directors did not assign any relative or specific weights to the foregoing factors, and individual directors may have given differing weights to differing factors. FOR THE REASONS DESCRIBED ABOVE, AND TAKING INTO CONSIDERATION THE INFORMATION AND FACTORS SET FORTH ABOVE, THE BOARD OF DIRECTORS, BY THE UNANIMOUS VOTE OF ALL DIRECTORS, APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, AND RECOMMENDS THAT THE STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER AGREEMENT. OPINION OF BUSINESS VALUATION SERVICES, INC. To assist the Board of Directors and management in connection with evaluating the fairness of the Merger Consideration, the Company retained BVS to render an opinion as to the fairness from a financial point of view of the Merger Consideration. The Company selected BVS for this purpose based on its qualifications and reputation as a nationally recognized appraisal and valuation consulting firm, advising and providing valuation services to clients in connection with a wide range of transactions, litigation proceedings and tax matters. BVS has had no material prior relationship with the Company or any of its respective affiliates. BVS has received two minor engagements from JAKKS on unrelated matters and rendered a fairness opinion in connection with a transaction involving another client of a law firm engaged by JAKKS. BVS does not believe these activities result in any conflict of interest. As compensation for its services, the Company has agreed to pay BVS a fee of $25,000, and to reimburse it for expenses in the amount not expected to exceed $5,000. No portion of BVS's compensation was contingent upon the results of its valuation analysis, its opinion, or the successful completion of the Merger. At a Special Meeting of the Company's Board of Directors on May 31, 2000, a representative of BVS presented a detailed summary of BVS' Fairness Opinion and the underlying analysis. BVS' opinion assumed that the aggregate payments to be made to the Stockholders would be approximately $18,000,000. Based on its analysis, BVS advised the Board of Directors that in its opinion the aggregate consideration to be received in the Merger was fair from a financial point of view to the holders of the outstanding equity interests of the Company. On May 31, 2000, during this meeting, BVS delivered to the Company and the Board of Directors, written copies of its opinion and the underlying report. BVS' engagement was limited solely to rendering its opinion with respect to the fairness from a financial point of view of the Merger Consideration. The Company did not request BVS to, and BVS did not, participate in any negotiations between the parties to the Merger; advise the Company with respect to the determination of the Merger Consideration or any other term or condition of the Merger or any related transaction; formulate, assess or advise the Company with respect to any other business plan or strategy or any other type of transaction involving the sale of the Company or any of its assets; or seek any alternative suitor or proposal for the sale of the Company or any of its assets. The full text of BVS' Fairness Opinion (excluding the exhibits thereto), which sets forth the matters considered, the procedures employed, the assumptions made and the limitations on its review, is attached hereto as Appendix B. The Company urges you to read the Fairness Opinion carefully in its entirety. BVS' FAIRNESS OPINION WAS DIRECTED TO THE BOARD OF DIRECTORS ONLY FOR THE LIMITED PURPOSES SPECIFIED THEREIN AND RELATES ONLY TO THE FAIRNESS OF THE MERGER CONSIDERATION FROM A FINANCIAL POINT OF VIEW. BVS' FAIRNESS OPINION (AND THE DISCUSSION OF ITS UNDERLYING ANALYSES INCLUDED HEREIN) DOES NOT ADDRESS ANY OTHER ASPECT OF THE MERGER OR ANY RELATED TRANSACTION AND DOES NOT CONSTITUTE AN ENDORSEMENT OF THE MERGER OR A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW TO VOTE AT THE SPECIAL MEETING. In arriving at its opinion, BVS (a) reviewed the terms of the Merger Agreement, (b) reviewed certain business and historical financial information relating to the Company, (c) reviewed certain financial forecasts and other data provided to it by management of the Company relating to the businesses and prospects of the Company, (d) conducted discussions with members of the senior management of the Company with respect to the businesses and prospects of the Company, (e) reviewed publicly available financial and stock market data with respect to certain other companies in lines of business it believed to be generally comparable to the Company's, (f) reviewed the terms of certain recent acquisition transactions, including business combinations, which it believed to be generally comparable to the Merger, (g) reviewed current market conditions, including the markets for securities comparable to those of the Company, and (h) conducted such other financial studies, analyses and investigations, and considered such other information as it deemed necessary or appropriate. BVS relied on the accuracy and completeness of the financial and other information regarding the Company provided to it and did not independently verify any such information. BVS assumed that the financial forecasts presented to it by the Company had been reasonably prepared on bases reflecting the best currently available estimates and judgments of the Company's management as to the Company's future financial performance. BVS did not make any independent evaluation or appraisal of any of the Company's assets or liabilities (contingent or otherwise), and its opinion was based on economic, monetary and market conditions existing on the date of its opinion. In connection with its opinion, BVS performed a variety of financial and comparative analyses, including those described below. The preparation of a fairness opinion is a complex process involving various determinations as to the most appropriate and relevant methods of financial analyses and the application of those methods to the particular circumstances. Therefore, such an opinion is not necessarily susceptible to summary description. Furthermore, in arriving at its opinion, BVS did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, BVS believes that its analyses must be considered as a whole and that considering any portion of such analyses and the factors considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying the preparation of the Fairness Opinion. In performing its analyses, BVS made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of the Company. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than such estimates. Any theoretical or implied values derived from these analyses are not necessarily indicative of actual fair market values, which may be, significantly more or less favorable than as set forth therein. In addition, BVS did not conduct an appraisal of any assets of the Company, and its analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which the Company's businesses or assets may actually be sold. BVS' opinion and related financial analyses were only one of several factors considered by the Board of Directors in its evaluation of the Merger and should not be considered as determinative of the Board of Director's decision to approve and recommend the Merger. The following is a summary of the analyses conducted by BVS as a basis for its opinion of the fairness of the Merger Consideration from a financial point of view, and does not purport to be a complete description of such analyses. Income Approach The income approach involves determining the present worth of anticipated future net cash flows generated by a business. BVS employed a discounted cash flow analysis, which is based on the premise that the value of the business enterprise is the value of the future economic income to be derived by the owners of the business, and involves an analysis of revenues, expenses, depreciation, capital spending and residual value. The net cash flows are forecast for an appropriate period, based on various factors influencing revenues, expenses and capital investment, and then discounted to present value using an appropriate discount rate. BVS determined that the discounted cash flow analysis implied a control value of the Company of between $15 and $18 million. Public Market Analysis This approach, involves identifying and analyzing historical financial data relating to comparable securities in the public markets in order to determine the relationships among certain operating and financial ratios and applying such ratios to determine the implied market value of the Company. BVS conducted an historical financial analysis and pricing study of six companies (including the Company) in the writing instrument and art supply markets and derived market minority interest multiples and controlling interest multiples for the Company as follows: Market Minority Interest Multiplies Implied by Implied Controlling Actual Stock Price Interest Multiple Price/Revenue ...... .39 .51(1) Price/EBITDA........ 24.73 9.0 (1) Price/EBIT.......... NMF 10.4 (1) (1) Based on updated FY2000 projections furnished to BVS by the Company. Control Premium Approach This approach involves a determination of the premium that an acquiror might be willing to pay over the public market price to achieve control of the Company. Since the public market price of securities reflects the value of such security as held by minority interests that lack the ability to control the management or operation of the Company, a potential acquiror typically would be willing to pay a price in excess of the public market price for the control of the Company gained through the acquisition of all or a majority of the outstanding securities. BVS performed the following procedures to determine the range of the control premium that might apply in the Merger. (a) BVS analyzed the historic market price and volatility of the Common Stock; and (b) BVS compared the proposed acquisition premium to be paid by JAKKS in the Merger to the average premiums paid for (i) all acquisitions of public companies in 1999; and (ii) acquisitions of companies in the miscellaneous manufacturing industry in 1999. Based on these procedures, BVS concluded that the proposed premium in the Merger exceeds the premiums paid in the other classes of transactions analyzed. Average Premium Two Week Four Week All acquisitions of public companies in 1999........................ NA 43% Acquisitions of companies in the miscellaneous manufacturing industry in 1999.................................. NA 30% Current Transaction...................... 40% 49% CONFLICTS OF INTEREST AND INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the Board of Directors that the Stockholders approve and adopt the Merger Agreement, Stockholders should be aware that certain officers and directors of the Company have certain interests in the Merger that are different from, or in addition to, the interests of the Stockholders. In particular, Stockholders should be aware that as a condition to the Merger, JAKKS (i) will enter into a Supplemental Services Agreement with each of Messrs. Norman Melnick and David Melnick providing for the payment of an aggregate of $125,000 and $216,000, respectively, for various consulting services and a covenant not to compete with JAKKS, and (ii) will enter into a Consulting Services Agreement with Mr. Kalin providing for the payment of $109,000 for various consulting services. Messrs. Norman Melnick, David Melnick and Kalin will be paid for their services in approximately three equal installments, the first at the closing of the Merger, the second on December 31, 2000 and the third on December 31, 2001. Messrs. Norman Melnick and David Melnick are each also expected to continue at the Effective Date as employees of the Company at an annual salary of $150,000 per year. Pursuant to the Supplemental Services Agreement with Mr. Norman Melnick, JAKKS canceled and forgave any and all indebtedness of Mr. Norman Melnick or any other person to the Company on account of loans made by the Company to fund insurance premiums payable on the life insurance policy of Mr. and Mrs. Norman Melnick (the "Policy"). Mr. Norman Melnick, on behalf of himself and his wife, agreed and acknowledged that any obligation that the Company had with respect to the making of such loans terminated and the Company agreed and acknowledged that Mr. Norman Melnick and his wife may make any amendment or rider to the Policy to remove the Company as a beneficiary entitled to receive any portion of the proceeds of the Policy. The Melnick Family and Mr. Kalin and his wife beneficially own an aggregate of 3,823,465 shares of Common Stock, representing approximately 30.4% of the outstanding shares of Common Stock on the Record Date. In addition to any compensation Messrs. Norman Melnick, David Melnick and Kalin are to receive for their services as employees or consultants under their respective agreements, pursuant to the Merger Agreement, the Melnick Family and Mr. Kalin and his wife will receive, approximately an aggregate of $5,400,000 for their shares of Common Stock and cancellation of their Options. Pursuant to the agreement between the Company and Goodrich, Goodrich is entitled to a fee at the closing of the Merger equal to 1.5% of the aggregate Merger Consideration plus the bank debt assumed upon completion of the Merger. FINANCING OF THE MERGER The total amount of funds required by JAKKS or Merger Sub to pay the aggregate Merger Consideration due to Stockholders and Option holders of the Company at the closing of the Merger, assuming there are no dissenting Stockholders, is expected to be approximately $18,000,000. In addition, JAKKS or Merger Sub will require approximately $500,000 to pay other expenses and costs relating to the transactions and up to $13,000,000 to refinance or repay indebtedness of the Company and for other general corporate purposes for a total cost of $31,500,000. The Company's outstanding indebtness is expected to be refinanced or repaid. JAKKS has represented to the Company that it has reserved cash sufficient to pay the Merger Consideration. CERTAIN TAX CONSEQUENCES TO STOCKHOLDERS The following is a summary of the material United States federal income tax consequences of the Merger to Stockholders. The receipt of cash in exchange for Common Stock pursuant to the Merger will be a taxable transaction for federal income tax purposes and may also be a taxable transaction under applicable state, local and foreign tax laws. A Stockholder will generally recognize gain or loss for federal income tax purposes in an amount equal to the difference between such Stockholder's adjusted tax basis in such Stockholder's Common Stock and the Merger Consideration received by such Stockholder. Such gain or loss will be a capital gain or loss if such Common Stock is held as a capital asset and will be long-term capital gain or loss if, at the Effective Time, such Common Stock has been held for more than one year. The foregoing discussion may not apply to Stockholders who acquired their Common Stock pursuant to the exercise of employee stock options, who are not citizens or residents of the United States or who are otherwise subject to special tax treatment. EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES OF THE MERGER, INCLUDING THE EFFECTS OF APPLICABLE, STATE, LOCAL OR OTHER TAX LAWS. THE MERGER AGREEMENT The description of the Merger Agreement contained in this Proxy Statement does not purport to be complete and is qualified in its entirely by reference to the Merger Agreement, a copy of which is attached hereto as Appendix A. Effective Time Pursuant to the Merger Agreement, the closing of the Merger, at which the Certificate of Merger will be filed in accordance with the requirements of the DGCL, will be held on the earliest practicable date, and in any event on or before the second business day after the satisfaction (or waiver) of all conditions to closing provided in the Merger Agreement (other than a condition which, by its terms, is to be satisfied at the closing). The closing shall be held at the offices of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, 750 Lexington Avenue, New York, NY 10022 or at such other place or on such other date, and at such time, as the Company, JAKKS and Merger Sub may agree. Certificate of Incorporation and Bylaws The Merger Agreement provides that the Certificate of Incorporation of the Company, as in effect immediately prior to the Effective Time, shall be the Certificate of Incorporation of the Surviving Corporation unless and until amended. The Merger Agreement further provides that the bylaws of Merger Sub will become the bylaws of the Surviving Corporation unless and until revoked or amended. Directors and Officers The two directors of Merger Sub at the Effective Time, from and after the Effective Time, will become the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and bylaws. The directors of Merger Sub currently are Messrs. Friedman and Berman. At the Effective Time, all incumbent directors of the Company shall resign. The officers of Merger Sub at the Effective Time from and after the Effective Time, shall become the initial officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and bylaws. At the Effective Time, all incumbent officers of the Company shall resign (or be removed). Options Concurrently with the effectiveness of the Merger, or as soon thereafter as is practicable, each Option issued, awarded or granted pursuant to the Plans or other stock options granted by the Company to purchase shares of Common Stock, will be canceled by the Company, subject to obtaining the consents, if necessary, of directors, officers and other holders discussed below, and each holder of a canceled Option will be entitled to receive from JAKKS in consideration for the cancellation of such Option an amount in cash (less applicable withholding taxes) equal to the product of (i) the number of shares of Common Stock previously subject to such Option and (ii) the excess, if any, of the Merger Consideration over the exercise price per share of Common Stock previously subject to such Option. At or prior to the closing of the Merger, the Company will deliver to JAKKS agreements (in a form reasonably acceptable to JAKKS) executed by each holder of an Option acknowledging that the payment described above is being made in full satisfaction of such individual's right under the applicable Option. Exchange of Certificates The Merger Agreement provides that the exchange of shares of Common Stock for the Merger Consideration will be effected as follows: (a) Prior to the Effective Time, JAKKS will designate American Stock Transfer & Trust Company to act as paying agent (the "Paying Agent") in effecting the exchange for the Merger Consideration of certificates that, prior to the Effective Time, represented shares of Common Stock (the "Certificates"). Upon the surrender of each such Certificate, together with a properly completed letter of transmittal, the Paying Agent will pay the holder of such Certificate the Merger Consideration multiplied by the number of shares of Common Stock formerly represented by such Certificate, in exchange thereof, and such Certificate will forthwith be canceled. Until so surrendered and exchanged, each such Certificate (other than Certificates representing shares of Common stock owned by JAKKS or Merger Sub or by any direct or indirect subsidiary of JAKKS or Merger Sub or which are held in the treasury of the Company or by any of its subsidiaries, all of which will be canceled, or which are held by dissenting Stockholders) will represent solely the right to receive the Merger Consideration. No interest will be paid or accrue on the Merger Consideration. If the Merger Consideration (or any portion thereof) is to be delivered to any person other than the person in whose name the Certificate surrendered in exchange therefor is registered, it will be a condition to such exchange that the Certificate so surrendered will be properly endorsed or otherwise be in proper form for transfer and that the person requesting such exchange will pay to the Paying Agent any transfer or other taxes required by reason of the payment of the Merger Consideration to a person other than the registered holder of the Certificate surrendered, or will establish to the satisfaction of the Paying Agent that such tax has been paid or is not applicable. (b) Prior to the Effective Time, JAKKS or Merger Sub will deposit, or cause to be deposited, in trust with the Paying Agent for the benefit of the Stockholders and the Option holders, the aggregate Merger Consideration to which Stockholders or Optionholders will be entitled at the Effective Time. (c) Promptly after the Effective Time, the Paying Agent will mail to each record holder of a Certificate a form of a letter of transmittal and instructions for use in surrendering such Certificates and receiving the Merger Consideration in exchange therefor. Representations and Warranties The Merger Agreement includes various representations and warranties of the parties thereto. The Merger Agreement includes representations and warranties by the Company (except as disclosed) as to, among other things: (i) the organization, existence and standing of the Company; (ii) the corporate power, authority, execution, delivery, performance and enforceability of the Merger Agreement and the transactions contemplated thereby; (iii) the engagement of BVS to render a Fairness Opinion; (iv) the Board of Directors has determined that the Merger is advisable and in the best interests of the Company and the Stockholders, approved it and adopted resolutions recommending that the Stockholders approve the Merger; (v) the absence of the need (except as specified) for governmental or other filings or actions with respect to the Merger Agreement and the transactions contemplated thereby; (vi) the absence of pending or threatened litigation which would have a Material Adverse Effect on the Company and the absence of any writ, order, judgement, injunction or decree which would have a Material Adverse Effect on the Company; (vii) the capital structure of the Company; (viii) the organization, existence and standing of each of the Company's subsidiaries; (ix) documents having been filed by the Company with the Commission and the Company's financial statements and the accuracy of information contained therein since January 1997; (x) the absence of certain changes or events since September 30, 1999 which would have a Material Adverse Effect (defined below) on the Company; (xi) the ownership of property of the Company; (xii) the existence of no material breaches by the Company of any agreement to which it is a party; (xiii) that the Company's inventory consists solely of merchandise usable or salable in the ordinary course of its business; (xiv) that the accounts receivable of the Company result from bona fide sales to nonaffiliates of the Company; (xv) the existence of government approvals necessary to operate the business; (xvi) intellectual property matters; (xvii) the real property utilized by the Company; (xviii) the use of hazardous materials; (xix) the filing of tax returns, payment of taxes and other matters; (xx) the terms, existence, operations, liabilities and compliance with applicable laws of the Company's benefits plans and certain other matters relating to the Employee Retirement Income Security Act of 1974, as amended; (xxi) labor and union matters; (xxii) the existence of severance rights of any employee or knowledge of any employee intending to terminate his or her employment relationship with the Company; (xxiii) memberships in entertainment facilities or automobile leases; (xxiv) the sales or purchases from the Company's ten largest customers and suppliers; (xxv) insurance matters; (xxvi) the existence of no broker other than Goodrich; and (xxvii) the accuracy of the representations of the Company contained in the Merger Agreement. As used in this Proxy Statement, the term "Material Adverse Effect" means a material adverse effect in the business of the Company, or the operations, financial condition or results of operations of the Company and its subsidiaries taken as a whole. As used in this Proxy Statement, "Person" includes without limitation a natural person, corporation, joint stock company, limited liability company, partnership, joint venture, association, trust, governmental authority or any group of the foregoing acting in concert. The Merger Agreement also includes representations and warranties by JAKKS as to, among other things: (i) the organization, existence and standing of JAKKS and Merger Sub; (ii) the corporate power, authority, execution, delivery, performance and enforceability of the Merger Agreement and the transactions contemplated thereby; (iii) the absence of the need (except as specified) for governmental or other filings or actions with respect to the Merger Agreement and the transactions contemplated thereby, the absence of pending or threatened litigation affecting JAKKS or Merger Sub in which an unfavorable order would prohibit, invalidate or make unlawful the Merger Agreement or carrying out the provisions thereof or the transactions contemplated thereby; (v) the existence of no broker engaged by JAKKS or Merger Sub; (vi) the reservation by JAKKS of sufficient funds to pay the Merger Consideration; and (vii) the accuracy of the representations of JAKKS contained in the Merger Agreement or made to the Company for use in a related document including, but not limited to, this Proxy Statement. Business of the Company Pending the Merger From the date the Company executed the Merger Agreement until the closing of the Merger, except as JAKKS may otherwise consent (which consent may not be unreasonably withheld), the Company has agreed with JAKKS that the Company and its subsidiaries shall: (a) conduct their business in the ordinary course; (b) use commercially reasonable best effects to preserve the business and assets of the Company and maintain their respective relationships with customers and other Persons with which they have material business dealings; (c) not enter into any agreement restricting their ability to conduct business activities; (d) not (i) sell, lease, transfer or dispose of any material asset of the Company other than sales of merchandise from inventory in the ordinary course of business or the disposal of defective, obsolete or otherwise unusable assets or (ii) terminate any material contract except upon expiration of the term thereof as provided therein; (e) use commercially reasonable best efforts to maintain all required governmental permits and consents and to comply with all applicable orders to which the Company or its subsidiaries is subject; (f) use commercially reasonable best efforts to maintain in full force and effect (or to replace on substantially equivalent terms) all currently applicable insurance; (g) except as required under any agreement applicable to the Company or a subsidiary or in the ordinary course of business consistent with its past practices, not increase the compensation or other employment benefits payable to or for the benefit of any employee, or enter into, adopt or modify any Plan or other agreement, plan, commitment or arrangement to provide to any employee or other Person any deferred compensation, retirement, severance or other similar payment or benefit; (h) not make any loan or advance or otherwise extend any credit to any director or officer of the Company or a subsidiary of the Company or any affiliate of any such director or officer; (i) not amend the Company's Certificate of Incorporation or Bylaws; (j) not merge or consolidate with any other Person or purchase or otherwise acquire any securities of, or other equity interest or participation in, any Person (other than a subsidiary of the Company); (k) other than pursuant to the Company's current credit facility, not incur or assume any indebtedness in an amount in excess of $250,000; (l) not purchase or otherwise acquire any securities of, or make any other investment in, any Person or enter into or create any joint venture; (m) not acquire (other than in the ordinary course of business) the business or assets, substantially as a whole, of any other Person, or make any capital expenditure in excess of $250,000; (n) not declare, set aside or pay any dividend or make any other distribution in cash, securities or other property, on or in respect of any capital stock (other than a cash dividend or distribution by any subsidiary of the Company or any other subsidiary); (o) not split or reverse-split the Common Stock or effect any other recapitalization or capital reorganization, or issue or reserve for issuance any Common Stock, other than upon the exercise of an Option in accordance with the terms thereof, or issue or grant any option, warrant or right to purchase, or security or instrument convertible into or exercisable for the Common Stock or any other capital stock of the Company; or (p) enter into, adopt or assume any agreement, commitment or arrangement which obligates the Company or any subsidiary of the Company to act or to refrain from acting in violation of, or in a manner inconsistent with, any of the foregoing. Stockholder Meeting The Meeting will be held on July __, 2000 at 10:00 A.M., local time, at the offices of Camhy, 1740 Broadway, Sixteenth Floor, New York, NY 10019-4315. At the Meeting, Stockholders will be asked to consider and vote upon (i) a proposal to approve and adopt the Merger Agreement; (ii) a proposal to grant the Board of Directors authority to postpone or adjourn the Meeting in order to solicit additional votes to approve and adopt the Merger Agreement; and (iii) such other matters as may properly come before the Meeting or any adjournment or postponement thereof. See "THE MEETING--MATTERS CONSIDERED." The Company has fixed the close of business on June 6, 2000 as the Record Date for determining holders of outstanding shares of Common Stock who are entitled to notice of and to vote at the Meeting. As of the Record Date, there were 12,571,258 shares of Common Stock issued and outstanding, each of which shares is entitled to one vote. The holders of a majority of the outstanding shares of Common Stock, which are present in person or by proxy at the Meeting, will constitute a quorum. The approval and adoption of the Merger Agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock. Accordingly, failure to vote your shares is effectively a vote against approval and adoption of the Merger Agreement. Only record holders of shares of Common Stock or their duly authorized proxies will be entitled to cast ballots at the Meeting. Proxy holders who wish to vote by ballot at the Meeting must provide the Secretary of the Company with evidence of their authority to act at least 30 minutes prior to the commencement of the Meeting. See "THE MEETING--VOTING; REVOCATION OF PROXIES." No Solicitation Except as set forth below, none of the Company, any subsidiary of the Company, the Melnick Family, Mr. Kalin, any affiliate thereof, any director, officer, employee or other agent or representative of any of them, shall, directly or indirectly, accept or solicit any inquiry, offer or proposal from any Person other than JAKKS with respect to any transaction involving any sale or other disposition of the Company (other than in the ordinary course of business) or any Common Stock or any subsidiary of the Company. The Company has agreed to promptly advise JAKKS of the receipt of any such inquiry, offer or proposal and the material terms thereof. The Company shall not be subject to this restriction with respect to any bid, offer or other proposal relating to an Alternative Transaction (defined below) (an "Alternative Proposal") that (a) is made in writing, (b) the Board of Directors determines in good faith in the exercise of its business judgement is reasonably capable of being completed on the terms proposed and if so completed would result in an Alternative Transaction that, from a financial point of view, would be superior and more beneficial to the Stockholders than the Merger, and (c) the Board of Directors determines in good faith that its failure to consider such Alternative Proposal or to withdraw, modify or qualify its approval or recommendation of the Merger would cause it to violate its fiduciary duties under the DGCL (a "Superior Proposal"). Prior to entering into any negotiations or discussions with any other Person with respect to, or furnishing confidential information or otherwise responding to, any Superior Proposal, Pentech shall enter into a confidentiality agreement with such Person (which agreement may not include any provision granting to such Person an exclusive right to negotiate with the Company with respect to an Alternative Transaction). Subject to the Company's compliance with these conditions prior to obtaining the Stockholder Approval, the Board of Directors may withdraw its approval or recommendation of the Merger, or modify or qualify such approval or recommendation, or approve or recommend a Superior Proposal if the Company shall give to JAKKS at least five days prior written notice of this. Unless the Merger Agreement is terminated in accordance with its terms prior to the Meeting, notwithstanding the Company's receipt of any Alternative Proposal or any Alternative Action (defined below), the Company shall hold the Meeting and call for a vote of the Stockholders for the approval and adoption of the Merger Agreement. As used in this Proxy Statement, the term "Alternative Transaction" shall mean (a) any merger, consolidation or other business combination or reorganization pursuant to which a substantial portion of the business or the assets of the Company are sold or otherwise transferred to, or combined with that or those of, another Person; (b) a transaction as a result of which any Person (other than the Company or a subsidiary of the Company) becomes the holder, directly or indirectly, of securities of the Company having 30% or more of the voting power of all voting securities of the Company; or (c) the acquisition, directly or indirectly, by another Person of control of the Company, in each case, other than the Merger. As used in this Proxy Statement, the term "Alternative Action" means any action (a) by the Board of Directors (i) to withdraw its approval or recommendation of the Merger, (ii) to modify or to qualify such approval or recommendation in a manner adverse to JAKKS or which would prevent, impede or delay the consummation of the Merger or (iii) to accept or recommend an Alternative Proposal; or (b) by the Company, the Melnick Family or Mr. Kalin or his wife to enter into any contract, letter of intent, agreement in principle or similar agreement relating to any Alternative Transaction. Indemnification of Directors and Officers From and after the Effective Time, JAKKS shall cause the Company, as the Surviving Corporation, to, and the Company, as the Surviving Corporation, shall, subject to any condition or limitation provided by Section 145 of the DGCL, indemnify each Person who at any time prior to the Effective Time shall have been a director or officer of the Company or a subsidiary of the Company and hold each such Person harmless from and against any loss, liability, or obligation, damage or expense, including reasonable attorneys' fees and disbursements, which any of them may suffer or incur in connection with any claim or proceeding against any of them based upon or resulting from any act or omission occurring at or prior to the Effective Time, including any acts or omissions in connection with the Merger Agreement or the Merger, in the same manner and to the same extent as is provided in the Certificate of Incorporation, Bylaws and any indemnification agreement of the Company or a subsidiary of the Company, as applicable, on the date of the Merger Agreement; cause the Company's Bylaws at all times during the six-year period following the Effective Time to include a provision for such indemnification and a provision regarding the elimination or limitation of liability of all such Persons in the manner and to the extent provided in the Certificate of Incorporation, or the Bylaws of the Company or a subsidiary of the Company, as applicable; and cause to be maintained throughout such six year period directors' and officers' liability insurance substantially equivalent to that provided to such Persons by the Company on the date of the Merger Agreement. Supplemental Services Agreements and Other Arrangements Prior to the Effective Time, the Board of Directors will adopt such resolutions or take such other actions as are required to (i) effect the transactions described in "--Options" above and (ii) with respect to any stock option, stock appreciation or other stock benefit plan of the Company or any of its Subsidiaries not addressed by the preceding clause (i), ensure that, following the Effective Time, no participant therein will have any right thereunder to acquire any capital stock of the Surviving Corporation or any subsidiary thereof. As a condition to the Merger Agreement, JAKKS will enter into a Supplemental Services Agreement with each of Messrs. Norman Melnick and David Melnick providing for the payment to them of an aggregate of $125,000 and $216,000, respectively. Pursuant to these agreements, Messrs. Norman Melnick and David Melnick shall perform until December 31, 2001 such consulting services as the Company may from time to time request with respect to the integration of the Company's business with JAKKS, which services shall not exceed more than five hours per month and shall not require either of them to travel more than 30 miles from their principal residence. In addition, Messrs. Norman Melnick and David Melnick each agreed for 30 months from the Effective Time or the first anniversary of the date of termination of their employment by JAKKS or a subsidiary thereof, whichever is later, not to directly or indirectly (a) own, control, manage, operate, participate or invest in, or otherwise be connected with, in any manner, any business activity, venture or enterprise which is engaged in any toy or stationery business in the United States in which JAKKS (or any subsidiary thereof) is engaged during the term of his employment; or (b) for himself or on behalf of any other person, employ or engage any person who shall have been at any time within the preceding six month period an employee of JAKKS (or a subsidiary thereof) or contact any supplier, customer or employee of JAKKS (or a subsidiary thereof) for the purpose of soliciting or diverting any supplier, customer or employee from JAKKS (or such subsidiary). In addition, it is expected that Messrs. Norman Melnick and David Melnick will each continue at the Effective Date as employees of the Company at their current salary of $150,000 per year. Pursuant to the Supplemental Services Agreement with Mr. Norman Melnick, JAKKS canceled and forgave any and all indebtedness (the principal amount of which was approximately $174,000) of Mr. Norman Melnick or any other person to the Company on account of loans made by the Company to fund insurance premiums payable on the life insurance policy of Mr. and Mrs. Norman Melnick (the "Policy"). Mr. Norman Melnick, on behalf of himself and his wife, agreed and acknowledged that any obligation that the Company had with respect to the making of such loans terminated and the Company agreed and acknowledged that Mr. Norman Melnick and his wife may make any amendment or rider to the Policy to remove the Company as a beneficiary entitled to receive any portion of the proceeds of the Policy. In addition, as a condition to the Merger Agreement, JAKKS will enter into the Consulting Services Agreement with Mr. Kalin providing for the payment to Mr. Kalin of $109,000. Pursuant to this agreement, Mr. Kalin shall perform until December 31, 2001 such consulting services (other than legal services) as JAKKS may from time to time request with respect to the integration of the Company's business with JAKKS, which services shall not exceed more than five hours per month and shall not require him to travel more than 30 miles from his principal residence. Payments to Messrs. Norman Melnick, David Melnick and Mr. Kalin under their Supplemental Services Agreement or Consulting Services Agreement with JAKKS shall be made in three approximately equal installments, the first at the closing of the Merger, the second on December 31, 2000 and the final payment on December 31, 2001. Conditions to Obligations of Each Party The respective obligations of the Company, on the one hand, and JAKKS and Merger Sub, on the other hand, to consummate the Merger are further subject to the satisfaction or waiver, at or prior to the Effective Time, of each of the following conditions: (a) the Stockholders shall have approved and adopted the Merger Agreement (the "Company Stockholder Approval"); (b) the waiting period under the HSR Act shall have expired or been terminated; (c) no order or law shall be in effect which (i) makes illegal or prohibits consummation of the Merger or (ii) would have a Material Adverse Effect, and no proceeding which could result in the enactment or adoption of any such law or the issuance of any such order shall be pending; (d) except for the filing of the Certificate of Merger, each consent of, or notice to, any governmental authority required for the consummation of the Merger and for the Surviving Corporation to conduct the business, including without limitation any order or other action by the NJDEPE under ECRA, shall have been obtained or given; and (e) the Supplemental Services Agreements and the Consulting Services Agreement shall have been executed and delivered by the respective parties thereto. Conditions to Obligations of JAKKS and Merger Sub The obligations of JAKKS and Merger Sub under the Merger Agreement to consummate the Merger are subject to the satisfaction (or waiver) by JAKKS, at or prior to the Effective Time, of each of the following conditions: (a) each of the representations and warranties made by the Company as to Material Adverse Effect shall be true, and each of the representations and warranties made by the Company in the Merger Agreement that is not so qualified shall be true in all material respects, at and as of the Effective Time; (b) the Company shall have, in all material respects, performed obligations and conditions to be performed or complied with by it under the Merger Agreement at or prior to the Effective Time; (c) since the date of the Merger Agreement, no event shall have occurred and no circumstances shall have existed which has had or would have a Material Adverse Effect; (d) each holder of an Option that does not by its terms or pursuant to the terms under which it is granted terminate at the Effective Time shall have executed and delivered to JAKKS an agreement terminating such Option at the Effective Time; (e) JAKKS shall have received environmental audit report(s) from environmental engineering or consulting firm(s) reasonably satisfactory to JAKKS and Pentech (i) confirming that there is no material likelihood that the aggregate cost of environmental site remediation or clean-up at any real property utilized by the Company or other facility or site (including without limitation for the treatment, storage or disposal of Hazardous Materials and underground storage tanks) located in the State of New Jersey would exceed $75,000, and (ii) not indicating that there is any other material environmental liability associated with any such real property or other facility or site; (f) JAKKS shall have received an opinion of Grotta, Glassman & Hoffman, P.A., in form and substance reasonably satisfactory to JAKKS, to the effect that the Company has complied in all material respects with applicable laws relating to ERISA, labor and employment matters and confirming in substance the Company's representations and warranties in respect thereto; and (g) the Company and its subsidiaries shall execute and/or deliver at the Closing the documents so to be executed and/or delivered by them and take all other actions at the closing required to be taken by them pursuant to the Merger Agreement. Conditions to Obligations of the Company The obligations of the Company under the Merger Agreement to consummate the Merger are subject to the satisfaction or waiver by the Company, at or prior to the Effective Time, of the following conditions: (a) the representations and warranties of JAKKS and the Merger Sub shall be true in all material respects at and as of the Effective Time; (b) JAKKS shall have, in all material respects, performed and complied with all obligations and conditions to be performed or complied with by it pursuant to the Merger Agreement; (c) JAKKS shall have obtained the consent of Bank of America, N.A., as required under the Company's current credit facility or shall have satisfied and discharged all outstanding monetary obligations under such facility; and (d) JAKKS and Merger Sub shall execute and/or deliver at the Closing all the documents so to be executed and/or delivered by them and take all other actions at the Closing required to be taken by them pursuant to the Merger Agreement. Termination The Merger Agreement may be terminated at any time prior to the closing of the Merger Agreement: (a) by the mutual agreement of JAKKS and the Company; (b) by any party, if the Merger shall have not occurred on or before November 30, 2000, or such later date to which JAKKS and the Company may agree upon written notice to such effect to the other; (c) by any party, at any time after the Meeting if, the Company Stockholder Approval is not obtained; (d) by JAKKS if (i) there shall be any material breach of any representation or warranty by, or any failure to perform any material covenant or other obligation of, the Company, and, unless such breach or failure is incapable of being cured within a period of 30 days after the giving of written notice thereof to the breaching or defaulting party, JAKKS gives such notice to such party and such breach or failure shall not be cured within 30 days of the giving of such notice, upon written notice of termination to the Company; or (ii) an Alternative Action shall have been taken; and (e) by the Company if (i) there shall be any material breach of any representation or warranty by, or any failure to perform any material covenant or other obligation of JAKKS or Merger Sub, and, unless such breach or failure is incapable of being cured within a period of 30 days after the giving of written notice thereof to the breaching or defaulting party, the Company gives such notice to such party and such breach or failure shall not be cured within 30 days of the giving of such notice, upon written notice of termination to JAKKS; or (ii) an Alternative Action shall have been taken with respect to a Superior Proposal and the Company shall have paid the Termination Fee (defined below) to JAKKS. Termination Fees If (a) the Merger Agreement is terminated by JAKKS at any time after the Meeting, if the Company Stockholder Approval is not obtained because the Melnick Family or Mr. Kalin and his wife have failed to vote their shares of Common Stock in favor of the Merger at the Meeting or otherwise made any material misrepresentation or failed in any material respect to comply with his or her obligations pursuant to the Voting Agreement, or because an Alternative Action shall have been taken; or (b) the Company terminates the Merger Agreement because an Alternative Action shall have been taken with respect to a Superior Proposal, the Company shall pay to JAKKS a termination fee in the amount of $1,000,000 (the "Termination Fee") within 15 days of such termination. The Termination Fee, if applicable, shall constitute liquidated damages to JAKKS in respect of all losses, liabilities, damages and expenses suffered or incurred by JAKKS by reason of the termination of the Merger Agreement or the failure of the Company to close the Merger and shall be in lieu of any other remedy or relief otherwise available to JAKKS by reason thereof. Fees and Expenses Whether or not the Merger is consummated, all fees and expenses incurred in connection with the Merger will be paid by the party incurring such fees and expenses. The Company will pay JAKKS the Termination Fee under certain circumstances (See "Termination Fees"). Estimated fees and expenses to be incurred by the Company or JAKKS in connection with the Merger are as follows: Fairness Opinion Fee and Disbursement.................$30,000.00 Investment Banking Fee................................$ SEC Filing Fees.......................................$ 3,519.95 HSR Filing Fees.......................................$45,000.00 Legal Fees and Expenses...............................$ Printing and Mailing Expenses.........................$ Paying Agent Fees.....................................$ Miscellaneous (including fees of environmental consultants, license transfer fees, if any, early payment premium on credit facility, if any, and other transaction costs).........................$ Total...............................................$ Amendment and Waivers At any time prior to the Effective Time and notwithstanding that the Company Stockholder Approval has been obtained, JAKKS and the Company may amend the Merger Agreement, if such amendment is authorized and approved by the respective Boards of Directors of JAKKS and the Company; provided that, after the Company Stockholder Approval is obtained, no such amendment may be made which is prohibited or which would require further action by the Stockholders, pursuant to Section 251(d) of the DGCL or other applicable law; and provided further that no such amendment shall, unless the Melnick Family, Mr. Kalin or his wife agrees or otherwise consents in writing thereto, impose any additional obligation on such Stockholder, as such, or deprive such Stockholder of any right, power or privilege, other than as provided in the Merger Agreement prior to such amendment. No amendment of the Merger Agreement shall be valid or effective, unless in writing and signed by or on behalf of JAKKS and the Company. No course of dealing or omission or delay on the part of any party to the Merger Agreement in asserting or exercising any right thereunder shall constitute or operate as a waiver of any such right. No waiver of any provision thereof shall be effective, unless in writing and signed by or on behalf of the party to be charged therewith. No waiver shall be deemed a continuing waiver or waiver in respect of any other or subsequent breach or default, unless expressly so stated in writing. THE VOTING AGREEMENT In connection with the execution of the Merger Agreement, the Company and the Melnick Family and Mr. Kalin and his wife, entered into the Voting Agreement. Pursuant to the Voting Agreement, the Melnick Family and Mr. Kalin and his wife, have each agreed to vote their shares of Common Stock at every meeting of the Stockholders from the date of the Voting Agreement to the termination of the Voting Agreement, as provided therein (i) to adopt the Merger Agreement and to approve the Merger in favor of any other action that could reasonably be expected to facilitate the Merger, and (ii) against any action or proposal that could reasonably be expected to result in the failures of any of the conditions to the obligations of the parties to the Merger Agreement with respect to the Merger or otherwise prevent, interfere or delay with the consummation of the Merger. At the Record Date, the shares of Common Stock owned by the Melnick Family and Mr. Kalin and his wife, including their minor children, were 3,823,465, representing approximately 30.4% of the voting power of the outstanding Common Stock. Pursuant to the terms of the Voting Agreement, the Melnick Family and Mr. Kalin and his wife have each agreed without the prior written consent of JAKKS, not to (a) sell, assign, pledge or otherwise transfer or dispose of any shares of Common Stock or create or suffer to exist any lien upon any shares of Common Stock owned by any of them; (b) agree or consent to relinquish or limit any right which any of them have or may exercise to vote or to direct the manner of voting of any shares of Common Stock; or (c) enter into any agreement, commitment or arrangement by which any other person would acquire any right to vote or to direct the manner of voting any shares of Common Stock. The Voting Agreement will terminate upon the earlier to occur of such date and time as (i) the Merger shall become effective in accordance with the provisions of the Merger Agreement or (ii) the termination of the Merger Agreement in accordance with its terms (see "--The Merger Agreement--Termination"). ACCOUNTING TREATMENT The Merger will be accounted for as a purchase under generally accepted accounting principles. Under this method of accounting, all identifiable assets and liabilities of the Company will be adjusted to fair value at the effective date of the Merger and any excess of the Merger Consideration over the fair value of the underlying net assets of the Company will be recorded as goodwill. Accordingly, a determination of the fair value of the Company's assets and liabilities will be made in order to allocate the purchase price to the assets acquired and the liabilities assumed. REGULATORY MATTERS Federal Under the HSR Act, and the rules promulgated thereunder by the FTC, the Merger may not be consummated until notifications have been given and certain information has been furnished to the FTC and the Antitrust Division of the Department of Justice and specified waiting period requirements have been satisfied. The Company and JAKKS filed their respective notification and respect forms under the HSR Act on June 9, 2000 and jointly requested early termination of the waiting period. Federal and state antitrust enforcement authorities frequently scrutinize the legality under the antitrust laws of mergers such as the Merger. At any time before or after the effectiveness of the Merger, and notwithstanding that the HSR Act waiting period has expired, any such agency could take any action under the antitrust laws that it deems to be in the public interest. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of business of the Company and JAKKS acquired as a result of the Merger. Private parties may also file legal actions under the antitrust laws under certain circumstances. Based on information available to it, the Company believes that the Merger can be effected in compliance with federal and state antitrust laws. However, there can be no assurance that a challenge to the consummation of the Merger on antitrust grounds will not be made or that, if such a challenge were made, the Company and JAKKS would prevail or would not be required to accept certain conditions in order to consummate the Merger. PRICE RANGE OF COMMON STOCK; DIVIDENDS The Common Stock is traded in the over-the-counter market on the Nasdaq National Market System under the symbol "PNTK." The following table sets forth the range of high and low bid prices for the Common Stock for each of the periods indicated as reported on Nasdaq. Quotations represent prices between dealers and do not reflect retail mark-up, mark-downs or commissions. HIGH LOW October 1, 1996 through December 31, 1996..... $1.25 $0.6875 January 1, 1997 through March 31, 1997........ $1.6875 $1.125 April 1, 1997 through June 30, 1997........... $2.25 $1.375 July 1, 1997 through September 30, 1997....... $3.125 $2.4375 HIGH LOW October 1, 1997 through December 31, 1997..... $3.125 $2.5625 January 1, 1999 through March 31, 1998........ $3.00 $1.125 April 1, 1998 through June 30, 1998........... $2.1875 $1.25 July 1, 1998 through September 30, 1998....... $2.00 $0.9375 October 1, 1998 through December 31, 1998..... $1.3125 $0.9375 January 1, 1999 through March 31, 1999........ $1.375 $0.65625 April 1, 1999 through June 30, 1999........... $0.875 $0.59375 July 1, 1999 through September 30, 1999....... $2.09375 $0.75 October 1, 1999 through December 31, 1999..... $1.25 $0.625 January 1, 2000 through March 31, 2000........ $2.1875 $0.59375 April 1, 2000 through May 22, 2000........... $1.3125 $0.65625 There were an aggregate of 382 holders of record of the Common Stock as of June 6, 2000. The Company has not paid any dividends on its Common Stock since its inception. The Company is prohibited from declaring or paying dividends to its Stockholders without the consent of Bank of America, N.A. under its credit agreement. Whether or not the Merger is consummated, the Company does not intend to pay any cash dividends in the foreseeable future. Rather, the Company intends to retain its earnings, if any, to provide for the continued operation and expansion of its business. On May 22, 2000, the last full trading day prior to the announcement of the execution of the Merger Agreement, the closing sales price per share of Common Stock as reported on the NASDAQ National Market System was $.90625. The highest bid price per share on such date was $.96875, and the lowest bid price per share on such date was $.8125. STOCKHOLDERS ARE URGED TO OBTAIN CURRENT QUOTATIONS FOR THE COMMON STOCK. APPRAISAL RIGHTS Stockholders are entitled to statutory appraisal rights under Section 262. The following discussion is not a complete statement of the law pertaining to statutory appraisal rights under the DGCL, but rather is only a guide for a Stockholder who wishes to exercise his or her statutory appraisal right, and is qualified in its entirety by reference to the full text of Section 262 which is reprinted in its entirety as Appendix C to this Proxy Statement. Under Section 262, Stockholders who follow the procedure set forth in Section 262 and who have not voted in favor of the Merger will be entitled to have their shares of Common Stock appraised by the Court of Chancery of the State of Delaware and to receive, instead of the Merger Consideration, an amount determined by such court to be the "fair value" of their shares of Common Stock, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest. This right is known as an "appraisal right." If a Stockholder wishes to exercise his or her statutory appraisal right he or she must not vote in favor of the Merger and must meet certain conditions. These conditions are set out in full in Appendix C. Delaware law requires that the Company notify Stockholders not less than 20 days prior to the Meeting that they have a right of appraisal and provide Stockholders with a copy of Section 262. This Proxy Statement constitutes that notice. If a Stockholder does not follow the procedures set out below and in Appendix C, he or she will lose his or her statutory appraisal right. ALL REFERENCES IN THIS SUMMARY AND IN SECTION 262 TO A "STOCKHOLDER" OR TO A "HOLDER" OF SHARES OF COMMON STOCK ARE TO THE RECORD HOLDER OF THE SHARES OF COMMON STOCK AS TO WHICH A STATUTORY APPRAISAL RIGHT IS ASSERTED. A PERSON HAVING A BENEFICIAL INTEREST IN SHARES OF COMMON STOCK HELD OF RECORD IN THE NAME OF ANOTHER PERSON, SUCH AS A BROKER OR NOMINEE, MUST ACT PROMPTLY TO CAUSE THE RECORD HOLDER TO FOLLOW THE STEPS SUMMARIZED BELOW PROPERLY AND IN A TIMELY MANNER TO PERFECT HIS OR HER STATUTORY APPRAISAL RIGHT. A Stockholder wishing to exercise his or her statutory appraisal right must deliver to the Company, before the vote on the Merger at the Meeting, a written demand for appraisal of his or her shares of Common Stock and must either (i) abstain from voting with respect to the Merger and not consent thereto in writing, or (ii) vote against the Merger. Because a fully executed proxy which does not contain voting instructions will, unless revoked, be voted for the Merger, a holder of shares of Common Stock who voted by proxy and who wishes to exercise his or her statutory appraisal right must mark his or her proxy to (i) vote against the Merger, or (ii) abstain from voting on the Merger. A vote against the Merger, in person or by proxy, will not in and of itself constitute a written demand for appraisal satisfying the requirement of Section 262, and a separate written demand for appraisal is required. In addition, a Stockholder wishing to exercise his or her statutory appraisal right must be the record holder of such shares on the date the written demand for appraisal is made and must continue to hold such shares of record until the Effective Time. A demand for appraisal should be executed by or on behalf of the holder of record, fully and correctly, as his or her name appears on his or her stock certificate, and must state that the Stockholder intends thereby to demand appraisal of his or her shares of Common Stock in connection with the Merger. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy and tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including two or more joint owners, may execute a demand for appraisal on behalf of a holder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, the agent is agent for such owner or owners. A record holder such as a broker who holds shares of Common Stock as nominee for several beneficial owners may exercise statutory appraisal rights with respect to the shares held for one or more beneficial owners while not exercising such rights with respect to the shares held for other beneficial owners; in such case, however, the written demand should set forth the number of shares as to which appraisal is sought and where no number of shares is expressly mentioned the demand will be presumed to cover all shares of Common Stock held in the name of the record owner. Any Stockholder who holds his or her shares of Common Stock in brokerage accounts or other nominee forms and who wishes to exercise statutory appraisal rights is urged to consult with his or her brokers to determine the appropriate procedures for the making of a demand for appraisal by such a nominee. All written demands for appraisal pursuant to Section 262 should be sent or delivered to the Company at 195 Carter Drive, Edison, NJ 08817, Attn.: Richard S. Kalin, Secretary. Written demands for appraisal pursuant to Section 262 must be received by Company before the taking of the vote on the Merger, scheduled for July __, 2000. Within ten days after the Effective Time, the Surviving Corporation must notify each Stockholder who has complied with Section 262 and has not voted in favor of or consented to the Merger of the date that the Merger has become effective. Within 120 days after the Effective Time, but not thereafter, the Surviving Corporation or any Stockholder who has so complied with Section 262 and is entitled to a statutory appraisal right under Section 262 may file a petition in the Court of Chancery of the State of Delaware demanding a determination of the fair value of his or her shares of Common Stock. The Surviving Corporation will have no obligation to file such a petition, and neither the Company nor JAKKS has any present intention to cause the Surviving Corporation to file such a petition. Accordingly, it is the obligation of the Stockholder who has complied with Section 262 to initiate all necessary action to perfect his or her statutory appraisal right within the time prescribed in Section 262. Any Stockholder who has complied with the requirements for exercise of his or her statutory appraisal rights will be entitled, upon written request, to receive from the Surviving Corporation a statement setting forth the aggregate number of shares of Common Stock not voted in favor of the Merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. If a petition for an appraisal is timely filed by a Stockholder, the Court of Chancery is empowered to conduct a hearing on such petition to determine those Stockholders who have complied with Section 262 and who have become entitled to statutory appraisal rights thereunder. The Court of Chancery may require the Stockholders who demanded appraisal of their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceeding; and if any Stockholder fails to comply with such direction, the Court of Chancery may dismiss the proceedings as to such Stockholder. After determining the holders entitled to appraisal, the Court of Chancery will appraise the "fair value" of their shares of Common Stock, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. Stockholders considering seeking appraisal should be aware that the fair value of their shares of Common Stock as determined in an appraisal proceeding under Section 262 could be more than, the same as or less than the Merger Consideration they would receive pursuant to the Merger if they did not seek appraisal of their shares, and that investment banking opinions as to fairness from a financial point of view are not necessarily opinions as to fair value for purposes of Section 262. The Delaware Supreme Court has stated that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in the appraisal proceeding. In addition, Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenter's exclusive remedy. The Court of Chancery will also determine the amount of interest, if any, to be paid upon the amounts to be received by persons whose shares of Common Stock have been appraised. The costs of the appraisal action may be determined by the Court and taxed upon the parties as the Court deems equitable. Each party must bear his or her own other expenses of the proceeding, although the Court may order that all or a portion of the expenses incurred by any Stockholder in connection with an appraisal, including, without limitation, reasonable attorneys' fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged against the value of all the shares of Common Stock entitled to be appraised. Any Stockholder who duly demands appraisal in compliance with Section 262 will not, after the Effective Time, be entitled to vote his or her shares of Common Stock for any purpose or be entitled to the payment of dividends or other distributions on those shares (except dividends or other distributions payable to holders of record as of a record date prior to the Effective Time). If any Stockholder who demands appraisal of his or her shares of Common Stock under Section 262 fails to perfect, or effectively withdraws or loses, his or her statutory right to appraisal, the shares of such Stockholder will be converted into the right to receive the Merger Consideration pursuant to the Merger Agreement as described herein (without interest). A Stockholder will fail to perfect, or will effectively lose or withdraw, his or her statutory right to appraisal if no petition for appraisal is filed within 120 days after the Effective Time, or if the Stockholder delivers to the Surviving Corporation a written withdrawal of his or her demand for appraisal and an acceptance of the Merger, except that any such attempt to withdraw made more than 60 days after the Effective Time will require the written approval of the Surviving Corporation and, once a petition for appraisal is filed, the appraisal proceeding may not be dismissed as to any holder absent court approval. FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 FOR PERFECTING STATUTORY APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF SUCH RIGHTS. CERTAIN EFFECTS OF THE MERGER If the Merger is consummated, the Stockholders will not have an opportunity to continue their common equity interest in the Company as an ongoing operation and therefore will not have the opportunity to share in its future earnings and potential growth, if any. If the Merger is consummated, the Company plans to take all necessary actions (i) to de-register shares of Common Stock under the Exchange Act and (ii) to terminate inclusion of the shares of Common Stock in the Nasdaq National Market System. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth certain information with regard to the beneficial ownership of the Common Stock as of June 6, 2000 by (i) each Stockholder who is known by the Company to beneficially own in excess of five percent of the outstanding shares of Common Stock; (ii) each director; (iii) each executive officer of the Company; and (iv) all executive officers and directors as a group. Except as otherwise indicated, each Stockholder listed below has sole voting and investment power with respect to shares of Common Stock beneficially owned by him or her. The shares of Common Stock listed under Messrs. Norman Melnick, David Melnick and Kalin below are covered by the terms of the Voting Agreement. Name and Address Shares (1) Percent Roy L. Boe 108,500(2)(3) (4) Richard S. Kalin 843,339(3)(5) 6.68% One Penn Plaza, Suite 1425 New York, NY 10119 David Melnick 2,018,098(3)(6) 15.95% 195 Carter Drive Edison, New Jersey 08817 Norman Melnick 1,177,428(3)(7) 9.24% 195 Carter Drive Edison, New Jersey 08817 Robert Semel 15,000(3) (4) William Visone 175,000(3) (4) Heartland Advisors 789 North Water Street Milwaukee, WI 53202 749,900(8) 5.96% All executive officers 4,624,179(2)(3)(5) 35.03% and directors as a group (6)(7) (eight persons) (1) All shares of Common Stock are owned directly, unless otherwise noted. (2) Includes 80,000 shares owned by his wife, Betty Boe, as to which he disclaims beneficial ownership. (3) Includes 160,000, 80,000, 50,000, 120,000, 16,000, 10,000 and 627,000 shares for Messrs. Norman Melnick, David Melnick, Kalin, Visone, Boe, Semel and all executive officers and directors as a group, respectively, that are issuable upon exercise of options. (4) Less than one percent. (5) Includes 319,064 shares owned by his wife, Noelle Makenzie, and 87,000 shares owned by his minor child, as to which he disclaims beneficial ownership. Includes 120,000 shares held in his retirement account. (6) Includes 869,228 shares owned by his wife, Dana Melnick, and 236,550 shares owned by his minor children, as to which he disclaims beneficial ownership. (7) Includes 363,300 shares owned by his wife, Libby Melnick, as to which he disclaims beneficial ownership. (8) Based on information furnished to the Company by Heartland Advisors, Inc. on Amendment No. 1 to Schedule 13G, dated January 27, 2000. Other than the Voting Agreement and the Merger Agreement, the Company is unaware of any arrangement, the operation of which, at a subsequent date, may result in a change in control of the Company. INDEPENDENT ACCOUNTANTS The firm of Ernst & Young LLP has served as the Company's independent accounts since August 31, 1993. The consolidated financial statements of the Company for Fiscal 1999, incorporated herein by reference to the Company's Annual Report on Form 10-K, have been audited by Ernst & Young LLP, independent accountants, as stated in its report appearing therein. It is expected that representatives of Ernst & Young LLP will be present at the Meeting, both to respond to appropriate questions of Stockholders and to make a statement if they so desire. STOCKHOLDER PROPOSALS If the Merger is consummated, there will be no public Stockholders and no public participation in any future meeting of Stockholders. However, if the Merger is not consummated, the Stockholders will continue to be entitled to attend and participate in the Company's Stockholder meetings. Pursuant to Rule 14a-8 promulgated by the Commission, any Stockholder who wishes to present a proposal at the next Annual Meeting of Stockholders (in the event the Merger is not consummated), and who wishes to have such proposal included in the Company's proxy statement for that meeting must deliver a copy of such proposal to the Company at 195 Carter Drive, Edison, NJ, 08817, Attention: Corporate Secretary, within a reasonable time before the Company delivers its proxy statement to Stockholders for that meeting in order for such proposal to be considered by the Board of Directors for inclusion in the proxy statement. In order for a Stockholder to bring other business before a Stockholder meeting, timely notice must be received by the Company within a reasonable time before the Company delivers its proxy statement to Stockholders for that Stockholder meeting. Such notice must include a description of the proposed business, the reasons therefor, and other specific matters. These requirements are separate from and in addition to the requirements a Stockholder must meet to have a proposal considered for inclusion in the Company's proxy statement. In each case, the notice must be given to the Secretary of the Company at the address listed above. Any Stockholder desiring a copy of the Company's Bylaws will be furnished one without charge upon request to the Secretary. DOCUMENTS INCORPORATED BY REFERENCE The Commission allows the Company to "incorporate by reference" information into its Proxy Statement, which means that the Company can disclose important information by referring you to another document filed separately with the Commission. The following documents are incorporated by reference in this Proxy Statement and are deemed to be part hereof: (1) The Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1999; and (2) The Company's Quarterly Report on Form 10-Q for the fiscal quarter March 31, 2000. Any statement contained in a document incorporated by reference shall be deemed to be modified or superseded for all purposes to the extent that a statement contained in this Proxy Statement modifies or replaces such statement. The Company also incorporates by reference the information contained in all other documents the Company files with the Commission pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy Statement and before the Meeting. The information contained in any such document will be considered part of this Proxy Statement from the date the document is filed and will supplement or amend the information contained in this Proxy Statement. The Company undertakes to provide by first class mail, without charge and within one business day of receipt of any request, to any person to whom a copy of this Proxy Statement has been delivered, a copy of any or all of the documents referred to above which have been incorporated by reference in this Proxy Statement, other than those contained in Appendices to this Proxy Statement. The Company's Annual Report on Form 10-K for Fiscal 1999, attached hereto as Appendix D, is accompanied by a list briefly describing all the exhibits not contained therein. The Company will furnish any of these exhibits upon the payment of a specified reasonable fee, which fee will be limited to the Company's reasonable expenses in furnishing such exhibit. Request for such copies should be directed to Corporate Secretary, Pentech International Inc., 195 Carter Drive, Edison, New Jersey 08817; telephone (732)287-6640. OTHER BUSINESS The Board of Directors does not know of any other matters to be presented for action at the Meeting other than as set forth in this Proxy Statement. If any other business should properly come before the Meeting, the persons named in the accompanying form of proxy intend to vote thereon in accordance with their judgment unless they are directed by a proxy to do otherwise. MISCELLANEOUS The Company will bear the cost of preparing, assembling and mailing the proxy, this Proxy Statement and other material that may be sent to Stockholders in connection with this solicitation. The Company may reimburse persons holding shares in their names or in the names of nominees for their reasonable expenses in sending proxy material to their principals. By Order Of The Board Of Directors, RICHARD S. KALIN Secretary PROXY PENTECH INTERNATIONAL INC. [LOGO] 195 Carter Drive Edison, New Jersey 08817 The undersigned, revoking all previous proxies, hereby appoints David Melnick and Richard S. Kalin, and each of them, proxies with power of substitution to each, for and in the name of the undersigned to vote all shares of Common Stock of Pentech International Inc. (the "Company") which the undersigned would be entitled to vote if present at the Special Meeting of Stockholders of the Company to be held on July [ ], 2000 at 10:00 A.M., at the offices of Camhy Karlinsky & Stein LLP, 1740 Broadway, 16th Floor, New York, New York 10019-4315 and any adjournments thereof, upon the matters set forth in the Notice of Special Meeting. The undersigned acknowledges receipt of the Proxy Statement of the Company dated June [ ], 2000 (the "Proxy Statement"). A VOTE FOR THE FOLLOWING PROPOSALS IS RECOMMENDED BY THE BOARD OF DIRECTORS. 1. Proposal to approve and adopt the Agreement of Merger dated May 22, 2000, a copy of which is attached as Appendix A to the Proxy Statement, providing for the merger of JAKKS Acquisition II, Inc. ("Merger Sub"), a wholly-owned subsidiary of JAKKS Pacific, Inc. ("JAKKS"), with and into the Company, and which, among other things, provides that each outstanding share of the Company's Common Stock (other than shares of Common Stock owned by JAKKS or Merger Sub or by any direct or indirect subsidiary of JAKKS or Merger Sub, or which are held in the treasury of the Company or by any of its subsidiaries, all of which will be canceled, or which are held by dissenting stockholders of the Company, whose shares will be subject to their statutory appraisal rights) will be canceled and converted into the right to receive $1.40 per share in cash, without interest, all as more fully described in the Proxy Statement and Appendix A thereto. FOR AGAINST ABSTAIN 2. To grant to the Board of Directors of the Company discretionary authority to postpone or adjourn the Special Meeting in order to solicit additional votes to approve Proposal No. 1. FOR AGAINST ABSTAIN 3. In their discretion, on such other matters as may properly come before the Special Meeting. PLEASE SIGN ON THE REVERSE SIDE AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS and when properly executed will be voted as directed herein. If no direction is given, this Proxy will be voted FOR Proposals 1 and 2. Date: , 2000 (Signature) (Signature, if held jointly) Where stock is registered in the names of two or more persons ALL should sign. Signature(s) should correspond exactly with the name(s) as shown above. Please sign, date and return promptly in the enclosed envelope. No postage need be affixed if mailed in the United States. Requests for additional copies of proxy materials should be addressed to Shareholder Relations, Pentech International Inc., 195 Carter Drive, Edison, NJ 08817. This material will be furnished without charge to any stockholder requesting it. EX-10 2 0002.txt APPENDIX A AGREEMENT OF MERGER OF JAKKS ACQUISITION II, INC. WITH AND INTO PENTECH INTERNATIONAL INC. Dated as of May 22, 2000 T A B L E O F C O N T E N T S Section Page 1. Certain Definitions. . . . . . . . . . . . . . . .1 2. The Constituent Corporations.. . . . . . . . . . . . 10 3. The Merger.. . . . . . . . . . . . . . . . . . . . . 10 4. Certificate of Incorporation; Bylaws; and Directors and Officers of the Surviving Corporation..11 5. Purchase Price; Conversion of Shares.. . . . . . . . 12 6. Payment Procedures.. . . . . . . . . . . . . . . . . 13 7. Representations and Warranties of Pentech. . . . . . 16 8. Representations and Warranties of JAKKS. . . . . . . 29 9. Certain Covenants. . . . . . . . . . . . . . . . . . 31 10. Conditions to Closing. . . . . . . . . . . . . . . . 38 11. Closing. . . . . . . . . . . . . . . . . . . . . . . 41 12. Termination. . . . . . . . . . . . . . . . . . . . . 43 13. Miscellaneous. . . . . . . . . . . . . . . . . . . . 45 AGREEMENT OF MERGER OF JAKKS ACQUISITION II, INC. WITH AND INTO PENTECH INTERNATIONAL INC. THIS AGREEMENT OF MERGER dated as of May 22, 2000 by and among JAKKS Pacific, Inc., a Delaware corporation ("JAKKS"), JAKKS Acquisition II, Inc., a Delaware corporation ("Newco"), and Pentech International Inc., a Delaware corporation ("Pentech"). W I T N E S S E T H : WHEREAS, JAKKS desires to acquire the business and assets of Pentech, subject to its liabilities, and to effect such acquisition, the parties hereto desire that Newco merge with and into Pentech, so that Pentech shall survive the merger as a wholly-owned subsidiary of JAKKS, all on the terms and subject to the conditions hereinafter set forth; NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties hereto hereby agree as follows: 1. Certain Definitions. 1.1 "Account" means any account receivable or other right to payment arising from the sale of merchandise or services in the Business, any loan or other extension of credit or any other sale, lease, exchange or other disposition of any Assets by, or for the account of, Pentech or a Subsidiary, whether or not in the ordinary course of business. 1.2 "Affiliate" of a Person means another Person directly or indirectly controlling, controlled by, or under common control with, such Person; for this purpose, "control" of a Person means the power (whether or not exercised) to direct the policies, operations or activities of such Person by virtue of the ownership of, or right to vote or direct the manner of voting of, securities of such Person, or pursuant to agreement or Law or otherwise. 1.3 "Agreement" means this Agreement of Merger, as amended or supplemented. 1.4 "Alternative Action" means any action (a) by Pentech's Board of Directors (i) to withdraw its approval or recommendation of the Merger or (ii) to modify or to qualify such approval or recommendation in a manner adverse to JAKKS or which would prevent, impede or materially delay the consummation of the Merger or (iii) to accept or recommend an Alternative Proposal; or (b) by Pentech or any Principal Stockholder to enter into any Alternative Agreement. 1.5 "Alternative Agreement" means any contract, letter of intent, agreement in principle or similar agreement relating to any Alternative Transaction. 1.6 "Alternative Proposal" means any bid, offer or other proposal relating to an Alternative Transaction. 1.7 "Alternative Transaction" means (a) any merger, consolidation or other business combination or reorganization pursuant to which a substantial portion of the Business or the Assets are sold or otherwise transferred to, or combined with that or those of, another Person; (b) a transaction as a result of which any Person (other than Pentech or a Subsidiary) becomes the holder, directly or indirectly, of securities of Pentech having 30% or more of the voting power of all voting securities of Pentech; or (c) the acquisition, directly or indirectly, by another Person of control of Pentech, in each case, other than the Merger. 1.8 "Assets" means the assets of Pentech or a Subsidiary. 1.9 "Business" means Pentech's business of designing, developing, manufacturing, marketing and otherwise dealing and trading in or with pens, markers, pencils, other writing instruments and activity kits, and all business activities incidental thereto. 1.10 "Certificate" means a certificate that, immediately prior to the Effective Time, shall represent outstanding shares of Pentech Common Stock. 1.11 "Certificate of Merger" means the certificate of merger, substantially in the form of Exhibit A, to be filed pursuant to Section 3.1. 1.12 "Closing" means the closing of the Merger as provided in Section 3.1. 1.13 "Closing Date" means the date of the Closing. 1.14 "Code" means the Internal Revenue Code of 1986, as amended, and the treasury regulations promulgated thereunder. 1.15 "Consent" means any approval, authorization, consent, ratification, waiver, exemption or variance by or on behalf of any Person that is not a party to this Agreement. 1.16 "Constituent Corporation" means Newco or Pentech. 1.17 "DGCL" means the Delaware General Corporation Law, as amended. 1.18 "Dissenting Shares" is defined in Section 5.5. 1.19 "ECRA" means the New Jersey Environmental Cleanup Responsibility Act. 1.20 "Effective Time" is defined in Section 3.1. 1.21 "Eligible Option" means any Option to the extent such Option is exercisable at any time with respect to any shares of Pentech Common Stock subject thereto at an exercise price less than $1.40 (whether or not such Option is vested or exercisable at the Effective Time with respect to such shares). 1.22 "Employee Plan" means an employee benefit plan (including a multi-employer plan) as defined in Section 3(3) of ERISA. 1.23 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.24 "ERISA Affiliate" means Pentech, a Subsidiary and any other Person that is a trade or business that would be deemed to be, together with Pentech and the Subsidiaries, a "single employer" within the meaning of Section 414 of the Code. 1.25 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 1.26 "Fairness Opinion" means an opinion of Business Valuation Services, Inc. or another investment banking or financial advisory firm reasonably satisfactory to JAKKS and Pentech to the effect that the Merger Consideration is, on the date hereof, fair, from a financial point of view, to the holders of outstanding shares of Pentech common stock. 1.27 "GAAP" means generally accepted accounting principles in the United States. 1.28 "Governmental Authority" means any United States or foreign federal, state or local government or governmental authority, agency or instrumentality; any court or arbitration panel of competent jurisdiction; any stock exchange or automated inter-dealer quotation system on which any securities of JAKKS or Pentech are listed, admitted to trading or included for quotation; or any recognized trade or industry association or organization that establishes policies or standards for, or otherwise regulates or supervises, the Business or the Assets. 1.29 "Hazardous Material" means any contaminant, pollutant or toxic or hazardous waste, effluent or other substance or material, including without limitation any radioactive, explosive, flammable, corrosive or infectious substance or material, or any substance or material containing friable asbestos, polychlorinated biphenyls or urea formaldehyde or which is otherwise subject to any Law, Permit or Order relating to the protection of the environment or human health or safety. 1.30 "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. 1.31 "HSR Form" means a Notification and Report Form for Certain Mergers and Acquisitions required to be filed pursuant to the HSR Act in connection with the Merger. 1.32 "Indebtedness" means, as to Pentech and the Subsidiaries on a consolidated basis (without duplication), (a) indebtedness for borrowed money or the deferred purchase price of property or services in respect of which any such Person is liable as obligor; (b) all obligations evidenced by notes, bonds, debentures or similar instruments; (c) indebtedness secured by any Lien on any Assets regardless of whether Pentech or any Subsidiary shall have assumed or is liable as obligor for such indebtedness; (d) obligations of any such Person under any capital lease; and (e) any other obligation or liability which would be required under GAAP to be recorded as indebtedness on a consolidated balance sheet of Pentech and the Subsidiaries. 1.33 "Joint Venture" means the Shanghai Jay Vee Stationery Co., Ltd. 1.34 "Law" means any statute, rule, regulation or ordinance of any Governmental Authority. 1.35 "Lease" means a lease by Pentech or a Subsidiary for any Real Property. 1.36 "License Agreement" means a license, royalty or other agreement pursuant to which Pentech or a Subsidiary has the right to use or exploit any Trade Right of another Person. 1.37 "Lien" means any security interest, conditional sale or other title retention agreement, mortgage, pledge, lien, charge, encumbrance or other adverse claim or interest. 1.38 "Material Adverse Effect" means a material adverse effect on the Business, the Assets, or the operations, financial condition or results of operations of Pentech and the Subsidiaries, taken as a whole. 1.39 "Material Contract" means any material contract to which Pentech or a Subsidiary is a party or is otherwise subject, including without limitation (a) any License Agreement; (b) any such contract that provides for any Person, other than Pentech or a Subsidiary, to use or exploit, or prohibits or limits such other Person's use of, a Trade Right of Pentech or a Subsidiary; (c) any Restrictive Agreement; (d) any such contract that prohibits any Person, other than Pentech or a Subsidiary, from engaging, or curtails or restricts the nature or scope of such other Person's activities, in any line of business or geographic territory; or (e) any such contract (i) that relates to (A) a transaction or series of related transactions involving the expenditure or receipt by Pentech and the Subsidiaries of an amount in excess of $100,000 or the transfer of property with a fair market value in excess of $100,000, (B) any Indebtedness in an amount in excess of $100,000, (C) any Lien on any Assets with a fair market value in excess of $100,000 or (D) a transaction not in the ordinary course of business, or (ii) as to which any breach or default thereunder would have a Material Adverse Effect. 1.40 "Merger" means the statutory merger of the Constituent Corporations and the related transactions provided for herein. 1.41 "Merger Consideration" means the cash consideration to be paid on account of the Merger in respect of (a) the shares of Pentech Common Stock outstanding at the Effective Time and (b) Eligible Options. 1.42 "Merger Document" means this Agreement and each other agreement, instrument, certificate or other document to be executed, delivered or filed pursuant to this Agreement or otherwise in connection with the Merger. 1.43 "NJDEPE" means the New Jersey Department of Environmental Protection and Energy. 1.44 "Notice" means giving any notice to, or making any declaration or filing, or registration or recordation, with any Person. 1.45 "Option" means an option or limited stock appreciation right granted under any Option Plan or Other Option. 1.46 "Option Plan" means one of Pentech's stock option plans listed on Schedule 1.46. 1.47 "Order" means any judgment, order, writ, decree, award, directive, ruling or decision of any Governmental Authority. 1.48 "Other Option" means an option, warrant or other right to purchase, or an outstanding security or instrument convertible into or exchangeable for, Pentech Common Stock listed on Schedule 7.7. 1.49 "Paying Agent" means the Person appointed by JAKKS to collect and cancel certificates representing shares of Pentech Common Stock outstanding at the Effective Time and to disburse the Merger Consideration. 1.50 "Payment Fund" is defined in Section 6.1. 1.51 "Pentech Common Stock" means the common stock, par value $.01 per share, of Pentech. 1.52 "Permit" means any permit, license, certification, qualification, franchise or privilege issued or granted by any Governmental Authority. 1.53 "Person" includes without limitation a natural person, corporation, joint stock company, limited liability company, partnership, joint venture, association, trust, Governmental Authority, or any group of the foregoing acting in concert. 1.54 "Plant Closing" means the shut-down and termination of production and distribution operations of Sawdust Pencil Company in the United States. 1.55 "Principal Stockholder" means a stockholder of Pentech who is a party to the Voting Agreement. 1.56 "Proceeding" means any action, suit, arbitration, audit, investigation or other proceeding, at law or in equity, before or by any Governmental Authority. 1.57 "Real Property" means the real property subject to the Leases. 1.58 "Restrictive Agreement" means an agreement that prohibits or limits Pentech's or a Subsidiary's use of a Trade Right of another Person or prohibits Pentech or a Subsidiary from engaging, or curtails or restricts the nature or scope of Pentech's or a Subsidiary's activities, in any line of business or geographic territory. 1.59 "SEC" means the U.S. Securities and Exchange Commission. 1.60 "Securities Act" means the Securities Act of 1933, as amended. 1.61 "Services Agreements" means the Supplemental Services Agreements between JAKKS and Norman Melnick and David Melnick, respectively, and the Consulting Agreement between JAKKS and Richard S. Kalin, substantially in the forms set forth in Exhibits B, C and D, respectively. 1.62 "Stockholder Approval" means the affirmative vote of the holders of a majority of shares of Pentech Common Stock outstanding on the record date for the Stockholders' Meeting to adopt this Agreement and to approve the Merger. 1.63 "Stockholders' Meeting" means a special meeting of Pentech's stockholders (including any postponement or adjournment thereof) to be held, pursuant to Notice, to consider and vote upon adoption of this Agreement and approval of the Merger. 1.64 "Subsidiary" means the Joint Venture or a Person listed on Schedule 1.64. 1.65 "Superior Proposal" is defined in Section 10.5. 1.66 "Tax" means any United States or foreign federal, state or local income, excise, sales, property, withholding, social security or franchise tax or assessment, and any interest, penalty or fine due thereon or with respect thereto. 1.67 "Termination Fee" is defined in Section 13.4 1.68 "Trade Right" means a patent, claim of copyright, trademark, trade name, brand name, service mark, logo, symbol, trade dress or design, or representation or expression of any thereof, or registration or application for registration thereof, or any other invention, trade secret, technical information, know-how, proprietary right or intellectual property. 1.69 "Voting Agreement" means the Voting and Lock-Up Agreement of even date herewith among JAKKS, Pentech and certain of its stockholders. 2. The Constituent Corporations. The name and the jurisdiction of incorporation of each Constituent Corporation are asfollows: Name Place of Incorporation Pentech International Inc. Delaware JAKKS Acquisition II, Inc. Delaware The surviving corporation is Pentech. 3. The Merger. 3.1 Subject to the satisfaction of the conditions set forth in Article 11, Pentech, as the surviving corporation of the Merger, shall file the Certificate of Merger in accordance with DGCL Section 251(c), and the Merger shall be effective as of the date and time set forth therein (the "Effective Time"). 3.2 At the Effective Time, Newco shall be merged with and into Pentech, and the Constituent Corporations shall thereupon become and constitute a single corporation. Pentech shall be the surviving corporation of the Merger and the separate existence of Newco shall cease. Except as otherwise provided by Law, the surviving corporation shall thereupon, without further act or deed, succeed to all the rights, privileges, immunities, powers and purposes of each of the Constituent Corporations; acquire all the business, property, franchises, claims and causes of action and every other asset of each of the Constituent Corporations; and assume and be subject to all the debts and liabilities of each of the Constituent Corporations. 3.3 The directors, officers, employees and agents of JAKKS and Pentech, as the surviving corporation, shall be authorized, at and after the Effective Time, to execute and deliver, in the name of Pentech or Newco, any assignments, bills of sale, deeds or other instruments and to take such other actions as are reasonably necessary or appropriate to vest in Pentech, as the surviving corporation, as a result of, or in connection with, the Merger, all right, title and interest in and to the Assets and to perfect and to confirm the same. 4. Certificate of Incorporation; Bylaws; and Directors and Officers of the Surviving Corporation. 4.1 At the Effective Time, the Certificate of Incorporation of Pentech shall continue in full force and effect as the Certificate of Incorporation of the surviving corporation, unless and until amended or restated in the manner provided by Law. 4.2 At the Effective Time, the Bylaws of Newco shall continue in full force and effect as the Bylaws of the surviving corporation, unless and until revoked or amended in the manner provided by Law, its Certificate of Incorporation or such Bylaws. 4.3 At the Effective Time, the number of Persons constituting the entire Board of Directors of the surviving corporation shall be two, and the incumbent directors of Newco immediately prior to the Effective Time shall thereupon become the directors of the surviving corporation. 4.4 At the Effective Time, all the incumbent officers of Pentech shall resign (or be removed) and the incumbent officers of Newco immediately prior to the Effective Time shall thereupon become the officers of the surviving corporation. 5. Purchase Price; Conversion of Shares. 5.1 At the Effective Time, by virtue of the Merger and without any further act or deed by any Person, each share of common stock of Newco then outstanding shall be converted into one share of Pentech Common Stock, all of which shares shall be validly issued, fully paid and nonassessable and shall thereafter constitute all of the issued and outstanding capital stock of Pentech, as the surviving corporation. 5.2 Subject to Section 5.5, at the Effective Time, by virtue of the Merger and without any further act or deed by any Person, each share of Pentech Common Stock then outstanding (other than any such share owned by Pentech, a Subsidiary, JAKKS or Newco) shall cease to be outstanding and shall be retired and cancelled, and the holder of each such share immediately prior to the Effective Time shall cease forthwith to have any right with respect to any capital stock of Pentech, as the surviving corporation, or any interest therein or in the Assets, but shall thereupon become entitled to receive Merger Consideration in the amount of $1.40 in respect of such share. 5.3 At the Effective Time, by virtue of the Merger and without any further act or deed by any Person, each share of Pentech Common Stock then outstanding owned by Pentech, a Subsidiary, JAKKS or Newco shall cease to be outstanding and shall be retired and cancelled, and no Merger Consideration shall be payable in respect thereof. 5.4 At the Effective Time, by virtue of the Merger and without any further act or deed by any Person, each Option outstanding at the Effective Time shall expire and terminate, and the holder thereof immediately prior to the Effective Time shall cease forthwith to have any right with respect to any capital stock of Pentech, as the surviving corporation, or any interest therein or in the Assets, except that the holder of each Eligible Option shall thereupon become entitled to receive in respect of each share of Pentech Common Stock subject to such Eligible Option Merger Consideration in an amount equal to the excess of $1.40 over the exercise price of such Eligible Option with respect to such share. 5.5 Any other provision of this Article 5 notwithstanding, any outstanding shares of Pentech Common Stock the holder of which asserts and perfects the right to receive payment for shares pursuant to DGCL Section 262 (the "Dissenting Shares") shall not be subject to the foregoing provisions of this Article, and the holder thereof shall have only such rights as are granted to dissenting stockholders under said DGCL Section 262; provided, however, that Dissenting Shares as to which the holder thereof subsequently withdraws his demand for payment (or fails to perfect his dissenter's rights) before payment thereof shall thereupon be subject to Section 5.2 in the same manner as provided herein for other outstanding shares of Pentech Common Stock (except as to the time of payment, which shall be as promptly as practicable after withdrawal of such demand). Pentech shall give to JAKKS prompt notice of any demands received from holders of Dissenting Shares for payment of the value of such shares, and JAKKS shall have the exclusive right to conduct all negotiations and proceedings with respect to any such demands. Pentech shall not, except with the prior written consent of JAKKS, voluntarily make any payment with respect to, or compromise or settle, or offer to compromise or settle, any such demand for payment. The assertion of any demand for payment by a holder of Dissenting Shares shall not prevent, interfere with or delay the consummation of the Merger and the other transactions contemplated hereby, except as provided by DGCL Section 262 or as a court of competent jurisdiction may otherwise Order. 6. Payment Procedures. 6.1 Prior to the Closing Date, JAKKS shall appoint American Stock Transfer and Trust Company or another Person (reasonably acceptable to Pentech) to act as the Paying Agent. Prior to or at the Closing, JAKKS shall deposit with the Paying Agent, in trust for the benefit of the holders of Pentech Common Stock outstanding at the Effective Time and holders of Eligible Options, cash in an amount sufficient to pay the Merger Consideration (the "Payment Fund"). The Paying Agent shall invest the Payment Fund as directed by JAKKS and any interest, dividends or other income thereon shall be added to and constitute a portion of the Payment Fund. If at any time the amount of the Payment Fund shall exceed the amount of the Merger Consideration remaining to be paid, the Paying Agent shall, upon request by JAKKS, remit to JAKKS cash in an amount less than or equal to the amount of such excess. If at any time the amount of the Payment Fund shall be less than the amount of the Merger Consideration remaining to be paid, the Paying Agent shall promptly give to JAKKS Notice to such effect and JAKKS shall promptly deliver to the Paying Agent funds in an amount equal to or greater than the amount of such deficiency. 6.2 JAKKS shall cause the Paying Agent promptly after the Effective Time to mail to each holder of Pentech Common Stock at the Effective Time (a) a letter of transmittal, in customary form reasonably acceptable to Pentech and the Paying Agent, which shall state that (i) such holder is entitled to receive the Merger Consideration in respect of the shares of Pentech Common Stock so held by such holder upon surrender of his Certificate or Certificates, as specified therein, and (ii) such surrender shall be effected, and risk of loss and title to such Certificate or Certificates shall pass only upon proper delivery thereof to the Paying Agent, and (b) instructions specifying the place at which and the manner in which such Certificate or Certificates are so to be delivered. Upon such surrender of any such Certificate, together which such letter of transmittal, duly completed and executed in accordance with the instructions thereto, and the delivery of such other documents as may reasonably be required by the Paying Agent, the holder of such Certificate shall be entitled to receive the Merger Consideration payable in respect of the shares of Pentech Common Stock represented by such Certificate, and the Paying Agent shall promptly mail a check in such amount to such holder payable to the Person indicated in the letter of transmittal. No interest shall accrue for the benefit of, or be payable to, any such holder on account of the Merger Consideration payable in respect of such shares of Pentech Common Stock. In the event of a transfer of ownership of any share of Pentech Common Stock which is not registered in the stock transfer records for the Pentech Common Stock, the Paying Agent may pay the Merger Consideration and mail a check therefor to the transferee thereof if the Certificate repesenting such shares is presented to the Paying Agent, together with such documents as the Paying Agent may reasonable request to evidence such transfer and the payment in full of any applicable stock transfer Taxes. 6.3 Notwithstanding the failure of any Certificate to be surrendered as hereinabove provided, each such Certificate, from and after the Effective Time, shall not represent any interest in the surviving corporation, or any Assets thereof, but shall represent only the right of the holder thereof at the Effective Time to receive the Merger Consideration payable in respect thereof upon surrender of such Certificate pursuant hereto. The stock transfer books of Pentech shall be closed immediately at the effective Time and no transfer of shares of Pentech Common Stock shall be effective or registered thereafter. 6.4 If any Certificate shall have been lost, stolen or destroyed, upon the making of an affidavit to such effect by the Person claiming to be the holder of such Certificate and, if required by JAKKS, the posting by such Person of a bond in a reasonable and customary amount as an indemnity against any claim that may be made against it with respect to such Certificate, the Paying Agent shall pay to such Person the Merger Consideration with respect to the shares represented by such Certificate. 6.5 Promptly after the Effective Time, the Paying Agent shall pay to each holder of an Eligible Option the Merger Consideration payable in respect thereof and mail to such holder at the address shown in the option agreement or Certificate relating to such Eligible Option a check in such amount payable to the order of such holder. 6.6 The Paying Agent shall deduct and withhold from the amount of the Merger Consideration otherwise payable pursuant to this Agreement to any holder of shares of Pentech Common Stock at the Effective Time or any holder of an Eligible Option such amounts as it is required to deduct and withhold with respect to the payment of the Merger Consideration under the Code or any corresponding provision of any other Law relating to Taxes. To the extent that any amount is so withheld, such amount shall be deemed for all purposes of this Agreement to have been paid as part of the Merger Consideration to the holder of the shares of Pentech Common Stock at the Effective Time or the holder of the Eligible Option that would otherwise have been entitled actually to receive such amount. 6.7 None of JAKKS, Pentech, as the surviving corporation, or the Paying Agent, or any officer, employee or agent thereof, shall be liable to any Person in respect of any Merger Consideration that is delivered to a public official pursuant to any applicable abandoned property, escheat or similar Law. 6.8 If any portion of the Payment Fund remains undistributed six months after the Closing Date, the balance thereof shall be delivered to JAKKS or to the Person designated by JAKKS, and any holder of a Certificate that shall not have theretofore complied with the provisions of this Article for the surrender of such Certificate and that shall not have received the Merger Consideration payable in respect thereof shall thereafter look only to JAKKS for the payment of such Merger Consideration. Any portion of the Payment Fund remaining unclaimed by holders of shares of Pentech Common Stock at the Effective Time five years after the Closing Date (or such earlier date as such amount would otherwise escheat to or become the property of any Governmental Authority) shall, to the fullest extent permitted by Law, become the property of Pentech, as the surviving corporation, free and clear of any claims or interests of any Person previously entitled thereto. 7. Representations and Warranties of Pentech. Pentech hereby represents and warrants to JAKKS as follows: 7.1 Pentech 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 and authority to own its Assets and carry on the Business as and in the places where such Assets are now located or such Business is conducted. Complete and correct copies of Pentech's Certificate of Incorporation, including all amendments thereto, certified by the Secretary of State of Delaware, and Pentech's Bylaws, including all amendments thereto, certified by the Secretary of Pentech, have been delivered to JAKKS. Pentech is permitted to transact business as a foreign corporation in each jurisdiction where required under applicable Law in light of the location or character of its Assets or the operation of the Business (except where the failure so to be Permitted would not have Material Adverse Effect), and each such jurisdiction is listed on Schedule 7.1. 7.2 Pentech has full corporate power and authority to execute and deliver this Agreement and each other Merger Document to which it is a party and to assume and perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and each other Merger Document to which it is a party by Pentech and the performance of its obligations hereunder and thereunder have been duly authorized by all requisite corporate action on the part of Pentech, except for the Stockholder Approval. This Agreement has been, and each other Merger Document to which it is a party will be, duly executed and delivered by Pentech, and this Agreement is, and each other Merger Document to which it is a party, when so executed and delivered, will be, a legally valid and binding obligation of Pentech, enforceable against it in accordance with their respective terms, subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and (b) equitable principles limiting the availability of specific performance, injunctive relief and other equitable remedies. The execution and delivery of this Agreement by Pentech do not, and the execution and delivery of each other Merger Document by Pentech and the performance by Pentech of its obligations hereunder and thereunder will not, violate any applicable Law or any provision of Pentech's Certificate of Incorporation or Bylaws, and, except as set forth on Schedule 7.2, do not and will not conflict with or result in any breach of any condition or provision of, or constitute a default under, or create or give rise to any adverse right of termination or cancellation by, or excuse the performance of, any other Person under, any Material Contract, or result in the creation or imposition of any Lien upon any of the Assets or have a Material Adverse Effect. 7.3 Pentech has engaged Business Valuation Services, Inc. to render a Fairness Opinion. 7.4 Pentech's Board of Directors has unanimously (a) determined that this Agreement and the Merger are advisable and in the best interests of Pentech and its stockholders, (b) approved this Agreement and the Merger and (c) adopted resolutions recommending that Pentech's stockholders adopt this Agreement and approve the Merger and directing that this Agreement and the Merger be submitted for consideration by, and to the vote of, Pentech's stockholders at the Stockholders' Meeting, to be duly called pursuant to Notice for such purpose, in each case, subject to its receipt of a Fairness Opinion, and none of the foregoing actions has been rescinded or amended. The holders of record of Pentech Common Stock on the record date for the Stockholders' Meeting are the only Persons entitled under applicable Law and Pentech's Certificate of Incorporation and Bylaws to notice of, and to vote at, the Stockholders' Meeting. The Stockholder Approval is the only corporate action required to be effected in order to comply with the corporate approval requirements of DGCL Section 251. Except for DGCL Section 203, no state takeover or business combination Law is applicable to this Agreement or the Merger. The approval of this Agreement and the Merger by Pentech's Board of Directors constitutes approval thereof for the purposes of DGCL Section 203. 7.5 Except for the filing by Pentech of an HSR Form and the expiration or early termination of the waiting period under the HSR Act; the filing by Pentech of the proxy materials relating to the Stockholders' Meeting with the SEC pursuant to Section 14 of the Exchange Act; the Notice required to be given or made pursuant to ECRA and the issuance of a negative declaration or administrative consent order by the NJDEPE; and the filing of the Certificate of Merger with the Secretary of State of Delaware, and except as set forth on Schedule 7.5, no Consent of, or Notice to, any Person is required as to Pentech in connection with its execution and delivery of this Agreement or any other Merger Document to which it is a party, or the performance of its obligations hereunder or thereunder, or the consummation of the Merger. 7.6 Schedule 7.6 lists certain Proceedings to which Pentech or a Subsidiary is a party and claims against Pentech or a Subsidiary. No Proceeding is pending or, to Pentech's knowledge, threatened against or affecting the Business, the Assets or Pentech's or any Subsidiary's operations in which an unfavorable Order would have a Material Adverse Effect, or prohibit, invalidate or make unlawful, in whole or in part, this Agreement or any other Merger Document, or the carrying out of the provisions hereof or thereof or the transactions contemplated hereby or thereby. None of Pentech or any Subsidiary is in default in respect of any Order, which default would have a Material Adverse Effect, nor is there any Order enjoining Pentech in respect of, or the effect of which is to prohibit or curtail Pentech's performance of, its obligations under this Agreement or any other Merger Document. 7.7 The entire authorized capital stock of Pentech consists of 20,000,000 shares of Pentech Common Stock, of which 12,571,258 shares are outstanding (and no shares are held in treasury), and 500,000 shares of series preferred stock, par value $.10 per share, none of which have been issued. All outstanding shares of Pentech Common Stock are duly authorized, validly issued, fully paid and nonassessable. Except as set forth on Schedule 7.7, Pentech is not a party to any voting agreement or trust or other agreement, commitment or arrangement with respect to the voting or disposition of its capital stock, nor, to Pentech's knowledge, is there any such trust, agreement, commitment or arrangement. Except as set forth on Schedule 7.7, Pentech is not prohibited or restricted from paying any dividend upon or making any other distribution in respect of its capital stock (other than compliance with the applicable provisions of the DGCL), nor is Pentech obligated to redeem, purchase or otherwise acquire, or to pay any dividend upon or make any distribution in respect of, any of its outstanding capital stock. Except for the Option Plans (and the Options granted thereunder) and the Other Options, there are no (a) agreements, commitments or arrangements providing for the issuance or sale of any of Pentech's capital stock, or (b) any options, warrants or rights to purchase, or securities or instruments convertible into or exchangeable for, any of Pentech's capital stock. The Option Plans were duly authorized and adopted by Pentech (including the approval of Pentech's Board of Directors and stockholders) and all Options granted under any such Option Plan were properly granted in accordance therewith and with applicable Law. All Other Options were duly authorized and granted by all requisite corporate action on the part of Pentech and in accordance with applicable Law. A sufficient number of shares of Pentech Common Stock have been duly reserved for issuance upon the exercise of Options granted under the Option Plans or Other Options, and no other shares of Pentech's capital stock are reserved for issuance. Schedule 7.7 sets forth a complete and correct list of all Options outstanding on the date hereof, including, as to each, the holder thereof, the date of grant thereof, the total number of shares of Pentech Common Stock subject thereto, the dates on which and the number of such shares as to which such Option becomes exercisable, and the exercise price thereof. All shares of Pentech Common Stock issuable upon the exercise of Options, if and when issued and delivered in accordance with the terms thereof, will be duly authorized, validly issued, fully paid and nonassessable 7.8 Each Subsidiary is a corporation duly organized, validly existing and in good standing under the Laws of its jurisdiction of incorporation, and has full corporate power and authority to own its Assets and carry on its business as and in the places where such Assets are located or such business is conducted. Complete and correct copies of the certificate or articles of incorporation or organization of each Subsidiary, including all amendments thereto, certified by the secretary of state or other appropriate authority of its jurisdiction of incorporation or organization, and the Bylaws of each Subsidiary, certified by the corporate secretary or similar officer thereof, have been delivered to JAKKS. Each Subsidiary is permitted to transact business as a foreign corporation in each jurisdiction where required under applicable Law in light of the location or character of its Assets or the operation of its business (except where the failure so to be Permitted would not have a Material Adverse Effect), and each such jurisdiction is listed on Schedule 7.8. Except as set forth on Schedule 7.8, Pentech owns beneficially and of record all of the outstanding shares of capital stock of each Subsidiary free and clear of all Liens or any restriction with respect to the voting or disposition thereof (other than restrictions of general applicability imposed by federal or state securities Laws), and all such shares are duly authorized, validly issued, fully paid and nonassessable. Except as set forth on Schedule 7.8, no Subsidiary is prohibited or restricted from paying any dividend upon or making any other distribution in respect of its capital stock (other than compliance with the applicable provisions of the DGCL), nor is any Subsidiary obligated to redeem, purchase or otherwise acquire, or to pay any dividend upon or make any distribution in respect of, any of its outstanding capital stock. There are no (a) agreements, commitments or arrangements providing for the issuance or sale of any capital stock or any Subsidiary, or (b) any options, warrants or rights to purchase, or securities or instruments convertible into or exchangeable for, any capital stock of any Subsidiary. No shares of capital stock of any Subsidiary are reserved for issuance. None of Pentech or any Subsidiary owns or has subscribed, or is subject to any obligation, to purchase or otherwise acquire, directly or indirectly, (a) any capital stock of, or other equity interest or participation in, or (b) any option, warrant or other right to purchase, or any security or instrument convertible into or exchangeable for, any capital stock of, any Person, other than a Subsidiary. 7.9 Pentech is required to file reports pursuant to Section 13 of the Exchange Act, and since January 1, 1997, Pentech has timely filed all reports, forms, statements and documents required to be filed by it under the Securities Act, the Exchange Act and any applicable rules of the Nasdaq Stock Market, Inc., all of which reports, forms, statements and other documents are in material compliance with applicable Laws. When filed, none of such reports, forms, statements and other documents contained any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Each of the consolidated financial statements contained in such reports, forms, statements and other documents were prepared in accordance with GAAP applied on a consistent basis, and each such financial statement represents fairly in all material respects the consolidated financial position of Pentech and the Subsidiaries at the dates and their consolidated results of operations and cash flows for each of the respective periods indicated. None of Pentech or any Subsidiary has any liability or obligation of any kind, contingent or otherwise, relating to the Business or its Assets which would be required under GAAP to be disclosed in a balance sheet or the notes thereto but which is not reflected on Pentech's consolidated balance sheet at September 30, 1999 or the notes thereto or set forth on Schedule 7.9, and all of the liabilities and obligations set forth on such Schedule have arisen in the ordinary course of business since September 30, 1999. 7.10 Except as set forth on Schedule 7.10, since September 30, 1999, there has been no material adverse change in the Business or the Assets or Pentech's or any Subsidiary's operations, financial condition or results of operations, nor has there been commenced any Proceeding in which an unfavorable Order would have a Material Adverse Effect, and none of Pentech or any Subsidiary has: (a) incurred any damage, destruction or similar loss, whether or not covered by insurance, materially affecting the Business or the Assets; (b) other than in the ordinary course of business, sold, assigned or transferred any of the Assets or any interest therein; (c) incurred any Indebtedness or other obligation or liability relating to the Business or the Assets, except in the ordinary course of business, or paid, satisfied or discharged any obligation or liability relating to the Business or the Assets prior to the due date or maturity thereof, except current obligations and liabilities in the ordinary course of business; (d) other than in the ordinary course of business, created, incurred, assumed, granted or suffered to exist any Lien on any of the Assets; (e) other than in the ordinary course of business, waived any right of material value or cancelled, forgiven or discharged any debt owed to it or claim in its favor; or (f) effected any transaction relating to the Business or the Assets other than in the ordinary course of business. 7.11 Pentech or a Subsidiary, as the case may be, owns all of the Assets free and clear of all Liens, except for the Liens listed on Schedule 7.11, all of which were created in the ordinary course of business. The Assets consisting of equipment and other tangible property are in sufficiently good operating condition (normal wear and tear excepted) to be used to conduct the Business. 7.12 Except as set forth on Schedule 7.12, there is no material breach or default by Pentech or a Subsidiary or, to Pentech's knowledge, by any other party under any Material Contract, each of which is in full force and effect. True and complete copies of all Contracts have been delivered or made available to JAKKS. 7.13 Except as set forth on Schedule 7.13, inventory included in the Assets consists solely of merchandise usable or saleable in the ordinary course of business. Since September 30, 1999, there has been no change in the inventory reflected in Pentech's consolidated balance sheet at September 30, 1999, except in the ordinary course of business. 7.14 The Accounts result from bona fide sales to non-Affiliate customers of Pentech or a Subsidiary in the ordinary course of business. 7.15 Each of Pentech and each Subsidiary has all Permits and all Consents of Governmental Authorities required for it to conduct the Business as presently conducted or which it is otherwise required to have under applicable Law, except such Permits or Consents which the failure to have would not, in the aggregate, have a Material Adverse Effect, all such Permits and Consents are in full force and effect and no cancellation or suspension of any thereof is pending or, to Pentech's knowledge, threatened. Except as set forth on Schedule 7.15, the applicability and validity of each such Permit or Consent will not be adversely affected by the consummation of the transactions contemplated by this Agreement. Pentech and each Subsidiary is in compliance with each Law applicable to it and the Business, including without limitation with respect to occupational safety, environmental protection and employment practices, except for such noncompliance which would not, in the aggregate, have a Material Adverse Effect, and none of them has received any written Notice alleging or asserting any material violation of or noncompliance with any such Law. 7.16 Schedule 7.16 is a complete and correct list and a brief description (including, if applicable, date of application, filing or registration, as the case may be, and the registration and application number) of each Trade Right relating to the Business, whether or not registered in the name of or applied for by Pentech or a Subsidiary, in which Pentech or a Subsidiary has any right or interest, whether through any License Agreement or otherwise. Except as otherwise listed on Schedule 7.16, none of Pentech or any Subsidiary is a licensor or a licensee in respect of any such Trade Right. The Trade Rights listed on Schedule 7.16 are adequate for Pentech and the Subsidiaries to conduct the Business as now operated. Except as otherwise set forth on Schedule 7.16, no Trade Right of Pentech or a Subsidiary relating to the Business conflicts with or infringes on, and there has been no misappropriation or unauthorized use by Pentech or a Subsidiary of, any Trade Right of any other Person, and no Trade Right of any other Person conflicts with or infringes on, and there has been no misappropriation or unauthorized use by any other Person of, any Trade Right of Pentech or a Subsidiary. 7.17 Schedule 7.17 sets forth a brief description of the Real Property, including the area and the current uses thereof. Each Lease is legal, valid and binding as between Pentech or a Subsidiary, as the case may be, and each other party thereto, and Pentech or a Subsidiary, as the case may be, is a tenant in good standing thereunder, free of any material breach or default whatsoever and quietly enjoys the Real Property subject thereto. None of Pentech or any Subsidiary has assigned any interest in any Lease or sublet any Real Property, nor is any Real Property used or occupied by any other Person. The Real Property is zoned for the purposes for which such Real Property is currently being used. Pentech or a Subsidiary, as the case may be, has legal and valid occupancy Permits for the Real Property. No improvement, fixture or equipment on the Real Property, nor the lease, use or occupancy thereof, is in violation of any applicable Law. No Real Property (a) is subject to any Law, Order or Lien which would materially adversely affect its use or value for the purposes now made of it or (b) has been condemned or otherwise taken, and, to Pentech's knowledge, no condemnation or other taking of any Real Property is pending or threatened. 7.18 Except as set forth on Schedule 7.18, no Hazardous Material has been generated, used, stored, treated, released or disposed of at, or transported to or from, the Real Property or in connection with the Business, all of which has been conducted in substantial compliance with applicable Law, and no Law, License, Order or Proceeding applicable to Pentech or any Subsidiary or any Assets requires any clean-up or remediation or participation in or contribution to any such clean-up or remediation. 7.19 Pentech has duly filed all Tax and information returns and reports required to have been filed by it to the date hereof, each of which is complete and correct in all material respects and Pentech has paid all Taxes due to any Governmental Authority required to have been paid by it and has created sufficient reserves or made provision for all Taxes accrued but not yet due and payable by it. Pentech has paid to the proper Governmental Authorities all customs, duties and similar or related charges required to be paid by it with respect to the importation of goods into the United States. No Governmental Authority is now asserting or, to Pentech's knowledge, threatening to assert any deficiency or assessment for additional Taxes with respect to Pentech, nor, to Pentech's knowledge, is there any basis for any such deficiency or assessment. Pentech has not been audited by any Governmental Authority with respect to any fiscal year, and, to Pentech's knowledge, no such audit has been threatened or proposed. Pentech has not waived or consented to any tolling of any limitation period with respect to any Tax liability. Pentech and the Subsidiaries, other than the Joint Venture, are, for federal income tax purposes, members of an affiliated group, which includes no other Person, and no Subsidiary, other than the Joint Venture, files any separate return with respect to any Tax. Pentech has delivered to JAKKS complete and correct copies of the Tax returns of Pentech for each of its three most recently ended fiscal years and any subsequent period for which a return was filed. 7.20 Schedule 7.20 sets forth a complete and correct list of all Employee Plans either maintained or to which contributions have been made by any ERISA Affiliate and all contributions made to each such Employee Plan for each of the three most recently ended fiscal years of Pentech. Except as set forth on Schedule 7.20, no ERISA Affiliate has any liability on account of any such Employee Plan for (a) contributions accruing under any such Employee Plan with respect to periods prior to the date hereof; (b) fiduciary breaches by any ERISA Affiliate, any employee of any ERISA Affiliate or any other Person under ERISA or any other applicable Law; or (c) income Taxes by reason of non-qualification of any such Employee Plan. With respect to each such Employee Plan, Pentech has delivered or made available to JAKKS copies of (i) the plan, related trust documents and amendments thereto, (ii) the most recent summary plan description and annual report, and (iii) the most recent actuarial valuation. No event has occurred for which, and there exists no condition or set of circumstances under which, (A) any ERISA Affiliate or any such Employee Plan could be subject to any material liability under Section 502(i) of ERISA or Section 4975 of the Code, or (B) any ERISA Affiliate could incur any liability with respect to any such Employee Plan that is a multi-employer plan, other than the payment of Pension Benefit Guaranty Corporation premiums and contributions. With respect to each such Employee Plan, (I) each ERISA Affiliate is in compliance in all material respects with the requirements prescribed by all applicable Laws, including without limitation ERISA and the Code, and Orders, and (II) there is no Proceeding (other than routine claims for benefits) pending or, to Pentech's knowledge, threatened, with respect to any such Employee Plan or against the assets of any such Employee Plan. 7.21 Except as set forth on Schedule 7.21, none of Pentech or any Subsidiary is a party to any collective bargaining, union representation or other labor contract or arrangement; none of Pentech or any Subsidiary has received any Notice from any labor union or group of employees that such union or group represents or intends to represent any of the employees of Pentech or any Subsidiary; and, to Pentech's knowledge, no strike or work interruption by any of its or any Subsidiary's employees is planned, under consideration, threatened or imminent. At no time during the past five years has Pentech or any Subsidiary experienced any strikes, work stoppages or demands for collective bargaining by any union or labor organization or any other group of employees, or been involved in or the subject of any grievance, dispute or controversy by or with any union or labor organization or any other group of employees or any pending or threatened Proceedings based on or related to any employment grievance, dispute or controversy or received any Notice of any of the foregoing. 7.22 Except in connection with the Plant Closing or as set forth on Schedule 7.22, to Pentech's knowledge, no employee intends to terminate his or her employment relationship with Pentech or any Subsidiary by reason of the Merger or otherwise. Except as set forth on Schedule 7.22, no director, officer or employee of, or consultant to, Pentech or a Subsidiary is or will become entitled to receive any severance pay or any additional compensation or benefit on account of this Agreement or the Merger, nor shall entering into this Agreement or the consummation of the Merger result in the acceleration of the time of vesting or payment of any compensation or benefit, except as provided in Section 5.4. Except as set forth on Schedule 7.22, no Affiliate of Pentech or any Subsidiary or any relative, associate or agent thereof has any interest in any Assets, including without limitation any contract for the furnishing of services by, or rental of real or personal property from or to, or requiring payments to, any such Affiliate. 7.23 Schedule 7.23 sets forth all memberships in resort, recreational or entertainment facilities or organizations owned or paid for, or the dues for which are borne, by Pentech or any Subsidiary and all vehicles, apartments and other facilities owned, leased or operated by Pentech or any Subsidiary and not listed on any other Schedule hereto. Pentech has delivered to JAKKS complete and correct copies of all agreements referred to on Schedule 7.23. 7.24 Schedule 7.24 is a complete and correct list of the names and addresses of the ten largest suppliers and ten largest customers of Pentech and the Subsidiaries during Pentech's fiscal year ended September 30, 1999 and the total sales to or purchases from such customers or suppliers made by Pentech and the Subsidiaries during such fiscal year. No supplier or customer of Pentech and the Subsidiaries representing in excess of 5% of their aggregate purchases or sales during such fiscal year has advised Pentech or any Subsidiary, formally or informally, that it intends to terminate, discontinue or substantially reduce its business with Pentech or any Subsidiary by reason of the Merger or otherwise. 7.25 All insurance maintained by Pentech or any Subsidiary is in full force and effect. To Pentech's knowledge, no insurer intends to cancel or refuse to renew any such insurance and there is no basis for any such cancellation or non-renewal. No insurer has disputed or, to Pentech's knowledge, intends to dispute any claim made under any policy and, to Pentech's knowledge, no event has occurred and no circumstance exists which would excuse the performance by any insurer of any of its obligations under any such policy with respect to such claim. None of Pentech or any Subsidiary has been refused any insurance for which it has applied, nor has any insurance carried by Pentech or any Subsidiary been cancelled (other than at the request of Pentech or a Subsidiary). 7.26 Except as set forth on Schedule 7.26, (a) none of Pentech or any Subsidiary, or any Affiliate thereof, has employed or engaged any Person to act as a broker, finder or other intermediary in connection with the transactions contemplated hereby, and (b) no Person is entitled to any fee, commission or other compensation relating to any such employment or engagement by Pentech or any Subsidiary. 7.27 No representation or warranty by Pentech in this Agreement or any other Merger Document contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading. 8. Representations and Warranties of JAKKS. JAKKS hereby represents and warrants to Pentech as follows: 8.1 Each of JAKKS and Newco is a corporation duly organized, validly existing and in good standing under the Laws of the State of Delaware, and each has full corporate power and authority to own its assets and carry on its business as and in the places where such assets are located or such business is conducted. Complete and correct copies of JAKKS' and Newco's respective Certificates of Incorporation, including all amendments thereto, certified by the Secretary of State of Delaware, and their respective Bylaws, including all amendments thereto, certified by the secretaries of JAKKS and Newco, respectively, have been delivered to Pentech. Newco has not conducted any business to date (other than in connection with its organization and entering into this Agreement) and is not required to have a Permit to transact business as a foreign corporation in any jurisdiction. JAKKS owns beneficially and of record all of the outstanding shares of Newco's capital stock free and clear of all Liens or any restriction with respect to the voting or disposition thereof (other than restrictions of general applicability imposed by federal or state securities Laws), and all such shares are duly authorized, validly issued, fully paid and nonassessable. 8.2 Each of JAKKS and Newco has full corporate power and authority to execute and deliver this Agreement and each other Merger Document to which it is a party and to assume and perform its obligations hereunder and thereunder. The execution and delivery of this Agreement and each other Merger Document to which it is a party by JAKKS and Newco and the performance of their respective obligations hereunder and thereunder have been duly authorized by all requisite corporate action on the part of each of them (including without limitation the adoption of this Agreement and the approval of the Merger by JAKKS, as the sole stockholder of Newco). This Agreement has been, and each other Merger Document to which it is a party will be, duly executed and delivered by JAKKS and Newco, respectively, and this Agreement is, and each other Merger Document to which it is a party, when so executed and delivered, will be, a legally valid and binding obligation of JAKKS and Newco, respectively, enforceable against each of them in accordance with their respective terms, subject to (a) bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally, and (b) equitable principles limiting the availability of specific performance, injunctive relief and other equitable remedies. The execution and delivery of this Agreement by JAKKS and Newco do not, and the execution and delivery of each other Merger Document by JAKKS and Newco and the performance by JAKKS and Newco of their respective obligations hereunder and thereunder will not, violate any applicable Law or any provision of their respective Certificates of Incorporation or Bylaws and do not and will not conflict with or result in any breach of any condition or provision of, or constitute a default under, or create or give rise to any adverse right of termination or cancellation by, or excuse the performance of, any other Person, or result in the creation or imposition of any Lien upon either of them or any of their respective assets or the acceleration of the maturity or date of payment or other performance of any obligation of either of them. 8.3 Except for the filing by JAKKS of an HSR Form and the expiration or early termination of the waiting period under the HSR Act; the Notice required to be given or made pursuant to ECRA and the issuance of a negative declaration or administrative consent order by the NJDEPE; and the filing of the Certificate of Merger with the Secretary of State of Delaware, no Consent of, or Notice to, any Person is required as to JAKKS or Newco in connection with its execution and delivery of this Agreement or any other Merger Document to which it is a party, or the performance of its obligations hereunder or thereunder, or the consummation of the Merger. 8.4 No Proceeding is pending, or, to JAKKS' knowledge, threatened against or affecting the business, assets or operations of JAKKS or Newco in which an unfavorable Order would prohibit, invalidate or make unlawful, in whole or in part, this Agreement or any other Merger Document, or the carrying out of the provisions hereof or thereof or the transactions contemplated hereby or thereby. There is no Order enjoining JAKKS or Newco in respect of, or the effect of which is to prohibit or curtail their performance of, their respective obligations under this Agreement or any other Merger Document. 8.5 Neither JAKKS nor Newco has employed or engaged any Person to act as a broker, finder or other intermediary in connection with the transactions contemplated hereby, and no Person is entitled to any fee, commission or other compensation relating to any such employment or engagement by JAKKS or Newco. 8.6 JAKKS has reserved cash sufficient to pay the Merger Consideration. 8.7 No representation or warranty by JAKKS in this Agreement or in any other Merger Document contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements contained herein or therein, in the light of the circumstances under which they were made, not misleading. 9. Certain Covenants. 9.1 From and after the date hereof and until the Closing or the termination of this Agreement, the parties hereto shall use their respective commercially reasonable best efforts, and shall cooperate with each other, to cause the consummation of the Merger in accordance with the terms and conditions hereof, including without limitation giving any Notice to or obtaining the Consent of any Governmental Authority, or any other Person with respect to any Material Contract, in each case, by reason of the Merger. In particular, Pentech and JAKKS shall use their respective commercially reasonable best efforts: (a) to obtain the environmental audit report(s) referred to in Section 10.2(e), to give any Notice required under ECRA and to obtain any Consent of the NJDEPE required to permit the consummation of the Merger thereunder; and (b) to file HSR Forms under the HSR Act as soon as practicable after the date hereof and to obtain early termination of the waiting period, including without limitation filing such additional documents and furnishing such additional information as the Federal Trade Commission or the Antitrust Division of the Department of Justice may request; provided that no provision hereof shall require JAKKS or Pentech to divest any business or assets or to hold any business or assets separate. The filing fees payable in respect of the filing of the HSR Forms shall be payable by JAKKS. 9.2 As soon as practicable after Pentech's receipt of a Fairness Opinion, Pentech shall prepare and file with the SEC preliminary proxy materials relating to the Stockholders' Meeting, including the Notice of such meeting, proxy statement and form of proxy, in accordance with the applicable provisions of the Exchange Act, shall use its best efforts to file with the SEC such additional documents and furnish to the SEC such additional information as the SEC may request and otherwise respond to the SEC's comments, if any, on the preliminary proxy materials and any such other documents or information. Pentech shall make such changes in the proxy materials as are appropriate based on the SEC's comments, if any, and shall cause the proxy materials to comply as to form in all material respects with the requirements of the Exchange Act and shall prepare and file definitive proxy materials in accordance with the applicable provisions of the Exchange Act. Pentech shall provide to JAKKS a draft of any proxy materials or other document to be filed with the SEC in connection with the Stockholders' Meeting or the Merger and advise it of any information to be furnished to the SEC at a reasonably sufficient time in advance in order to allow JAKKS to review the same and give to Pentech any comments or suggestions it may have thereon. Pentech shall also furnish to JAKKS copies of any correspondence to or from the SEC relating to the proxy materials and advise JAKKS of the SEC's comments, if any, thereon, and shall confer with JAKKS as to the appropriate response thereto. Pentech shall pay the filing fee, if any, applicable to the filing of the proxy materials with the SEC. JAKKS shall cooperate with Pentech in connection with the preparation and filing of the proxy materials and in responding to any SEC comments thereon, and shall provide to Pentech, at Pentech's request, any information required to be included in the proxy materials (including in any amendment or supplement thereto) in accordance with the Exchange Act and so that the definitive proxy materials shall not at any time prior to or at the Effective Time contain any misstatement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. 9.3 Pentech shall take all actions required to call, give Notice of, and hold the Stockholders' Meeting as soon as reasonably practicable after the date hereof, including printing and mailing definitive proxy materials. Pentech shall also take all lawful actions to solicit the Stockholder Approval, including without limitation including in the definitive proxy materials the recommendation of Pentech's Board of Directors in favor of the adoption of this Agreement and the approval of the Merger, unless such recommendation or the inclusion thereof in the definitive proxy materials would cause any of Pentech's directors to breach his fiduciary duty or cause Pentech or any of its directors, officers, employees or agents to violate any applicable Law. 9.4 From and after the date hereof, none of Pentech, any Subsidiary, any Principal Stockholder, any Affiliate thereof, or any director, officer, employee or other agent or representative of any of them, shall, directly or indirectly, accept or solicit any inquiry, offer or proposal from any Person other than JAKKS with respect to any transaction involving any sale or other disposition of the Business or any Assets (other than in the ordinary course of business) or any capital stock of Pentech or any Subsidiary. Pentech shall promptly advise JAKKS of the receipt of any such inquiry, offer or proposal and the material terms thereof. 9.5 Pentech shall not take any Alternative Action, except, subject to the provisions of this Section and the payment of the Termination Fee, if applicable, with respect to any Alternative Proposal that (a) is made in writing, (b) Pentech's Board of Directors determines in good faith in the exercise of its business judgment is reasonably capable of being completed on the terms proposed and if so completed would result in an Alternative Transaction that, from a financial point of view, would be superior and more beneficial to Pentech's stockholders than the Merger, and (c) Pentech's Board of Directors determines in good faith that its failure to consider such Alternative Proposal or to withdraw, modify or qualify its approval or recommendation of the Merger would cause it to violate its fiduciary duties under applicable Law (a "Superior Proposal"). Prior to entering into any negotiations or discussions with any other Person with respect to, or furnishing confidential information or otherwise responding to, any Superior Proposal, Pentech shall enter into a confidentiality agreement with such Person (which agreement may not include any provision granting to such Person an exclusive right to negotiate with Pentech with respect to an Alternative Transaction). No provision hereof shall preclude Pentech or its Board of Directors from complying with the requirements of Rule 14d-9 or Rule 14e-2 under the Exchange Act with regard to the Merger or any Alternative Proposal. Subject to Pentech's compliance with the conditions of this Section 9.5, prior to obtaining the Stockholder Approval, Pentech's Board of Directors may withdraw its approval or recommendation of the Merger, or modify or qualify such approval or recommendation, or approve or recommend a Superior Proposal if Pentech shall give to JAKKS written Notice thereof at least five (5) business days prior thereto. Unless this Agreement is terminated in accordance with Article 12 prior to the Stockholders' Meeting, notwithstanding Pentech's receipt of any Alternative Proposal or any Alternative Action, Pentech shall hold the Stockholders' Meeting and call for a vote of its stockholders for the adoption of this Agreement and the approval of the Merger. 9.6 Except as set forth on Schedule 9.6, from and after the date hereof and until the Closing, except as otherwise provided elsewhere herein or as JAKKS may otherwise consent (which consent may not be unreasonably withheld), Pentech and each Subsidiary shall: (a) conduct the Business in ordinary course; (b) use commercially reasonable best efforts to preserve the Business and Assets and maintain their respective relationships with customers and other Persons with which they have material business dealings; (c) not enter into any Restrictive Agreement; (d) not (i) sell, lease, transfer or dispose of any material Asset, other than sales of merchandise from inventory in the ordinary course of business or the disposal of defective, obsolete or otherwise unusable Assets or (ii) terminate any Material Contract, except upon expiration of the term thereof as provided therein; (e) use commercially reasonable best efforts to maintain all required Permits and Consents and to comply with all applicable Orders; (f) use commercially reasonable best efforts to maintain in full force and effect (or to replace on substantially equivalent terms) all currently applicable insurance; (g) except as required under any agreement applicable to Pentech or a Subsidiary or in the ordinary course of business consistent with its past practices, not increase the compensation or other employment benefits payable to or for the benefit of any employee, or enter into, adopt or modify any Employee Plan or other agreement, plan, commitment or arrangement to provide to any employee or other Person any deferred compensation, retirement, severance or other similar payment or benefit; (h) not make any loan or advance or otherwise extend any credit to any director or officer of Pentech or a Subsidiary or any Affiliate of any such director or officer; (i) not amend its certificate or articles of incorporation or organization or Bylaws; (j) not merge or consolidate with any other Person or purchase or otherwise acquire any securities of, or other equity interest or participation in, any Person (other than a Subsidiary); (k) other than pursuant to Pentech's current credit facility, not incur or assume any Indebtedness in an amount in excess of $250,000; (l) not purchase or otherwise acquire any securities of, or make any other investment in, any Person or enter into or create any joint venture; (m) not acquire (other than in the ordinary course of business) the business or assets, substantially as a whole, of any other Person, or make any capital expenditure in excess of $250,000; (n) not declare, set aside or pay any dividend or make any other distribution in cash, securities or other property, on or in respect of any capital stock (other than a cash dividend or distribution by any Subsidiary to Pentech or any other Subsidiary); (o) not split or reverse-split any capital stock or effect any other recapitalization or capital reorganization, or issue or reserve for issuance any capital stock, other than upon the exercise of an Option outstanding on the date hereof in accordance with the terms thereof, or issue or grant any option, warrant or right to purchase, or security or instrument convertible into or exercisable for, any capital stock; or (p) enter into, adopt or assume any agreement, commitment or arrangement which obligates Pentech or any Subsidiary to act or to refrain from acting in violation of, or in a manner inconsistent with, any of the foregoing. 9.7 From and after the date hereof and until the Closing, Pentech shall furnish to JAKKS such information with respect to the Business and Assets as JAKKS may from time to time reasonably request and shall permit JAKKS and its authorized representatives access, at a mutually-agreeable time during regular business hours and upon reasonable Notice, to conduct a physical inventory of the Assets, to inspect the Real Property, to examine the books and records of Pentech or any Subsidiary and to make inquiries of responsible Persons designated by Pentech with respect thereto; provided that any information so disclosed to JAKKS shall not constitute an additional representation or warranty of Pentech beyond those expressly set forth in Article 7; and provided further that all such information shall be subject to Section 9.9. 9.8 From and after the date hereof and until the Closing, no party hereto shall make any press release or other public announcement with respect to this Agreement or the Merger, without the prior written consent of the other parties (which consent shall not be unreasonably withheld), unless such announcement is required by Law, in which case the other parties shall be given Notice of such requirement prior to such announcement and the parties shall consult with each other as to the scope and substance of such disclosure. 9.9 JAKKS and Newco acknowledge that certain information relating to or concerned with the Business and the affairs of Pentech and the Subsidiaries, including without limitation all Trade Rights, product information, customer and supplier lists, marketing and sales data, personnel and financing and Tax matters is proprietary and that its confidentiality is absolutely essential to the operation of the Business. Until the Closing, such information shall be subject to that certain Confidentiality and Non-Disclosure Agreement dated as of November 19, 1999 to which the parties hereby agree to be bound and which is incorporated herein by this reference. 9.10 From and after the Effective Time, JAKKS shall: (a) cause Pentech, as the surviving corporation to, and Pentech, as the surviving corporation shall, subject to any condition or limitation provided by DGCL Section 145 or other applicable Law, indemnify each Person who at any time prior to the Effective Time shall have been a director or officer of Pentech or a Subsidiary and hold each such Person harmless from and against any loss, liability, obligation, damage or expense, including reasonable attorneys' fees and disbursements, which any of them may suffer or incur in connection with any claim or Proceeding against any of them based upon or resulting from any act or omission occurring at or prior to the Effective Time, including any acts or omissions in connection with this Agreement or the Merger, in the same manner and to the same extent as is provided in the certificate or articles of incorporation or organization, Bylaws and any indemnification agreement of Pentech or a Subsidiary, as applicable, on the date hereof; (b) cause Pentech's Bylaws at all times during the six-year period following the Closing Date to include provision for such indemnification and a provision regarding the elimination or limitation of liability of all such Persons in the manner and to the extent provided in the certificate or articles of incorporation or organization, or the Bylaws of Pentech or a Subsidiary, as applicable; and (c) cause to be maintained throughout such six-year period directors' and officers' liability insurance substantially equivalent to that provided to such Persons by Pentech on the date hereof. 10. Conditions to Closing. 10.1 The obligation of the parties hereto to consummate the Merger in accordance herewith shall be subject to the satisfaction (or waiver) at the Effective Time of each of the following conditions: (a) Pentech shall have received a Fairness Opinion; (b) the Stockholder Approval shall have been obtained and be in effect; (c) the waiting period under the HSR Act shall have expired or been terminated; (d) no Order or Law shall be in effect which (i) makes illegal or prohibits consummation of the Merger or (ii) would have a Material Adverse Effect, and no Proceeding which could result in the enactment or adoption of any such Law or the issuance of any such Order shall be pending; (e) except for the filing of the Certificate of Merger, each Consent of, or Notice to, any Governmental Authority required for the consummation of the Merger and for the surviving corporation to conduct the Business, including without limitation any Order or other action by the NJDEPE under ECRA, shall have been obtained or given; and (f) the Services Agreements shall have been executed and delivered by the respective parties thereto. 10.2 The obligation of JAKKS and Newco to consummate the Merger in accordance herewith shall also be subject to the satisfaction (or waiver) at the Effective Time of each of the following conditions: (a) each of the representations and warranties made by Pentech herein that is qualified as to Material Adverse Effect shall be true, and each of the representations and warranties made by Pentech herein that is not so qualified shall be true in all material respects, at and as of the Effective Time; (b) Pentech shall have, in all material respects, performed and complied with all obligations and conditions to be performed or complied with by it hereunder; (c) since the date of this Agreement, no event shall have occurred and no circumstances shall have existed which has had or would have a Material Adverse Effect; (d) each holder of an Option that does not by its terms or pursuant to the Option Plan under which it is granted terminate at the Effective Time shall have executed and delivered to JAKKS an agreement terminating such Option at the Effective Time; (e) JAKKS shall have received environmental audit report(s) from environmental engineering or consulting firm(s) reasonably satisfactory to JAKKS and Pentech (i) confirming that there is no material likelihood that the aggregate cost of environmental site remediation or clean-up at any Real Property or other facility or site (including without limitation for the treatment, storage or disposal of Hazardous Materials and underground storage tanks) listed on Schedule 7.17 or Schedule 7.18 located in the State of New Jersey would exceed $75,000, and (ii) not indicating that there is any other material environmental liability associated with any such Real Property or other facility or site; (f) JAKKS shall have received an opinion of Grotta, Glassman & Hoffman, P.A., in form and substance reasonably satisfactory to JAKKS, to the effect that Pentech has complied in all material respects with applicable Laws relating to ERISA, labor and employment matters and confirming in substance Pentech's representations and warranties in Sections 7.20, 7.21 and 7.22; and (g) Pentech and the Subsidiaries shall execute and/or deliver at the Closing all the documents so to be executed and/or delivered by them and take all other actions at the Closing required to be taken by them pursuant to Article 11. 10.3 The obligation of Pentech to consummate the Merger in accordance herewith shall also be subject to the satisfaction (or waiver) prior to or at the Closing of each of the following conditions: (a) each of the representations and warranties made by JAKKS herein shall be true in all material respects at and as of the Effective Time; (b) JAKKS shall have, in all material respects, performed and complied with all obligations and conditions to be performed or complied with by it hereunder; (c) JAKKS shall have obtained the Consent of Bank of America, N.A., as required under Pentech's current credit facility or shall have satisfied and discharged all outstanding monetary obligations under such facility; and (d) JAKKS and Newco shall execute and/or deliver at the Closing all the documents so to be executed and/or delivered by them and take all other actions at the Closing required to be taken by them pursuant to Article 11. 11. Closing. 11.1 The Closing shall be held at the offices of Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP, 750 Lexington Avenue, New York, New York 10022 on the earliest practicable date, and in any event on or before the second business day, after the satisfaction (or waiver) or all conditions to closing provided in Article 10 (other than any condition which, by its terms, is to be satisfied at the Closing), or at such other place or on such other date, and at such time, as the parties hereto may agree. The execution and/or delivery of each document to be executed and/or delivered at the Closing and each other action to be taken at the Closing shall be subject to the condition that every other document to be executed and/or delivered at the Closing is so executed and/or delivered and every other action to be taken at the Closing is so taken, and all such documents and actions shall be deemed to be executed and/or delivered or taken, as the case may be, simultaneously. 11.2 At the Closing, Pentech shall: (a) deliver to JAKKS the resignations, effective at the Effective Time, of all of the respective directors and officers immediately prior to the Effective Time of Pentech and each Subsidiary; (b) deliver to JAKKS a certificate of Pentech's chief executive officer and chief financial officer to the effect that the conditions set forth in Section 10.2 have been satisfied; (c) deliver to JAKKS the agreements referred to in Section 10.2(d); and (d) deliver to JAKKS such other agreements, instruments, certificates and documents as JAKKS may reasonably request to effect the consummation of the Merger. 11.3 At the Closing, JAKKS shall: (a) cause the Certificate of Merger to be filed with the Secretary of State of Delaware; (b) deliver to the Paying Agent written Notice of the effectiveness of the Merger, authorizing the Paying Agent to pay the Merger Consideration; (c) deliver to Pentech a certificate of JAKKS' chief executive officer and chief financial officer to the effect that the conditions set forth in Section 10.3 have been satisfied; and (d) deliver to Pentech such other agreements, instruments, certificates and documents as Pentech may reasonably request to effect the consummation of the Merger. 12. Termination. 12.1 This Agreement may be terminated at any time prior to the Closing: (a) by the mutual agreement of JAKKS and Pentech; (b) by Pentech, if Pentech shall not have received a Fairness Opinion on or before July 31, 2000; (c) if the Closing shall not have occurred on or before November 30, 2000, or such later date to which JAKKS and Pentech may agree, by JAKKS or Pentech, upon written Notice to such effect to the other; (d) by JAKKS or Pentech at any time after the Stockholders' Meeting, if the Stockholder Approval is not obtained; (e) by JAKKS, if (i) there shall be any material breach of any representation or warranty by, or any failure to perform any material covenant or other obligation of, Pentech, and, unless such breach or failure is incapable of being cured within a period of 30 days after the giving of written Notice thereof to the breaching or defaulting party, JAKKS gives such Notice to such party and such breach or failure shall not be cured within 30 days of the giving of such Notice, upon written Notice of termination to Pentech; or (ii) an Alternative Action shall have been taken; (f) by Pentech, if (i) there shall be any material breach of any representation or warranty by, or any failure to perform any material covenant or other obligation of, JAKKS or Newco, and, unless such breach or failure is incapable of being cured within a period of 30 days after the giving of written Notice thereof to the breaching or defaulting party, Pentech gives such Notice to such party and such breach or failure shall not be cured within 30 days of the giving of such Notice, upon written Notice of termination to JAKKS; or (ii) an Alternative Action shall have been taken with respect to a Superior Proposal and Pentech shall have paid the Termination Fee to JAKKS. 12.2 Subject to the rights of the other parties hereto, either Constituent Corporation may, by resolution of its Board of Directors, abandon the Merger prior to the Effective Time, notwithstanding that the stockholders of either Constituent Corporation shall have approved and authorized the same. 12.3 Upon termination of this Agreement pursuant to Section 12.1, all obligations of the parties shall terminate except those under Sections 12.4 and 12.5 and Article 13; provided that, except as provided in Section 12.5, no such termination shall relieve any party hereto of any liability to any other party by reason of any breach of or default under this Agreement. 12.4 If (a) this Agreement is terminated by JAKKS pursuant to Section 12.1(d)because any Principal Stockholder shall have failed to vote his shares of Pentech Common Stock in favor of the Merger at the Stockholders' Meeting or otherwise made any material misrepresentation or failed in any material respect to comply with his obligations pursuant to the Voting Agreement, or pursuant to Section 12.1(e)(ii); or (b) Pentech terminates this Agreement pursuant to Section 12.1(f)(ii), Pentech shall pay to JAKKS a termination fee in the amount of $1,000,000 (the "Termination Fee") within 15 days of such termination. 12.5 The Termination Fee shall constitute liquidated damages to JAKKS in respect of all losses, liabilities, damages and expenses suffered or incurred by JAKKS by reason of the termination of this Agreement or the failure of Pentech to close the Merger under the circumstances referred to in Section 12.4 and shall be in lieu of any other remedy or relief otherwise available to JAKKS by reason thereof. The parties hereto acknowledge that it would be impracticable to ascertain the amount of all losses, liabilities, damages and expenses (including all legal fees and expenses relating to the Merger) that would be suffered or incurred by JAKKS under the circumstances described in Section 12.4 and that the amount of the Termination Fee represents a fair and reasonable estimate of such losses, liabilities, damages and expenses and provides a reasonable and certain amount to compensate JAKKS therefor. 13. Miscellaneous. 13.1 Termination of Representations and Warranties. No representation or warranty of any party hereto shall survive the Effective Time. 13.2 Limitation of Authority. Except as expressly provided herein, no provision hereof shall be deemed to create any partnership, joint venture or joint enterprise or association among the parties hereto, or to authorize or to empower any party hereto to act on behalf of, obligate or bind any other party hereto. 13.3 Fees and Expenses. Except as otherwise expressly provided herein, each party hereto shall bear such fees and expenses as may be incurred by it in connection with this Agreement and the Merger. 13.4 Notices. Any Notice or demand required or permitted to be given or made hereunder to or upon any party hereto shall be deemed to have been duly given or made for all purposes if (a) in writing and sent by (i) messenger or an overnight courier service against receipt, or (ii) certified or registered mail, postage paid, return receipt requested, or (b) sent by telegram, telecopy, telex or similar electronic means, provided that a written copy thereof is sent on the same day by postage-paid first-class mail, to such party at the following address: to JAKKS or Newco at: 22761 Pacific Coast Highway Malibu, California 90265 Attn: President Fax: (310) 317-8527 with a copy to: Feder, Kaszovitz, Isaacson, Weber, Skala & Bass LLP 750 Lexington Avenue New York, New York 10022 Attn: Murray L. Skala, Esq. Fax: (212) 888-7776 to Pentech at: Pentech International Inc. 195 Carter Drive Edison, New Jersey 08817 Attn: President Fax: (732) 287-3127 with copies to: Kalin & Associates, P.C. 1 Penn Plaza, Suite 1425 250 West 34th Street New York, New York 10119 Attn: Richard S. Kalin, Esq. Fax: (212) 239-8401 and Camhy Karlinsky & Stein LLP 1740 Broadway, 16th Floor New York, New York 10019-4315 Attn: Alan I. Annex, Esq. Fax: (212) 977-8389 or such other address as any party hereto may at any time, or from time to time, direct by Notice given to the other parties in accordance with this Section. Except as otherwise expressly provided herein, the date of giving or making of any such Notice or demand shall be, in the case of clause (a)(i), the date of the receipt; in the case of clause (a)(ii), five business days after such Notice or demand is sent; and, in the case of clause (b), the business day next following the date such Notice or demand is sent. 13.5 Amendment. At any time prior to the Effective Time and notwithstanding that the Stockholder Approval has been obtained, JAKKS and Pentech may amend this Agreement, if such amendment is authorized and approved by the respective Boards of Directors of the Constituent Corporations; provided that, after the Stockholder Approval is obtained, no such amendment may be made which is prohibited or which would require further action by Pentech's stockholders, pursuant to DGCL Section 251(d) or other applicable Law; and provided further that no such amendment shall, unless each Principal Stockholder agrees or otherwise consents in writing thereto, impose any additional obligation on such Principal Stockholder, as such, or deprive such Principal Stockholder of any right, power or privilege, other than as provided herein prior to such amendment. No amendment of this Agreement shall be valid or effective, unless in writing and signed by or on behalf JAKKS and Pentech. 13.6 Waiver. No course of dealing or omission or delay on the part of any party hereto in asserting or exercising any right hereunder shall constitute or operate as a waiver of any such right. No waiver of any provision hereof shall be effective, unless in writing and signed by or on behalf of the party to be charged therewith. No waiver shall be deemed a continuing waiver or waiver in respect of any other or subsequent breach or default, unless expressly so stated in writing. 13.7 Governing Law. This Agreement shall be governed by, and interpreted and enforced in accordance with, the Laws of the State of Delaware without regard to principles of choice of Law or conflict of Laws. 13.8 Jurisdiction. Each of the parties hereto hereby irrevocably consents and submits to the jurisdiction of the Supreme Court of the State of New York and the United States District Court for the Southern District of New York in connection with any Proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, waives any objection to venue in the County of New York, State of New York, or such District, and agrees that service of any summons, complaint, Notice or other process relating to such Proceeding may be effected in the manner provided by clause (a) (ii) of Section 13.4. 13.9 Remedies. In the event of any actual or prospective breach or default by any party hereto, any other party hereto shall be entitled to equitable relief, including remedies in the nature of rescission, injunction and specific performance. Except as otherwise expressly provided in Section 13.5, All remedies hereunder are cumulative and not exclusive, and nothing herein shall be deemed to prohibit or limit any party from pursuing any other remedy or relief available at law or in equity for such actual or prospective breach or default, including the recovery of damages. 13.10 Severability. The provisions hereof are severable and in the event that any provision of this Agreement shall be determined to be invalid or unenforceable in any respect by a court of competent jurisdiction, the remaining provisions hereof shall not be affected, but shall, subject to the discretion of such court, remain in full force and effect, and any invalid or unenforceable provision shall be deemed, without further action on the part of the parties hereto, amended and limited to the extent necessary to render the same valid and enforceable. 13.11 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original and which together shall constitute one and the same agreement. 13.12 Further Assurances. Each party hereto shall cooperate with the other parties hereto and shall promptly execute, deliver, file or record such agreements, instruments, certificates and other documents and perform such other and further acts as any other party hereto may reasonably request or as may otherwise be reasonably necessary or proper, to consummate and perfect the transactions contemplated hereby. 13.13 Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Except as provided in Section 10.10, this Agreement is not intended, and shall not be deemed, to create or confer any right or interest for the benefit of any Person not a party hereto. 13.14 Assignment. This Agreement, and each right, interest and obligation hereunder, may not be assigned by any party hereto without the prior written consent of the other parties hereto, and any purported assignment without such consent shall be void and without effect. 13.15 Titles and Captions. The titles and captions of the Articles and Sections of this Agreement are for convenience of reference only and do not in any way define or interpret the intent of the parties or modify or otherwise affect any of the provisions hereof. 13.16 Grammatical Conventions. Whenever the context so requires, each pronoun or verb used herein shall be construed in the singular or the plural sense and each capitalized term defined herein and each pronoun used herein shall be construed in the masculine, feminine or neuter sense. 13.17 Knowledge. The qualification or limitation of any statement made herein to a party's "knowledge" or to a matter "known" to a party refers to the actual knowledge (but not imputed or constructive knowledge) of the directors, officers and operational managers of such party, after reasonable due inquiry. 13.18 References. The terms "herein," "hereto," "hereof," "hereby" and "hereunder," and other terms of similar import, refer to this Agreement as a whole, and not to any Article, Section or other part hereof. 13.19 No Presumptions. Each party hereto acknowledges that it has participated, with the advice of counsel, in the preparation of this Agreement. No party hereto is entitled to any presumption with respect to the interpretation of any provision hereof or the resolution of any alleged ambiguity herein based on any claim that any other party hereto drafted or controlled the drafting of this Agreement. 13.20 Incorporation by Reference. The Exhibits and Schedules hereto are an integral part of this Agreement and are incorporated in their entirety herein by this reference. 13.21 Entire Agreement. This Agreement embodies the entire agreement of the parties hereto with respect to the subject matter hereof and supersedes any prior agreement, commitment or arrangement relating thereto. IN WITNESS WHEREOF, JAKKS and the Constituent Corporations, by their respective duly authorized officers, and the Principal Stockholders have duly executed this Agreement as of the date set forth in the Preamble hereto. PENTECH INTERNATIONAL INC. JAKKS PACIFIC, INC. By: s/David Melnick By: s/Jack Friedman Name: David Melnick Name: Jack Friedman Title: Chief Executive Officer Title: Chairman (Chief Executive Officer) JAKKS ACQUISITION II, INC. By: s/Jack Friedman Name: Jack Friedman Title: President (Chief Executive Officer) EX-99 3 0003.txt APPENDIX B May 31, 2000 Board of Directors of Pentech International, Inc. c/o Mr. Norman Melnick Chairman of the Board of Directors Pentech International, Inc. 195 Carter Drive Edison, NJ 08817 Gentlemen: We have acted as financial advisor to the Board of Directors of Pentech International, Inc. ("Pentech" or the "Company") in connection with its review of the proposal by JAKKS Pacific, Inc. or its acquisition subsidiary, JAKKS Acquisition II, Inc. ("JAKKS" or the "Acquiror") to acquire 100% of the outstanding equity of the Company by merger (the "Merger"). In connection therewith, you have requested our opinion as to the fairness, from a financial point of view, of the consideration to be received by the shareholders (including for such purpose the holders all outstanding options, warrants or other rights to acquire stock in the Company) of Pentech in connection with the proposed Merger (which we have been advised, and for purposes of this opinion have assumed, to be approximately $18,000,000). We understand that the Merger is to be effected pursuant to a merger agreement by and among JAKKS and Pentech. The proceeds are comprised of cash from the Acquiror for 100% of the outstanding equity interest in Pentech. In arriving at our opinion, we have, among other things: (i) reviewed the terms of the proposed Agreement of Merger of JAKKS Acquisition II, Inc with and into Pentech International, Inc. dated as of May 22, 2000, (ii) reviewed certain business and historical financial information relating to Pentech, (iii) reviewed certain financial forecasts and other data provided to us by management relating to the businesses and prospects of Pentech, (iv) conducted discussions with members of the senior management of Pentech with respect to the businesses and prospects of the Company, (v) reviewed publicly available financial and stock market data with respect to certain other companies in lines of business we believe to be generally comparable to Pentech, (vi) reviewed the terms of certain recent acquisition transactions, including business combinations, which we believe to be generally comparable to the Merger, (vii) reviewed current market conditions, including the markets for securities comparable to the securities of Pentech, and (viii) conducted such other financial studies, analyses and investigations, and considered such other information, as we deemed necessary or appropriate. Board of Directors of Pentech International, Inc. May 31, 2000 Page 2 We have relied on the accuracy and completeness of the financial and other information regarding Pentech provided to us, and have not independently verified any such information. With respect to the financial forecasts referred to above, we have assumed that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Pentech as to the future financial performance of the Company. In addition, we have not made any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of Pentech. Further, our opinion is based on economic, monetary and market conditions existing on the date hereof. It is our understanding that this letter is for the information of the Board of Directors of Pentech only and, except as required by law, or pursuant to order of a court, is not to used for any other purpose without the consent of BVS, which consent shall not be unreasonably withheld. This letter may not be quoted or referred to, in whole or in part, in any registration statement, prospectus or proxy statement, or in any other written document used in connection with the offering or sale of securities, without the prior consent of BVS, which consent shall not be unreasonably withheld or delayed. Notwithstanding the foregoing, we hereby consent to the Board of Directors of Pentech making this opinion, and the contents hereof, available to the Company's auditors and counsel. Based upon and subject to the foregoing, it is our opinion that as of the date hereof, the aggregate consideration to be received in the Merger is fair, from a financial point of view, to the holders of the outstanding equity interests in Pentech. Respectfully submitted: BUSINESS VALUATION SERVICES, INC. s/ David N. Fuller David N. Fuller, CFA, ASA Principal EX-99.1 4 0004.txt APPENDIX C DELAWARE GENERAL CORPORATION LAW Section 262. Appraisal rights. (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to 251 (other than a merger effected pursuant to 251(g) of this title), 252,254,257, 258, 263 or 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares ofany class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendmentto its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsection (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to 228 or 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. EX-13 5 0005.txt APPENDIX D 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, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file 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 16, 1999, was approximately $5,296,933 based on the average of the closing bid and asked quotations of the registrant's Common Stock, par value $.01 share, as reported by NASDAQ on December 16, 1999. On December 16, 1999, there were outstanding 12,571,258 shares of the registrant's Common Stock. The Proxy Statement of the registrant to be filed on or before January 29, 2000 is incorporated herein by reference. PART I Item 1. BUSINESS. (a) Pentech International Inc. (the "Company") was formed in April 1984 to design and market writing and drawing instruments and other stationery products. In November 1989, the Company formed a wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), to manufacture certain of the Company's writing instruments. The Company and its wholly-owned subsidiaries are collectively referred to herein as the "Company." (b) The Company primarily operates in one business segment: the manufacture and marketing of pens, markers, pencils, other writing instruments and activity kits, primarily to major mass market retailers located in the United States, under the "Pentech" name or licensed trademark brand. For financial information relating to this business segment, please refer to the financial statements contained elsewhere herein. (c) The Company's product line consists of pens, markers, pencils, activity products and miscellaneous products. These products compete on the basis of special features, packaging design, quality and price, or a combination of these characteristics. The Company believes its reputation and ability to develop innovative products and marketing programs for its products, through the industry experience and marketing expertise of its management, are principal success factors. The Company has also had an ongoing program to secure select license agreements with licensors of established trademarks to utilize with certain of the Company's products. The Company views its licenses as an important ingredient in offering a strong product line with strong consumer appeal. (i) The Company markets its product line on a direct basis as well as through approximately 100 independent, nonexclusive, sales representatives throughout the United States. Generally sales initiated by the sales representatives are made directly to retail chains including mass merchants, chain drug stores, grocery stores, warehouse clubs, and office supply super stores. The Company also has limited sales to the stationary, military and college store markets and some sales through distributors and wholesalers. Additionally, the Company sells its products in Canada, Europe, Mexico and other selected countries, generally through a variety of distribution arrangements. The percentages of revenues contributed by the following classes of products over the Company's last three fiscal years are as follows: Activity Miscellaneous Pens Markers Pencils Products Products FY 1997 27.8% 19.2% 33.4% 14.4% 5.2% FY 1998 18.8% 26.5% 42.0% 11.7% 1.0% FY 1999 13.6% 27.6% 45.3% 13.5% - (ii) The Company conducts market research to stay abreast of consumer trends and to gauge the demand for new writing instruments and related products. Once the Company identifies a product for marketplace introduction, it either selects a suitable overseas manufacturer to manufacture the product or elects to manufacture the product itself. The Company's domestic pencil and marker manufacturing facility, Sawdust, is presently being utilized by the Company to manufacture a significant portion of the Company's writing instruments. Sawdust's capacity (on a two shift basis) is approximately $34,500,000 (wholesale value) of pencils, markers and other writing instruments. During the Company's fiscal year ended September 30, 1999 ("Fiscal 1999"), the Company manufactured approximately $28,200,500 (wholesale value) of products at Sawdust, which represents 81.7% of its current capacity and approximately 44.2% of the Company's current sales requirements. During its fiscal year ended September 30, 1998 ("Fiscal 1998"), the Company manufactured 42% of the wholesale value of the products it sold. An important part of the product development process is packaging. The Company leverages its unique packaging style to reinforce its image as a marketer of modern, well-designed, high quality, and reasonably priced writing instruments and children's activity products. (iii) The Company utilizes foreign manufacturers to supply a large percentage of the products it sells. It acquires a majority of its products from contract manufacturers located in Taiwan, China, Korea, Italy, India and other foreign countries. Such products are manufactured to the Company's order. The Company generally acquires its imported products pursuant to purchase orders, which typically provide for delivery within 60 to 90 days after the order. The present policy is to establish with a majority of its vendors payment terms ranging from 30 to 60 days and finance the remainder pursuant to letters of credit. To date, the Company has experienced limited supply shortages with respect to these imported products. The Company has occasionally incurred additional costs by shipping goods into its warehouse via airfreight, as opposed to by ship when the manufacturers did not timely deliver products or the Company required faster delivery. The Company is unable to predict whether it will experience similar or more severe product shortages in the future. The Company has successfully developed alternative sources of supply for virtually all of its important items to ensure timely deliveries in the event of a disruption in deliveries due to a dispute with any overseas manufacturer or any other reason. The Company has achieved this through building Sawdust and developing multiple sources in Taiwan, China, Korea, Italy, India and other foreign countries. As a result, the loss of any one overseas manufacturer would probably not create any long-term disruptions in the Company's ability to ship its goods to its customers on a timely basis. Management believes that it is not now dependent, upon any one manufacturer for its product lines. It believes that products of quality comparable to its present products could, if necessary, be acquired from a variety of overseas manufacturers at comparable rates. The Company obtains raw materials for Sawdust from domestic and foreign suppliers. It has not faced material supply shortages, and it generally has multiple sources for most of its product requirements. Due to a determination by the United States International Trade Commission that certain Chinese manufacturers of pencils were dumping these pencils in the United States, the Company has been required to pay "Dumping Duties" to acquire pencils from certain of its Chinese suppliers of pencils. The Company has also been successful in developing additional sources for its supply of certain of its pencils. In some instances, this has resulted in increased costs to the Company for the wood for its pencils. Recently, certain of the Company's Chinese suppliers of pencils and related products have been the subject of a redetermination which, in certain instances, increased the amount of Dumping Duties the Company has or may be required to pay. The Company has accrued for any additional duties which may arise from this redetermination. On September 26, 1999 the Company signed a letter of intent with a Chinese manufacturer to establish a joint venture in Shanghai China for the purpose of developing additional capability to manufacture pencils and markers. The transaction is subject to the manufacturer's ability to operate the Company's machinery and produce comparable product, approval of the Company's bank, final approval of the Company's Board of Directors, approval of the Chinese government, and approval of the final documents. Accordingly, there is no assurance that the transaction will be completed, or what, if any, impact this will have on the Company's current manufacturing operations. As of the September 30, 1999 the Company has not recorded any impact of this transaction given the uncertainty of its successful completion, however, if the transaction is successful there is the potential of some costs associated with closing down the Company's domestic manufacturing facility. (iv) The Company generally markets its products under the individual product's name and either the Company's name or the trademark of one of its licensors. In the event opportunities present themselves which the Company determines are advantageous for it to import certain products in bulk on a private label basis (i.e., store brand), the Company may capitalize on such opportunity. In such event, the Company may request an advance deposit from the customer before effecting such transaction, depending on the credit worthiness of the customer. This, historically, has been a small portion of the Company's business. The Company's marketing efforts include the development of special promotions in connection with purchases of merchandise by certain major chain stores. These promotions often feature advertising allowances, free goods and free displays or permit the sale of several of the Company's products at one favorable price. The funding for these special promotions is substantially derived from the revenues to be received from the sales themselves, and generally the Company is not required to allocate a large portion of its working capital to such efforts. The Company also has designed point of purchase product displays which it offers to its customers. The Company has entered into license agreements with entities such as Lucasfilm, Ltd. (Star Wars), The Walt Disney Company (Mickey Mouse and Winnie the Pooh), the NBA (National Basketball Association), the NHL (National Hockey League), the NFL (National Football League), and Coca-Cola Company, using these trademark names on the Company's products. In most situations, the licensor requires an advance royalty, a royalty against net sales for licensed products and a minimum royalty. Generally, the Company satisfies the minimum royalty; occasionally it does not. When the Company is unable to meet the minimum sales levels required under a license, the Company must pay the minimum royalty and possibly incur losses as a result thereof. The Company evaluates its licenses carefully and attempts to minimize such losses. These licenses have terms ranging from one to three years and are renewed by mutual consent from both parties. Except when the Company uses trademarks owned by others, the Company follows a policy of registering with the U.S. Patent and Trademark Office trademarks covering the names of items in its product line and proposed names for new items. The Company has been awarded trademarks in the past. There is no assurance that any pending trademarks will be registered. (v) The business of the Company has certain seasonal aspects. Sales tend to increase during the months of May through August, because retailers buy in anticipation of fall school opening, and to decrease during the months of September through December. The Company has been developing marketing programs to reduce the impact of this seasonality. (vi) The Company maintains a warehouse in North Brunswick, NJ, for a portion of its inventory. Generally, the Company does not require any of its customers to post letters of credit or to advance any deposits on orders, except in certain instances, depending upon the creditworthiness of the customer, for special orders. The Company analyzes each special order customer independently to determine whether any deposits should be paid. The Company considers credit rating, location, and amount of order, among other factors, to determine whether a deposit is required. Normal credit terms are "net 30 days." The Company, in certain instances, follows the industry practice of "School Dating," which is the shipment of products from May through August, for which payment is not due until September or October. The Company reviews its credit practices regularly and currently attempts to insure 80% of its receivables through credit insurance. In the past, the Company has experienced a limited amount of bad debts from its customers, usually as a result of a bankruptcy. In such a case the Company's policy has been to liquidate its claims as promptly as reasonable under the circumstances. This has been further ameliorated since the Company obtained credit insurance. The Company believes it has sufficient resources to manage its credit function. (vii) The Company's primary customers include major mass market retailers in the United States. In Fiscal 1999, one customer accounted for 9% of the Company's revenues. While the loss of this customer could have a material adverse impact upon the Company in the short-term, the Company believes such impact would be minimized in the long-term since the Company could either reduce its expenses related to this customer or sell all or a portion of these products to other customers. Certain of the Company's customers include: - Office Max - Walgreen Drug - Walmart - Eckerd - Target - Staples The above list of customers does not include independent distributors nor products the Company sells to the stationery, military and college store markets. The Company advertises in trade journals on a limited basis and maintains display booths for use at trade shows. It owns several booths that attractively display its line of products for such trade shows. The Company has developed a website to attractively display its products on the world wide web located at "www.pentechintl.com." The Company has no current plans for any other major advertising campaign, however it regularly investigates additional advertising avenues. The Company warrants its merchandise against manufacturing defects. In the event of any such returns the Company evaluates the problem and attempts to rectify the problem for the customer, if possible. The Company believes it maintains adequate product liability insurance. (viii) As of December 16, 1999 and 1998, the Company's backlog of firm written orders was approximately $1,600,000 in each year. This backlog is comprised of the normal delay between receipt and processing of orders and orders for delayed delivery. All orders were delivered or are expected to be filled within the applicable fiscal year. (x) The industry in which the Company is engaged is highly competitive. The Company competes with a large number of companies, including such well-known companies as Bic Pen Company, Papermate, RoseArt Industries, Inc. and Newell. Some of the Company's competitors have far greater financial resources and sales. The Company generally competes on the basis of the special features of its products, quality, packaging design (which includes the individual product's name and the Company's name and logo or the trademark of one of the Company's licensors) and price. (xiii) As of December 16, 1999, the Company had approximately 146 employees. The Company's sales are made primarily by independent sales organizations which are compensated exclusively on a commission basis with commissions ranging from two and one half to seven percent. The Company does not anticipate a substantial increase in the number of its employees in the near future. The Company considers its relations with its employees to be good. In December 1992, the production and maintenance employees of the Company's wholly-owned subsidiary, Sawdust, voted to join Local 478 of the International Brotherhood of Teamsters (the "Union"). In the Company's fiscal year ended September 30, 1996 ("Fiscal 1996"), Sawdust renewed its labor agreement with the Union for the benefit of these employees, which agreement expired August 31, 1999. At present, the Union has agreed to work under the terms and conditions of the expired contract until a new contract is negotiated and a determination is made as to the impact of the Company's investigation into moving a portion of its manufacturing operations overseas. (d) The Company exported approximately 6.3% of its sales, primarily to customers in Canada, Europe and Mexico, during Fiscal 1999. Item 2. PROPERTIES. The Company's present executive offices are located at 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 expiring March 1, 2003. The Company extended its lease for five years commencing June 1, 1995 (the "Sawdust Lease") for approximately 50,000 square feet for Sawdust's premises. These premises are located at 44 National Road, Edison, NJ 08817. The Sawdust Lease, which is triple net, currently requires annual rental payment of $180,936 with yearly increment additions in each subsequent year of the Sawdust Lease's term. The Sawdust Lease contains an option to renew on terms providing for moderate increases in rent for up to an additional five years. The Company entered into a five year lease for a warehouse at 1101 Corporate Road, North Brunswick, New Jersey (the "Warehouse Lease") for approximately 130,000 square feet, which commenced on September 1, 1995. The Warehouse Lease provides for annual base rent of approximately $436,000 per year. The Company entered into a year-to-year lease for a sales office in Madison, Wisconsin (the "Madison Lease"). The Madison Lease is for approximately 1,885 square feet and commenced May 1, 1997. The Madison Lease calls for annual rental of $24,318, which increases by 3.5 percent each subsequent lease year until termination. The Company entered into a month-to-month lease for a studio at 75 Broad Street, Red Bank, New Jersey for approximately 2,400 square feet which commenced on April 1, 1997. The Studio Lease provides for monthly rent of $3,700. Item 3. LEGAL PROCEEDINGS. There are no legal proceedings to which the Company is a party or known to be contemplated that are deemed material by the Company at the present time, and the Company knows of no material legal proceedings pending or threatened, or judgments entered, against any director or officer of the Company in his capacity as such. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. 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 1999 1st Quarter 1 3/16 9/16 2nd Quarter 1 7/32 5/8 3rd Quarter 25/32 19/32 4th Quarter 1 15/32 3/4 1998 1st Quarter 3 1/16 2 1/2 2nd Quarter 2 31/32 1 1/8 3rd Quarter 2 1 1/8 4th Quarter 1 13/16 15/16 On December 16, 1999, the closing "bid" and "ask" prices for the Common Stock were $11/16 and $25/32 respectively, as reported by NASDAQ. (b) On December 16, 1999, the number of shareholders of record of the Common Stock was 430. The Company is aware that it has a substantial number of additional shareholders who hold their shares of Common Stock in "street name." (c) The Company has not declared a cash dividend in the past and is not permitted to do so without the consent of its lender. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." Item 6. SELECTED FINANCIAL DATA. The following summary of financial information should be read in conjunction with the Financial Statements and notes thereto included elsewhere in this Form 10-K. STATEMENT OF OPERATIONS DATA Fiscal Years Ended September 30, 1999 1998 1997 1996 1995 ($ 000s omitted except per share amounts) Net sales $60,949 $57,485 $60,806 $61,679 $54,892 Net (loss) income (334) (3,504) 600 (5,317) (1,059) Basic and diluted net (loss) income per share ($.03) ($.28) $.05 ($.51) ($.10) Weighted average number of shares outstanding 12,570 12,537 12,297 10,497 10,661 Dividends - - - - - BALANCE SHEET DATA September 30, 1999 1998 1997 1996 1995 ($ 000s omitted) Working capital $11,971 $12,883 $15,452 $13,676 $16,928 Total assets 36,094 41,583 42,503 48,189 44,518 Notes and bankers' acceptances payable (included in current liabil- ities) 13,882 18,618 17,238 22,841 17,011 Long- term debt 1,500 2,000 2,300 2,300 - Share- holders' equity 13,985 14,758 17,591 16,028 21,345 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Fiscal 1999 compared to Fiscal 1998 Net sales for Fiscal 1999 were $60,949,084 as compared to $57,485,045 for Fiscal 1998, reflecting an increase of $3,464,039 or approximately 6%. This was the result of the success of the Company's new licenses and further market penetration of the Company's childrens activity product line. In Fiscal 1999, the Company had income from operations of $1,133,057 as compared to a loss from operations of $2,339,443 in Fiscal 1998. The Company's gross profit of 31.9% in Fiscal 1999 increased from 28.1% in Fiscal 1998 largely in part to the increased sales from its three new licenses, which have higher gross profit margins. In addition, the Company made an investment through aggressive pricing to gain shelf space for its children's activity product line in the prior year. The Company's selling, general and administrative ("SG&A") expenses decreased during Fiscal 1999 to $18,286,990 from $18,474,161 in Fiscal 1998, reflecting an decrease of $187,171. SG&A as a percentage of sales also decreased to 30% from 32.1%. This decrease was primarily related to the Company's cost reduction program offset by the increase in royalty expenses associated with the success of the Company's three new licenses. In addition, in the prior year, the Company incurred higher promotional costs associated with the launch of its activity product line. During Fiscal 1999, the Company's average level of short-term borrowings increased to $16,500,000 from $16,000,000 in Fiscal 1998. This was due to the increased loan balance at the beginning of Fiscal 1999 resulting from the higher inventory levels. These levels were reduced during the course of the year. The Company's effective annual interest rate decreased from 8.4% to 8.0%. In addition, interest incurred on the settlement note was lower from the prior year as a result of quarterly principal payments. As a result, the Company's interest expense decreased during Fiscal 1999 to $1,470,699 from $1,528,779. During Fiscal 1999, the Company increased its valuation allowance against all of its deferred tax assets from $2,614,202 to $2,670,714 due to the uncertainty of the Company's ability to utilize its federal and state net operating loss carryforwards. As a result of the above, the Company recognized a net loss of $333,609, or $.03 per share, in Fiscal 1999 as compared to a net loss of $3,504,303, or $.28 per share, in Fiscal 1998. Fiscal 1998 Compared to Fiscal 1997 Net sales for Fiscal 1998 were $57,485,045 as compared to $60,806,386 for Fiscal 1997, reflecting a decrease of $3,321,341 or approximately 5.5%. Sales from three of the Company's licensed products were down from the previous year as were sales from promotional and holiday programs. This was offset, in part, by the success of the children's activity products as well as commodity programs. In Fiscal 1998, the Company had a loss from operations of $2,339,443 as compared to income from operations of $2,155,227 in Fiscal 1997. The Company's gross profit of 28.1% in Fiscal 1998 decreased from 34.3% in Fiscal 1997. The Company's gross profit decreased principally due to the decline in licensed products which historically are marketed at higher margins and, to a lesser extent, to an inventory write-down and the impact of a large return of promotional back-to-school products. The Company also made an investment to gain shelf space for its activity product line through aggressive pricing and various other promotions. The Company's SG&A expenses increased during Fiscal 1998 to $18,474,161 from $17,988,791 in Fiscal 1997, reflecting an increase of $485,370. SG&A expenses as a percentage of sales also increased from 29.6% to 32.1%. The increase was primarily related to higher promotional costs associated with the Company's launch of its activity product line to new retail stores. The Company incurred higher bad debt expense as a result of bankruptcies of two customers. The Company also incurred additional costs for the development of products for two of its new licenses. Warehouse and freight expenses also increased as a percentage of sales due to a decline in the average order size as a result of increased sales to the office superstores. Finally, the percentage of SG&A expenses to revenues increased as a result of higher levels of fixed costs incurred but there was lower sales volume. In the second quarter of Fiscal 1998, the Company as part of the settlement of a lawsuit, was awarded $965,000, net of legal fees. During Fiscal 1998, the Company's average level of short-term borrowings remained unchanged from the prior year at approximately $16,000,000. This was due to the sale of assets, related to the cosmetic product line, plus the litigation settlement offset by an increase in inventory levels and the operating loss. The Company's effective annual interest rate decreased from 8.7% to 8.4%. In addition, interest incurred on the settlement note was lower than the prior year as a result of quarterly principal payments, which began in January 1998. As a result, the Company's interest expense decreased during Fiscal 1998 to $1,528,779 from $1,583,750. During Fiscal 1998, the Company increased its valuation allowance against its deferred tax assets from $965,565 to $2,614,202. The increase of $1,648,637 was recorded due to the uncertainty of the Company's ability to fully utilize federal and state net operating loss carryforwards. Based on the above, the Company recognized a net loss of $3,504,303 in Fiscal 1998 as compared to net income of $600,014 in Fiscal 1997. (b) Liquidity and Capital Resources Cash and cash equivalents decreased to $0 at September 30, 1999 from $759,349 at September 30, 1998. Accounts receivable increased to $15,300,613 at September 30, 1999 from $14,327,195 at September 30, 1998, primarily due to higher sales volume. The Company believes that its allowance for doubtful accounts and its accrual for returns and advertising allowances are adequate given the Company's detailed review of its accounts receivable aging, its review of subsequent cash receipts, its use of credit limits and its on-going credit evaluation and account monitoring. In addition, the Company has credit insurance on most of its major accounts receivable. Inventory decreased to $15,415,326 at September 30, 1999 from $20,015,241 the year before due to the Company's inventory reduction program. The decrease to $3,154,383 for equipment at September 30, 1999 from $3,562,283 at September 30, 1998 primarily reflects a reduction in the rate of equipment purchases. Notes payable at September 30, 1999 decreased to $13,881,901 from $18,618,186 at September 30, 1998 due primarily to the decreased inventory levels. Net cash provided by operating activities for the Fiscal 1999 was $4,606,458 as compared to net cash used in operating activities of $1,309,440 for Fiscal 1998. This increase was primarily due to improved operating results, the reduction in inventory, and to a lesser extent, the increase in accounts payable offset by the increase in accounts receivable. Cash used in investing activities during Fiscal 1999 of $630,272 was higher than $9,643 in the prior year due to proceeds from the sale of the cosmetic assets in the prior year. The cash used in financing activities during Fiscal 1999 was $4,735,535 as compared to cash provided by financing activities of $1,429,620 in Fiscal 1998. The decrease in cash provided by financing activities was primarily due to the decrease in notes payable. As a result of these activities, cash and cash equivalents decreased $759,349 during Fiscal 1999 as compared to an increase of $110,537 during Fiscal 1998. As a result of the above, the Company's working capital decreased to $11,970,736 at September 30, 1999 from $12,882,941 at September 30, 1998. In January 1997, the Company entered into a three year $30,000,000 revolving credit facility with BankAmerica Business Credit, Inc. now known as Bank of America, N.A.("BABC") (the "Credit Agreement"). The amount of drawings under the facility is subject to limitations based upon eligible inventory and accounts receivable as described in the Credit Agreement. The Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In addition, in accordance with the Credit Agreement, the Company has agreed, among other things, to the maintenance of certain minimum amounts of tangible net worth and minimum interest coverage ratios. In January 1999, the Company and BABC entered into an agreement to amend the Credit Agreement. This amendment, among other things, modified certain financial covenants for Fiscal 1999, reduced the revolving credit facility to $25,000,000, lowered the maximum inventory advance and allowed for a seasonal over-advance. In December 1999, the Company and BABC entered into an agreement to renew the Credit Agreement for an additional three years (the "Renewal"). The Renewal, among other things, waives compliance with certain financial covenants violated at September 30, 1999, modifies the financial covenants for the next three fiscal years, increases the maximum inventory advance and allows for a seasonal over-advance. The note issued in connection with the legal settlement referred to above requires $100,000 quarterly principal payments through April 1, 2004. The Company continued several actions to increase its liquidity during Fiscal 1999. It continued a policy of obtaining 30 to 60 days vendor credit to finance a majority of its purchases; previously these purchases had been financed pursuant to letters of credit. Actions were also taken to reduce the number of items held in inventory as well as reduce its headcount. On September 26, 1999 the Company signed a letter of intent with a Chinese manufacturer to establish a joint venture in Shanghai China for the purpose of developing additional capability to manufacture pencils and markers. The transaction is subject to the manufacturer's ability to operate the Company's machinery and produce comparable product, approval of the Company's bank, final approval of the Company's Board of Directors, approval of the Chinese government, and approval of the final documents. Accordingly, there is no assurance that the transaction will be completed, or what, if any, impact this will have on the Company's current manufacturing operations. As of the September 30, 1999 the Company has not recorded any impact of this transaction given the uncertainty of its successful completion, however, if the transaction is successful there is the potential of some costs associated with closing down the Company's domestic manufacturing facility. As a result of the seasonal nature of the Company's business, the Company's use of credit increases significantly in the months of May, June, July and August as the Company finances its inventory and receivables, and declines in September and October after collection of the invoices from its Back-to-School sales. The Company anticipates that its revolving credit line provided by the Credit Agreement, together with anticipated cash flow from operations, will be sufficient to provide liquidity on both a short-term and long-term basis to finance current and future operations. With respect to the Year 2000 issue, all internal computer equipment, manufacturing, distribution and business equipment are Year 2000 compliant. The Company utilizes a third party software package to run its internal operating and accounting systems and purchased and installed the Year 2000 compliant version in December 1998. In addition, all telecommunications equipment and computer applications are Year 2000 compliant. The Company has, therefore, not developed any contingency plans relating to Year 2000 issues. Year 2000 problems involving third parties may have a negative impact on the Company's customers or suppliers, the general economy or on the ability of businesses generally to receive essential services (such as telecommunications, banking services, etc.). Any such problem could have a material adverse effect on the Company's business and financial condition. The Company has contacted its major suppliers and customers in order to assess any third party risk, the majority of which has stated that they are Year 2000 compliant, however, the Company is unable at this time to assess the possible impact on its business of Year 2000 problems involving any third party. The costs associated with becoming Year 2000 compliant were not material and, for the most part, were absorbed in the Company's normal information technology budget. Although the Company believes that its systems are Year 2000 compliant, there can be no assurance that unanticipated Year 2000 problems will not arise which, depending on the nature and magnitude of the problem, could have a material adverse effect on the Company's business and financial condition. (c) Safe Harbor Statement Statements which are not historical facts, including statements about the Company's confidence and strategies and its expectations about new and existing products, technologies and opportunities, market and industry segment growth, demand and acceptance of new and existing products are forward looking statements that involve risks and uncertainties. These include, but are not limited to, product demand and market acceptance risks; the impact of competitive products and pricing; the results of financing efforts; the loss of any significant customers of any business; the effect of the Company's accounting policies; the effects of economic conditions and trade, legal, social, and economic risks, such as import, licensing, and trade restrictions; the results of the Company's business plan and the impact on the Company of its relationship with its lender. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. None. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. This information is contained on pages F-1 through F-25 hereof. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III The information required by this section will be incorporated by reference to the Proxy Statement of the Company to be filed with the Securities and Exchange Commission on or before January 29, 2000. 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, 1999 and 1998.................................................... F-2-3 Consolidated Statements of Operations for the years ended September 30, 1999, 1998 and 1997 .......... F-4 Consolidated Statements of Shareholders' Equity for the years ended September 30, 1999, 1998 and 1997....... F-5 Consolidated Statements of Cash Flows for the years ended September 30, 1999, 1998, and 1997.......... F-6-7 Notes to Consolidated Financial Statements.............. F-8-25 (a) (2) Financial Statement Schedules Schedule II - Valuation and Qualifying Accounts and Reserves............................................... F-26 All other schedules are omitted because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto. (a) (3) Exhibits 3.1 The Company's Certificate of Incorporation, as amended, incorporated by reference to Exhibit 3.1 to Registration Statement No. 2-95102-NY of the Company ("Form S-18"). 3.2 The Company's By-laws incorporated by reference to Exhibit 3.2 of Form S-18. 10.1 1989 Stock Option Plan incorporated by reference to Exhibit 4.2 to the Registration Statement No. 33-27009 on Form S-8. 10.2 1993 Stock Option Plan incorporated by reference to Exhibit 4.1 to the Registration Statement No. 33-67802 on Form S-8. 10.3 1995 Stock Option Plan is incorporated by reference to Exhibit 4.1 to the Registration Statement No. 333-30595 filed on Form S-8. 10.4 Loan and Security Agreement dated as of January 13, 1997, among the Company, Pentech Cosmetics, Inc., Sawdust Pencil Co. and BankAmerica Business Credit, Inc. incorporated by reference to Exhibit 10.7 of the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1996. 10.5 Waiver and First Amendment to Loan and Security Agreement among the Company, Pentech Cosmetics, Inc., Sawdust Pencil Co. and BankAmerica Business Credit, Inc. dated as of January 11, 1999 incorporated by reference to Exhibit 10.5 of the Company's Form 10-K Annual Report for its fiscal year ended September 30, 1998. 10.6 Waiver, Consent and Second Amendment to Loan and Security Agreement by and among Bank of America, N.A., the Company, Pentech Cosmetics and Sawdust Pencil Co. dated as of December 20, 1999. 10.8 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP dated December 28, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENTECH INTERNATIONAL INC. December 27, 1999 By:s/David Melnick David Melnick, 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 27, 1999 Norman Melnick of Directors s/David Melnick President and Chief December 27, 1999 David Melnick Executive Officer and Director (principal operating officer) s/John F. Kuypers Director December 27, 1999 John F. Kuypers s/Richard S. Kalin Secretary and Director December 27, 1999 Richard S. Kalin s/Roy L. Boe Director December 27, 1999 Roy L. Boe s/Robert K. Semel Director December 27, 1999 Robert Semel s/William Visone Executive Vice President- December 27, 1999 William Visone Strategic Planning and Director (principal financial officer) REPORT OF INDEPENDENT AUDITORS Board of Directors Pentech International Inc. We have audited the accompanying consolidated balance sheets of Pentech International Inc. and subsidiaries as of September 30, 1999 and 1998 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended September 30, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pentech International Inc. and subsidiaries as of September 30, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. s/ERNST & YOUNG LLP ERNST & YOUNG LLP MetroPark, New Jersey December 8, 1999, except for Note 3(c), as to which the date is December 20, 1999 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets Assets (Note 3) September 30, 1999 1998 Current Assets: Cash and cash equivalents $ - $ 759,349 Accounts receivable, net of allowance for doubtful accounts $35,654 and $128,814 in 1999 and 1998, respect- ively) 15,300,613 14,327,195 Inventory (Note 2) 15,415,326 20,015,241 Income taxes receivable (Note 5) 300 448,087 Prepaid expenses and other 1,632,401 1,436,415 Available-for-Sale Security (Notes 1 and 13) 181,400 621,875 Total current assets 32,530,040 37,608,162 Equipment: Equipment and furniture 9,472,206 8,934,327 Less accumulated depreciation (6,317,823) (5,372,044) 3,154,383 3,562,283 Other assets: Trademarks, net of amortization of $762,388 and $666,766 in 1999 and 1998, respectively 236,301 239,530 Due from officer 173,512 173,512 409,813 413,042 $36,094,236 $41,583,487 See accompanying notes. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Balance Sheets Liabilities and Shareholders' Equity September 30, 1999 1998 Current liabilities: Notes payable (Note 3) $13,881,901 $18,618,186 Accounts payable 3,322,094 2,455,073 Accrued expenses (Note 11) 3,055,309 3,351,962 Settlement note payable (Note 8) 300,000 300,000 Total current liabilities 20,559,304 24,725,221 Other liabilities: Royalty payable, long-term (Note 8) 50,000 100,000 Settlement note payable, long-term (Note 8) 1,500,000 2,000,000 1,550,000 2,100,000 Commitments and contingencies (Note 6) Shareholders' equity (Notes 1 and 4): Preferred stock, par value $.10 per share; authorized 500,000 shares; issued and outstanding, none - - Common stock, par value $.01 per share; authorized 20,000,000 shares; issued and outstanding 12,571,258 and 12,570,258 in 1999 and 1998, respectively 125,713 125,703 Capital in excess of par 6,838,723 6,837,983 Retained earnings 6,839,096 7,172,705 Accumulated other comprehensive income (Notes 1 and 13) 181,400 621,875 13,984,932 14,758,266 $36,094,236 $41,583,487 See accompanying notes. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Operations Year ended September 30, 1999 1998 1997 Net sales (Note 9) $60,949,084 $57,485,045 $60,806,386 Cost of sales 41,529,037 41,350,327 39,975,368 Gross profit 19,420,047 16,134,718 20,831,018 Selling, general and administrative expenses 18,286,990 18,474,161 17,988,791 Loss from cosmetics operation (Note 7) - - 687,000 Income (loss) from operations 1,133,057 (2,339,443) 2,155,227 Other (income) expense: (Income) from litigation (Note 14) (965,542) - Interest expense 1,470,699 1,528,779 1,583,750 Interest income (4,033) (33,392) (9,660) 1,466,666 529,845 1,574,090 (Loss) income before taxes (333,609) (2,869,288) 581,137 Income tax expense (benefit) (Note 5) - 635,015 (18,877) Net (loss) income $ (333,609) $(3,504,303) $ 600,014 Basic and diluted (loss) earnings per common share (Note 1) ($.03) ($.28) $.05 See accompanying notes. Pentech International Inc. and Subsidiaries Consolidated Statements of Shareholders' Equity Years ended September 30, 1999, 1998 and 1997
Common Stock Capital Number of Shares in Accumulated Excess Retained Comprehensive Other Comprehen- Authorized Issued Amount of Par Earnings Income (loss) sive Income Balance, September 30, 1996 20,000,000 10,496,758 104,968 5,845,781 10,076,994 - Issuance of Common Stock 2,007,500 20,075 943,362 Net income 600,014 $600,014 Balance, September 30, 1997 20,000,000 12,504,258 125,043 6,789,143 10,677,008 - Comprehensive (loss): Net loss (3,504,303) $(3,504,303) Other comprehensive income: Unrealized gain on available-for-sale security 621,875 621,875 Comprehensive (loss) $(2,882,428) Issuance of Common Stock 66,000 660 48,840 Balance, September 30, 1998 20,000,000 12,570,258 125,703 6,837,983 7,172,705 621,875 Comprehensive (loss): Net loss (333,609) $(333,609) Other comprehensive (loss) Unrealized loss on available-for-sale security (440,475) (440,475) Comprehensive (loss) $(774,084) Issuance of Common Stock 1,000 10 740 20,000,000 12,571,258 $125,713 $6,838,723 $ 6,839,096 $ 181,400 See accompanying notes.
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Year ended September 30, 1999 1998 1997 Cash flows from operating activities Net (loss) income $ (333,609) $ (3,504,303) $ 600,014 Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation 945,779 942,432 982,702 Amortization 95,622 100,363 116,925 Provision for losses on accounts receivable 95,753 134,974 15,401 Deferred income taxes - 635,015 290,099 Provision for loss from cosmetics operation - - 687,000 Change in assets and liabilities: (Increase) decrease in accounts receivable (1,069,171) 1,746,117 (1,771,187) Decrease (increase) in inventory 4,599,915 (1,957,743) (152,916) (Increase) decrease in prepaid expenses and other (195,986) 118,620 (605,228) (Increase) in due from officer - (32,000) (32,001) (Decrease) in bankers' acceptances payable - - (1,488,757) Increase (decrease) in accounts payable 867,021 1,121,468 (331,698) (Decrease) in accrued expenses (296,653) (88,742) (386,426) (Decrease) in settlement payables (550,000) (500,000) (1,000,000) Change in income taxes payable/ receivable 447,787 (25,641) 723,968 Net cash provided by (used in) operating activities 4,606,458 (1,309,440) (2,352,104) See accompanying notes. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (cont'd) Year ended September 30, 1999 1998 1997 Cash flows from investing activities Sale of cosmetics assets - 758,426 - Purchase of equipment and furniture (537,879) (697,884) (793,006) Increase in trademarks (92,393) (70,185) (118,891) Net cash used in investing (630,272) (9,643) (911,897) activities Cash flows from financing activities Net (decrease) increase in notes payable (4,736,285) 1,380,120 (4,114,432) Proceeds from the issuance of Common Stock 750 49,500 963,437 Net cash (used in) provided by financing activities (4,735,535) 1,429,620 (3,150,995) Net (decrease) increase in cash and cash equi- valents (759,349) 110,537 (6,414,996) Cash and cash equivalents, beginning of year 759,349 648,812 7,063,808 Cash and cash equivalents, end of year $ - $ 759,349 $ 648,812 Supplemental disclosures of cash flow information Non-cash investing activities: (Decrease) increase in fair value of available for sale equity security $ (440,475) $ 621,875 Purchase of fixed assets by capital lease - - $ 72,050 Cash paid during the year for: Interest $ 1,557,011 $1,454,840 1,773,920 Income taxes - - 30,931 See accompanying notes. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements September 30, 1999 1. Summary of Significant Accounting Policies Organization Pentech International Inc. (the "Company") was formed in April 1984. A wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), was formed in November 1989. The Company and its subsidiary are engaged in the production, design, and marketing of writing and drawing instruments. In October 1993, the Company formed another wholly-owned subsidiary, Pentech Cosmetics, Inc., to manufacture and distribute cosmetic pencils. During Fiscal 1997, the Company decided to dispose of this product line. The Company primarily operates in one business segment: the manufacture and marketing of pens, markers, pencils, other writing instruments and activity kits, primarily to major mass market retailers located in the United States, under the "Pentech" name or licensed trademark brand. The Company's fiscal year ends September 30. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Cash Equivalents The Company considers all time deposits with a maturity of three months or less to be cash equivalents. Inventory and Cost of Sales Inventory is stated at the lower of cost (first-in, first-out) or market. Cost of sales for imported products includes the invoice cost, duty, freight in, display and packaging costs. Cost of domestically manufactured products includes raw materials, labor, overhead and packaging costs. Equipment and Depreciation Equipment is stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, which range between five to ten years. Major improvements to existing equipment are capitalized. Expenditures for maintenance and repairs which do not extend the life of the assets are charged to expense as incurred. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 1. Summary of Significant Accounting Policies (cont'd) Trademarks Costs related to trademarks are being amortized over a five year period on a straight-line basis. Revenue recognition Revenue is recognized upon shipment of product to the customer. Fair Value of Financial Instruments The fair value for cash and accounts receivable approximate carrying amounts due to the short maturity of these instruments. The fair value amounts for notes payable approximate carrying amounts due to the variable interest rates. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (Loss) Earnings Per Share: In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share, which was adopted by the Company in December 1997. SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earning per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share for all periods have been presented and conform to the SFAS No. 128 requirements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 1. Summary of Significant Accounting Policies (cont'd) The following table sets forth the computation of basic and diluted earnings per share: YEAR ENDED SEPTEMBER 30, 1999 1998 1997 Numerator: Net (loss) income $ (333,609) $(3,504,303) $ 600,014 Denominator: Denominator for basic earnings per share- weighted average shares 12,570,508 12,537,258 12,297,124 Effect of dilutive securities: Employee stock options 0 0 194,043 Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions: 12,570,508 12,537,258 12,491,167 Basic and diluted (loss) income per share ($.03) ($.28) $.05 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 1. Summary of Significant Accounting Policies (cont'd) Stock Based Compensation Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Other Recently Issued Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" which is effective for years beginning after June 15, 2000. The Company has completed its review of SFAS 133 and has concluded that the adoption of this statement would not have any effect on the Company and its reporting. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 2. Inventory 1999 1998 Raw materials $ 4,261,866 $ 6,634,833 Work-in-process 1,748,504 1,641,162 Finished goods 10,510,956 12,849,246 Allowance for slow- moving items (1,106,000) (1,110,000) $15,415,326 $20,015,241 3. Notes Payable 1999 1998 Revolving line of credit interest payable monthly at prime plus .5% (8.75% at September 30, 1999 and 9% at September 30, 1998) $ 1,881,901 $ 4,618,186 Revolving line of credit, interest payable monthly at libor plus 2.5% (ranging from 7.76% to 7.87% at September 30, 1999 and 7.813% to 8.188% at September 30, 1998) 12,000,000 14,000,000 $13,881,901 $18,618,186 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 3. Notes Payable (cont'd) (a) In January 1997, the Company entered into a three year $30,000,000 Revolving Credit Agreement with BankAmerica Business Credit, Inc. now known as Bank of America, N.A. ("BABC") (the "Credit Agreement"). Borrowings under the Credit Agreement are subject to limitations based upon eligible inventory and accounts receivable as defined in the Credit Agreement. Amounts borrowed under the Credit Agreement accrue interest, at the Company's option, at either prime plus .5% or libor plus 2.5%. The Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In connection with the Credit Agreement, the Company has agreed, among other things, to the maintenance of certain minimum amounts of tangible net worth and interest coverage ratios and the Company cannot declare a cash divided without the consent of BABC. (b) In January 1999, the Company and BABC entered into an agreement to amend the Credit Agreement. This amendment, among other things, waived compliance with the violated covenants, reduced the revolving credit facility to $25,000,000, modified the financial covenants for Fiscal 1999, lowered the maximum inventory advance and allowed for a seasonal over-advance. (c) In December 1999, the Company and BABC entered into an agreement to renew the Credit Agreement for an additional three years (the "Renewal"). The Renewal, among other things, waives compliance with certain financial covenants violated at September 30, 1999, modifies the financial covenants for the next three fiscal years, increases the maximum inventory advance and allows for a seasonal over-advance. The weighted average annual interest rate during the periods on the outstanding short-term borrowings was 8.0% and 8.4% for fiscal years ended September 30, 1999 and 1998, respectively. 4. Shareholders' Equity Stock Options During Fiscal 1997, the Company granted options (outside of the plans discussed herein) covering in the aggregate 20,000 shares of common stock at an exercise price of $1.19 per share (representing fair market value at date of grant). In addition, options covering in the aggregate of 175,000 shares were canceled. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 4. Shareholders' Equity (cont'd) Stock Option Plans On January 5, 1989, the Company adopted a stock option plan ("1989 Plan"). The 1989 Plan provides for options and limited stock appreciation rights ("Limited SARs") to be granted in tandem to issue up to 600,000 shares of common stock. Limited SARs may only be granted in conjunction with related options. The exercise price of options granted may not be less than the fair market value of the shares on the date of the grant (110% of such fair market value for a holder of more than 10% of the Company's voting securities), nor may options be exercised more than ten years from date of grant (5 years for a holder of more than 10% of the Company's voting securities). No SARs have been granted. The 1989 Plan was terminated on January 5, 1999. Outstanding options continue to be exercisable according to their terms and remain subject to all the terms and conditions of the 1989 Plan, however no more grants can be issued. On April 14, 1993, the Company adopted a Stock Option Plan ("1993 Plan"). The 1993 Plan provides for the issuance of incentive and nonstatutory stock options to employees, consultants, advisors and/or directors for a total up to 700,000 shares of common stock. The exercise price of options granted may not be less than the fair market value of the shares on the date of grant (110% of such fair market value for a holder of more than 10% of the Company's common stock), nor may options be exercised more than five years from date of grant. The 1993 Plan will terminate on January 4, 2003. On May 9, 1995, the Company adopted a Stock Option Plan ("1995 Plan"). The 1995 Plan provides for the issuance of incentive and nonstatutory stock options to employees, consultants, advisors and/or directors for a total of up to 700,000 shares of Common Stock. The determination of the exercise price of the options granted under the 1995 Plan are the same as those of the 1993 Plan. The 1995 Plan will terminate on January 4, 2005. On November 26, 1996, the Board of Directors offered to cancel and reissue certain options (at a reduced level) in the 1989 and 1993 Plans at the fair market value of the Company's Common Stock on such date. Upon acceptance by the option holders, the vesting period began one year from the date of the offer and the options become exercisable ratably over a period of three years and expire four years from the date of issuance. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 4. Shareholders' Equity (cont'd) The table below presents option information for the 1989 Plan: Year ended Year ended Year ended Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997 Price range Shares Price range Shares Price Range Shares Outstanding, beginning of year $0.75-2.875 270,600 $0.75 285,600 $3.125-7.875 351,000 Options granted 1.50-2.875 105,000 0.75 285,600 Canceled 0.75-2.875 (78,600) 0.75 (72,000) 3.125-7.875 (351,000) Exercised 0.75 (48,000) Outstanding, end of year $0.75-2.875 192,000 $0.75-2.875 270,600 $0.75 285,600 Eligible for exercise currently $0.75-2.875 107,835 $0.75 51,200 - - PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 4. Shareholders' Equity (cont'd) The table below presents option information for the 1993 Plan: Year ended Year ended Year ended Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997 Price range Shares Price range Shares Price Range Shares Outstanding, beginning of year $0.75-5.50 310,500 $0.75-5.50 440,500 $3.125-6.125 647,500 Options granted 0.75-1.25 155,600 - - 0.75 -0.875 385,500 Canceled 0.75-5.50 (125,500) 0.75-4.50 (112,000) 3.125-6.125 (592,500) Exercised 0.75 (1,000) 0.75 ( 18,000) Outstanding, end of year $0.75-5.50 339,600 $0.75-5.50 310,500 $0.75 -5.50 440,500 Eligible for exercise currently $0.75-5.50 133,500 $0.75-5.50 96,000 $4.50 -5.50 43,000 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (cont'd) September 30, 1999 4. Shareholders' Equity (cont'd) The table below presents option information for the 1995 Plan: Year Ended Year Ended Year Ended Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997 Price range Shares Price range Shares Price range Shares Outstanding, beginning of year $0.75-2.9375 75,002 $0.75-2.9375 123,000 $3.00 10,000 Options granted - - 1.625-1.688 9,500 0.75-2.9375 123,000 Canceled 0.75-1.4375 (8,500) 1.4375-2.9375 (57,498) 3.00 (10,000) Exercised - - - - - - Outstanding, end of year $1.4375-2.9375 66,502 $ 0.75-2.9375 75,002 $0.75-2.9375 123,000 Eligible for exercise curr- ently $1.4375-2.9375 49,002 $ 0.75-2.9375 29,750 $1.4375 12,000 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 4. Shareholders' Equity (cont'd) The Financial Accounting Standards Board has issued Financial Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 took effect for transactions entered into during the fiscal year beginning October 1, 1996; with respect to disclosures required for entities that elect to continue to measure compensation cost using prior permitted accounting method, such disclosures must include the effects of all awards granted in the fiscal year beginning October 1, 1995. The Company has elected to follow Accounting Principles Board Opinion No. 25. "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by Statement No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. This fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions: Risk-free interest rate 6.01% Expected dividend yield 0% Expected stock price volatility .605% Expected life of options 2-6 years The weighted average fair value of options granted during Fiscal 1999 and Fiscal 1998 is $.68 and $.74 per share, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can mutually affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information is as follows (in thousands except for earnings per share amounts): PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 4. Shareholders' Equity (cont'd) Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997 As reported Pro forma As reported Pro forma As reported Pro forma Net (loss) income ($334) ($404) ($3,504) ($3,594) $600 $491 (Loss) earn- ings per share ($.03) ($.03) ($ .28) ($ .29) $.05 $.04 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1998 5. Income Taxes 1999 1998 1997 Expense/(Benefit) Federal: Current $ - $ - $(309,276) Deferred - 349,002 273,730 State: Current - - 300 Deferred - 286,013 16,369 $ - $ 635,015 $ (18,877) Reconciliations of the statutory federal income tax rate of 34% to the effective tax rates are as follows: 1999 1998 1997 Statutory tax rate (34.00%) (34.00%) 34.00% State income taxes, net of federal tax expense (benefit) 9.88% (4.84%) 1.86 IRS audit adjustment 5.32 Permanent differences 10.04% 1.37% Increase (decrease) in valuation allowance 16.94% 57.46% (47.77%) Other (2.86%) 2.14% (6.65%) Effective tax rate - 22.13% (3.25%) PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 5. Income Taxes (cont'd) Significant components of the Company's deferred tax assets and liabilities as of September 30, 1999 and 1998 are as follows: September 30, 1999 1998 Current deferred tax liability: State taxes on deferred federal items $ (51,957) $ (68,687) Current deferred tax assets: Bad debts 15,331 55,390 Inventory reserve 475,580 477,300 Reserve for returns and allowances 267,018 303,528 Unicap 8,364 7,787 Total current deferred tax assets 766,293 844,005 Valuation allowance on current deferred tax assets (714,336) (775,318) 51,957 68,687 Net current deferred tax assets $ - $ - Long-term deferred tax liabilities: Depreciation $ (853,163) $ (932,290) Long-term deferred tax assets: Reserve for litigation 817,000 1,053,500 State net operating loss carryforwards 552,210 535,598 Federal net operating loss carry- forward 1,440,331 1,182,076 Total long-term deferred tax assets 2,809,541 2,771,174 Valuation allowance on long-term deferred tax assets (1,956,378) (1,838,884) 853,163 932,290 Net long-term deferred tax assets $ - $ - PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 5. Income Taxes (cont'd) The Company has generated state net operating loss carryforwards of $6,135,663, which will expire in varying amounts beginning on September 30, 2001. The Company has also generated a federal net operating loss carry-forward of $4,206,218, which will expire in varying amounts on September 30, 2013. In 1997, approximately $277,000 of the valuation allowance was recognized as a tax benefit. In 1998, the Company increased the valuation allowance to $2,614,202 due to the uncertainty of its ability to fully utilize the federal and state net operating loss carry-forward. In 1999, there was a net increase in the valuation allowance to $2,670,714. As in the prior year, in 1999 no tax benefit was recognized due to the uncertainty of utilizing the net loss carry-forwards. 6. Commitments and Contingencies Letters of Credit The Company was contingently liable for outstanding letters of credit of $158,202 at September 30, 1999. Leases Rent expense for the years ended September 30, 1999, 1998 and 1997 amounted to $1,022,852, $1,056,934 and $1,024,491, respectively. In May 1990, the Company entered into a 60 month lease for manufacturing space. The lease provides for all real estate taxes and operating expenses to be paid by the Company and it contains options to renew for two 60 month periods. The Company exercised its first option and extended the lease for an additional 60 months commencing in June 1995. In March 1993, the Company entered into a 60 month lease for office, warehouse and manufacturing space. The lease provides for all real estate taxes and operating expenses to be paid by the Company and it contains an option to renew for an additional 60 month period. In October 1997, the Company exercised its option to renew. In August 1995, the Company entered into a 60 month lease for its 130,000 square foot distribution center. The lease provides for all real estate taxes and operating expenses to be paid by the PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 6. Commitments and Contingencies (cont'd) Company and it contains two options to renew for two five year periods. Future minimum rental payments under operating leases are as follows: 2000 744,932 2001 177,743 2002 141,375 2003 82,469 $1,146,519 Concentration of Labor In December 1992, the production and maintenance employees of the Company's wholly owned subsidiary, Sawdust, voted to join local 478 of the International Brotherhood of Teamsters (the "Union"). In the Company's fiscal year ended September 30, 1996 ("Fiscal 1996"), Sawdust renewed its labor agreement with the Union for the benefit of these employees, which agreement expired August 31, 1999. The Union has agreed to work under the terms and conditions of the expired contract until a new contract is negotiated and a determination is made as to the impact of the Company's investigation into moving a portion of its manufacturing facility overseas. As of September 30, 1999, 47% of the Company's employees were members of the Union. To date, the Company has maintained a favorable relationship with the Union. 7. Loss from Cosmetics Operation: During the second quarter of 1997, the Board of Directors determined to discontinue its cosmetics operation and focus its efforts primarily on its writing instruments business. The loss from cosmetics operation reported in the second quarter of 1997 reflects the write-down of certain assets of this operation to their estimated net realizable value (Note 13). 8. Paradise Settlement In October 1987, the Company commenced an action against Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc., (collectively, "Paradise") in the United States District Court for the Southern District of New York which resulted in an adverse multi-million dollar judgment against Pentech. In December 1996, the parties to such litigation entered into a settlement agreement providing, among other things, for Pentech to pay $500,000 at the date of signing, deliver a $3,000,000 promissory note plus interest at the rate of 7% per annum (the "Note") and enter into a five year PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1999 8. Paradise Settlement (Cont'd) non-exclusive license to sell such products for a 10% royalty, with an aggregate minimum royalty of $500,000 (the "Paradise Settlement"). The Company paid Paradise the $500,000 at the date of signing in January 1997 and a required payment against the Note of $400,000 in February 1997. In addition, the Note required $100,000 quarterly principal payments commencing January 1, 1998. Quarterly principal payments have been made through October, 1999. The Company also has paid $300,000 against the minimum royalty. 9. Major Customer and Concentration of Credit Risk For the years ended September 30, 1999, 1998 and 1997, the Company had one customer who accounted for 9%, 12% and 13%, respectively, of net sales. Concentration of credit risk with respect to trade receivables is generally limited due to the Company's use of credit limits, credit insurance and ongoing credit evaluations and account monitoring procedures. 10. 401(k) Plan The Company has a defined contribution 401(k) plan, covering substantially all employees not covered under a collective bargaining agreement. The plan provides employees an opportunity to make pre-tax payroll contributions to the plan. The plan was amended on April 1, 1996 to incorporate an employer discretionary match of 1/3 of the first 6% of employee contributions. For the years ended September 30, 1999, 1998, 1997 the Company contributed $37,500, $32,558 and $36,273, respectively. 11. Accrued Expenses September 30, 1999 1998 Accrued returns and advertising rebates $2,038,410 $1,878,847 Accrued royalties 430,000 346,940 Other accrued expenses 586,899 1,126,175 $3,055,309 $3,351,962 12. Private Placement In January 1997, the Company completed a private offering of 20 Units, each Unit consisting of 100,000 shares of Common Stock of the Company for $50,000 per Unit (the "Private Offering"). The Company received net proceeds of $963,000 from the Private PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Cont'd) September 30, 1998 12. Private Placement (Cont'd) Offering. Officers and directors of the Company acquired 52.5% of the Units sold in the Private Offering and participated on the same terms as the other investors in the Private Offering. The terms of the Private Offering were established by a Special Committee of the Board of Directors who did not participate in the Private Offering. The Company was required by its banks (at that time) to raise funds in the Private Offering in order to fund the $500,000 payment referred to in Note 8 and to enable the Company to fund its requirements for capital expenditures. 13. Sale of Cosmetic Assets/Available-for-Sale Security In November 1997, the Company entered into an agreement to sell the fixed assets and inventory of its Cosmetics subsidiary to an outside company, Fun Cosmetics Inc. ("Fun") (significantly owned by a former employee) for its net book value of $758,000 plus 200,000 shares of Fun. In December 1997, $100,000 was received as a down payment, $150,000 was received at closing and a note was issued for approximately $508,000 bearing interest at a rate of 9% per annum. The terms of the note provided that the principal be reduced by $150,000 a month commencing February 1998, until paid. This note was paid in full in March 1998. At the time of sale, the Company assigned no value to the shares received since the acquiring company was a start-up company with minimal assets and was still seeking financing. Since November 1997, Fun has raised additional equity and funding and has become a non-reporting company whose shares are listed on the NASD Electronic Bulletin Board. At September 30, 1999, the value of this stock (based on quoted market prices) was $.907 a share. The Company has the right to begin selling its shares in Fun. However, due to the historically low level of trading activity, the number of shares the Company owns and the fact that the shares are unregistered, there is no assurance the Company will realize the current market value. 14. Income from Lawsuit Settlement: In June 1997, the Company commenced an action against Cooper and Dunham LLP and Lewis H. Eslinger (collectively, "Defendants") in the Supreme Court of the State of New York and County of New York for legal malpractice, gross negligence, misrepresentation and breach of contract in connection with the adverse, multi-million dollar judgment resulting from a patent infringement case which the defendants had been retained to pursue. On April 10, 1998, the Company terminated this action and received a payment of $1,250,000. All actions arising from the patent infringement case have now been discontinued with prejudice. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES Years Ended September 30, 1999, 1998 and 1997 Column A Column B Column C Column D Column E Charged to Costs Balance at and Balance Beginning Expenses/ End of Description of Period Other Deductions(1) Period Year ended September 30, 1999 Allowance for doubtful accounts $ 128,814 $ 95,753 $188,913 $ 35,654 Allowance for slow moving items $1,110,000 $ 213,000 $217,000 $1,106,000 Valuation allowance for deferred taxes $2,614,202 $ 56,512 $ - $2,670,714 Year ended September 30, 1998 Allowance for doubtful accounts $ 30,087 $ 134,974 $ 36,247 $ 128,814 Allowance for slow moving items $1,210,000 $ 300,000 $400,000 $1,110,000 Valuation allowance for deferred taxes $ 965,565 $1,648,637 - $2,614,202 Year ended September 30, 1997 Allowance for doubtful accounts $ 402,513 $ 15,401 $387,827 $ 30,087 Allowance for slow moving items $1,386,000 $ 400,000 $576,000 $1,210,000 Valuation allowance for deferred taxes $1,243,191 $ 237,009 $514,635 $ 965,565 (1) Amount represents various accounts written off during the year, net of recoveries. EXHIBIT INDEX Exhibit 10.6 Waiver, Consent and Second Amendment to Loan and Security Agreement by and among Bank of America, N.A., the Company, Pentech Cosmetics and Sawdust Pencil Co. dated as of December 20, 1999. 21 Subsidiaries of the Company. 23.1 Consent of Ernst & Young LLP dated December 28, 1999. 27 Financial Data Schedule. EX-13.1 6 0006.txt APPENDIX E FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For the transition period from to . Commission file number 0-15374 PENTECH INTERNATIONAL INC. (Exact name of registrant as specified in its charter) Delaware 23-2259391 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 195 Carter Drive, Edison, New Jersey 08817 (Address of principal executive offices) (Zip Code) (732) 287-6640 (Registrant's telephone number, including area code) (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the issuer's classes of common stock, as of May 12, 2000, was 12,571,258 shares of common stock, par value $.01 per share. Exhibit Index is located on Page 21. Page 1 of 21 INDEX Part I. Financial Information: Item 1. Financial Statements (Unaudited). Page Consolidated Balance Sheets as of March 31, 2000 and September 30, 1999 3-4 Consolidated Statements of Operations for the three and six months ended March 31, 2000 and 1999 5 Consolidated Statements of Cash Flows for the six months ended March 31, 2000 and 1999 6-7 Notes to Consolidated Financial Statements 8-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 16-18 Item 3. Quantitative and Qualitative Disclosure About Market Risk. 18 Part II. Other Information: Item 5. Other Information 19 Item 6. Exhibits and Reports on Form 8-K. 19 Signatures 20 PART I. FINANCIAL INFORMATION Item 1. Financial Statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ASSETS (000's omitted) (Substantially all pledged or assigned) March 31, 2000 September 30, 1999 (unaudited) Current Assets: Accounts receivable, net of allowance for doubtful accounts of $83 at March 31, 2000 and $36 at September 30, 1999 $10,099 $15,301 Inventories (Notes 1 and 2) 14,132 15,415 Prepaid expenses and other 2,169 1,633 Joint venture receivable (Note 8) 1,328 - Available for-sale security (Note 7) 10 181 Total current assets 27,738 32,530 Equipment and furniture (Note 1) 8,402 9,472 Less accumulated depreciation (6,028) (6,318) 2,374 3,154 Other assets: Trademarks, net of accumulated amort- ization of $811 at March 31, 2000 and $762 at September 30, 1999 (Note 1) 233 236 Due from officer 174 174 407 410 $30,519 $36,094 See notes to consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Cont.) LIABILITIES AND SHAREHOLDERS' EQUITY (000's omitted) March 31, 2000 September 30, 1999 (unaudited) Current liabilities: Notes payable, bank (Note 3) $11,695 $13,882 Accounts payable 3,588 3,322 Accrued expenses 1,820 3,056 Settlement note payable 300 300 Deferred revenue from joint venture (Note 8) 449 - Total current liabilities 17,852 20,560 Other liabilities: Royalty payable, long-term 50 50 Settlement note payable, long-term 1,400 1,500 1,450 1,550 Commitments and contingencies (Note 4) Shareholders' equity: Preferred stock, par value $.10 per share; authorized 500,000 shares; issued and outstanding none Common stock, par value $.01 per share; authorized 20,000,000 shares; 12,571,258 shares issued and outstanding at March 31, 2000 and September 30, 1999, respectively 125 125 Capital in excess of par 6,839 6,839 Retained earnings 4,243 6,839 Accumulated other comprehensive income 10 181 11,217 13,984 $30,519 $36,094 See notes to consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (000's omitted except for per share amounts) (unaudited) Three Months Ended Six Months Ended March 31, March 31, 2000 1999 2000 1999 Net sales $10,497 $ 9,187 $20,781 $19,755 Cost of sales 7,069 6,088 14,129 13,385 Gross profit 3,428 3,099 6,652 6,370 Selling, general and administrative expenses 4,140 3,603 7,875 7,141 Plant relocation costs 574 - 787 - (Loss) from operations (1,286) (504) (2,010) (771) Interest expense 290 324 586 700 Other (income) - (15) - (17) Net (loss) $(1,576) $ (813) $(2,596) $(1,454) Net (loss) per share $ (.13) $ (.06) $ (.21) $ (.12) basic and diluted (Note 1) See notes to consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (000's omitted) (unaudited) Six Months Ended March 31, 2000 1999 Cash flows from operating activities: Net (loss) $(2,596) $(1,454) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 523 492 (Increase) decrease in: Accounts receivable 5,202 4,926 Inventories 868 1,140 Prepaid expenses and other (536) (36) Income taxes receivable - 448 Increase (decrease) in: Accounts payable 266 (70) Accrued expenses (1,236) (1,582) Settlement payable (100) (250) Total adjustments 4,987 5,068 Net cash provided by operating activities 2,391 3,614 Cash flows from investing activities: (Purchase) of furniture/equipment (158) (335) (Increase) decrease in trademarks (46) 16 Net cash (used in) investing activities (204) (319) See notes to consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000's omitted) (unaudited) Six Months Ended March 31, 2000 1999 Cash flows from financing activities: Net (decrease) in notes payable $(2,187) $(3,835) Net cash (used in) financing activities (2,187) (3,835) Net (decrease) in cash and cash equivalents - (540) Cash and cash equivalents, beginning of period - 759 Cash and cash equivalents, end of period $ - $ 219 Supplemental disclosures of cash flow information: Non-cash operating activities: (Increase) in joint venture receivable $(1,328) - Increase in deferred revenue from joint venture $ 449 - Decrease in fixed assets due to transfer to joint venture $ 464 - Decrease in inventory due to transfer $ 415 - to joint venture Non-cash investing activities: (Decrease) in fair value of available-for-sale security $ (171) $ (269) Cash paid during the period for: Interest $ 584 $ 782 See notes to consolidated financial statements. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) 1. Summary of Significant Accounting Policies: Organization: Pentech International Inc. (the "Company") was formed in April 1984. A wholly-owned subsidiary, Sawdust Pencil Company ("Sawdust") was formed in November 1989 and commenced operations in January 1991. The Company and its subsidiary are engaged in the production, design and marketing of writing and drawing instruments. The Company primarily operates in one business segment: the manufacture and marketing of pens, markers, pencils and other writing instruments and related products to major mass market retailers located in the United States, under the "Pentech" name or licensed trademark brand. The Company's business is subject to certain seasonal conditions in which sales tend to be concentrated in the third and fourth quarters of the fiscal year. The Company's fiscal year ends September 30. Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Cash Overdraft: Any bank overdrafts are included within accounts payable in the accompanying consolidated balance sheet. Unaudited Financial Statements: The unaudited financial information includes adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of the financial position at March 31, 2000 and the results of operations for the three and six month periods ended March 31, 2000 and 1999 and cash flows for the six months ended March 31, 2000 and 1999. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) 1. Summary of significant accounting policies (Cont'd): Inventory and Cost of Sales: Inventory is stated at the lower of cost or market (first-in, first-out). Interim inventories are based on an estimated gross profit percentage by product, calculated monthly. Cost of sales for imported products includes the invoice cost, duty, freight in, display and packaging costs. Cost of domestically manufactured products includes raw materials, labor, overhead and packaging costs. Equipment and depreciation: Equipment is stated at cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, which range from five to ten years. Major improvements to existing equipment are capitalized. Expenditures for maintenance and repairs which do not extend the life of the assets are charged to expense as incurred. Trademarks: Costs related to trademarks are being amortized over a five year period on a straight-line basis. Revenue recognition: Revenue is recognized upon shipment of product to the customer. Fair Value of Financial Instruments: The fair value for cash and accounts receivable approximates carrying amounts due to the short maturity of these instruments. The fair value for notes payable approximates carrying amounts due to the variable interest rates. Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) 1. Summary of significant accounting policies (Cont'd): accompanying notes. Actual results could differ from those estimates. Stock Based Compensation: Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) 1. Summary of significant accounting policies (Cont'd): (Loss) Earnings per share: The following table sets forth the computation of basic and diluted earnings per share: Three months ended Six months ended March 31, March 31, 2000 1999 2000 1999 Numerator: Net (loss) $(1,576,000)$ (813,000) $(2,596,000) $(1,454,000) Denominator: Denominator for basic earnings per share - weighted average shares 12,571,258 12,570,258 12,571,258 12,570,258 Effect of dilutive securities: Employee stock options - - - - Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions: 12,571,258 12,570,258 12,571,258 12,570,258 Basic and diluted (loss) per share $(.13) $(.06) $(.21) $(.12) PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) Other Recently Issued Accounting Standard: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" which was amended by the Statement of Financial Accounting Standards No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133" and is effective for years beginning after June 15, 2000. The Company has completed its review of SFAS 133 and has concluded that the adoption of this statement would not have any effect on the Company and its reporting. 2. Inventory March 31, September 30, 2000 1999 Raw materials $ 3,334,000 $ 4,262,000 Work-in-process 953,000 1,748,000 Finished goods 10,742,000 10,511,000 Allowance for slow-moving items (897,000) (1,106,000) $14,132,000 $15,415,000 March 31, September 30, 2000 1999 3. Notes Payable, bank: Revolving line of credit with interest payable monthly at prime plus .5% (9.50% at March 31, 2000 and 8.75% at September 30, 1999) $ 695,000 $ 1,882,000 Revolving line of credit with interest payable at maturity at libor plus 2.5% (8.68% at March 31, 2000 and ranging from 7.76% to 7.87% at September 30, 1999) 11,000,000 12,000,000 $11,695,000 $13,882,000 PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) In January 1997, the Company entered into a three year Revolving Credit Agreement with BankAmerica Business Credit, Inc. now known as Bank of America, N.A. (BABC) (the "Credit Agreement"). Borrowings under the Credit Agreement are subject to limitations based upon eligible inventory and accounts receivable as defined in the Credit Agreement. Borrowings under the Credit Agreement accrue interest, at the Company's option, at either prime plus .5% or libor plus 2.5%. In December 1999, the Company and BABC entered into an agreement to renew the Credit Agreement for an additional three years (the "Renewal"). The Renewal, among other things, waives compliance with certain financial covenants violated at September 30, 1999, modifies the financial covenants for the next three fiscal years, increases the maximum inventory advance and allows for a seasonal over-advance. The Renewal is collateralized by a security interest in substantially all of the assets of the Company. In connection with the Renewal, the Company has agreed to the maintenance of certain financial covenants and cannot declare a cash divided without the consent of BABC. 4. Contingency: At March 31, 2000, the Company was contingently liable for outstanding letters of credit of $551,417. 5. Income Taxes: Following is a reconciliation to income taxes at the statutory rate: Three months ended Six months ended March 31, 2000 March 31, 2000 Income tax at Federal statutory rate applied to income before taxes $(536,000) $ (883,000) State income taxes, net of Federal tax benefit (93,000) (154,000) Increase in valuation allowance 629,000 1,037,000 $ - $ - PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) 6. Paradise Settlement In Fiscal 1997, the Company entered into a settlement agreement with Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc., (collectively, "Paradise") providing, among other things, for Pentech to pay $500,000, deliver a $3,000,000 promissory note plus interest at the rate of 7% per annum (the "Note") and enter into a five year non-exclusive license to sell such products for a 10% royalty, with an aggregate minimum royalty of $500,000 (the "Paradise Settlement"). The Company paid $500,000 at the date of signing in January 1997 and a required payment against the Note of $400,000 in February 1997. In addition, the Note required $100,000 quarterly principal payments commencing January 1, 1998. Quarterly principal payments have been made through April 2000. The Company also paid $400,000 against the minimum royalty. 7. Available-for-Sale Security The value of Fun Cosmetics, Inc. stock (based on quoted market prices) as of March 31, 2000 was $.05 a share. However, due to the historically low level of trading activity, the number of shares the Company owns, the shares are unregistered and the Company has recently became aware that Fun has discontinued active operations, there is no assurance the Company will realize the current market value. Accumulated Other Comprehensive Income March 31, March 31, 2000 1999 Net loss $(2,596) $(1,454) Unrealized loss on available-for- sale security (171) (269) Comprehensive loss $(2,767) $(1,723) PENTECH INTERNATIONAL INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (The information for the three and six months ended March 31, 2000 and 1999 is unaudited.) 8. Joint Venture During the quarter ended December 31, 1999, the Company formed a strategic partnership with a manufacturer in Shanghai, China with the purpose of developing and manufacturing both existing products and many of the Company's new products in development. The terms of the joint venture provide for Pentech to receive cash for some of its manufacturing equipment and obtain a 50% ownership in the new entity being formed in China. In addition, there are costs associated with the relocation of the Company's domestic manufacturing facility. As of March 31, 2000, the Company has shipped approximately $1,328,000 worth of equipment and inventory and incurred relocating costs of approximately $787,000. Item 2. Management's discussion and analysis of financial condition and results of operations. (1) Material Changes in Results of Operations Net sales increased in the three and six months ended March 31, 2000 14.3% and 5.2%, respectively, from the same periods a year ago, primarily due to an increase in its "Fireworks" line of pens and its children's activity product line. Gross profit as a percentage of net sales decreased for the three and six months ended March 31, 2000 to 32.7% and 32% from 33.7% and 32.2%, respectively, as compared to the same periods a year ago. This was due to the decline in sales of licensed products for which the Company historically obtained higher gross margins. In addition, there was an increase in sales from the direct import program which generate lower gross profit margins. Selling, general and administrative ("SG&A") expenses as a percentage of sales for the three and six months ended March 31, 2000 increased to 39.4% and 37.9% from 39.2% and 36.1%, respectively, as compared to the same periods a year ago. This was primarily due to the increase in our sales force as well as an increase in freight expenses. In addition, there was an increase in advertising and promotional expenses. For the three and six months ended March 31, 2000, interest expense decreased as compared to the same periods a year ago. This was due to a lower outstanding loan balance this year. For the three and six months ended March 31, 2000, the net loss was $1,576,000, or $.13 per share, and $2,596,000, or $.21 per share, as compared to a net loss of $813,000, or $.06 per share, and $1,454,000, or $.12 per share, respectively, for the same prior periods a year ago. The decrease in income was primarily due to higher SG&A expenses and the plant move expenses. (2) Material Changes in Financial Condition In January 1997, the Company entered into a three year $30,000,000 (subsequently amended to $25,000,000) revolving credit facility with BankAmerica Business Credit Inc., now known as Bank of America, N.A. ("BABC") (the "Credit Agreement"). The amount of drawings under the facility is subject to limitations based upon eligible inventory and accounts receivable as described in the Credit Agreement. The Credit Agreement is collateralized by a security interest in substantially all of the assets of the Company. In addition, in accordance with the Credit Agreement, the Company has agreed, among other things, to the maintenance of certain financial covenants. In December 1999, the Company and BABC entered into an agreement to renew the Credit Agreement for an additional three years (the "Renewal"). The Renewal, among other things, waives compliance with certain financial covenants violated at September 30, 1999, modifies the financial covenants for the next three fiscal years, increases the maximum inventory advance and allows for a seasonal over-advance. The $3,000,000 note (the "Note") issued in connection with the Paradise Settlement requires $100,000 quarterly principal payments that commenced January 1, 1998 thru April 1, 2004. Quarterly principal payments were made through April 2000. During the quarter ended December 31, 1999, the Company formed a strategic partnership with a manufacturer in Shanghai, China with the purpose of developing and manufacturing both existing products and many of the Company's new products in development. The terms of the joint venture provide for Pentech to receive cash for some of its manufacturing equipment and obtain a 50% ownership in the new entity being formed in China. In addition, there are costs associated with the relocation of the Company's domestic manufacturing facility. As of March 31, 2000, the Company has shipped approximately $1,328,000 worth of equipment and inventory and incurred relocation costs of approximately $787,000. The Company continued several actions to increase its liquidity. It continued a policy of obtaining thirty to sixty day open credit to finance a majority of its purchases that historically have been financed pursuant to letters of credit. It continues to reduce the number of items held in inventory and has reduced the level of capital expenditures. Working capital decreased $2,084,000 to $9,886,000 at March 31, 2000. As a result of the seasonal nature of the Company's business, the Company's borrowings under the Credit Agreement increases significantly in the months of May, June, July and August as the Company finances its inventory and receivables, and declines in September and October after the collections of receivables from its sales during its seasonally high "Back to School" sales period. The change in financial position during the six months ended March 31, 2000 reflects primarily this seasonality due to the decrease in receivables from the collection of its Back- to-School sales and a decline in inventory. The Company anticipates that borrowings under the Credit Agreement together with anticipated revenues from operations, will be sufficient to provide liquidity on both a short-term and long-term basis to finance its future operations. The Company believes these resources are sufficient to support its operating expenses. (3) Safe Harbor Statement Statements which are not historical facts, including statements about the Company's confidence and strategies and its expectations about new and existing products, technologies and opportunities, market and industry segment growth, demand and acceptance of new and existing products are forward looking statements that involve risks and uncertainties. there include, but are not limited to, product demand and market acceptance risks; the impact of competitive products and pricing; the results of financing efforts; the loss of any significant customers of any business; the effect of the Company's accounting policies; the effects of economic conditions and trade, legal, social, and economic risks, such as import, licensing, and trade restrictions; the results of the Company's business plan and the impact on the Company of its relationship with its lenders. Item 3. Quantitative and Qualitative Disclosure About Market Risk. Market risk represents the risk of loss that may impact our financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and international borrowing rates and changes in foreign currency exchange rates. In addition, we are exposed to market risk in certain geographic areas that have experienced or remain vulnerable to an economic downturn, such as China. We purchase substantially all of our inventory from companies in China, and therefore, we are subject to the risk that such suppliers will be unable to provide inventory at competitive prices. While we believe that, if such an event were to occur we would be able to find alternative sources of inventory at competitive prices, we cannot assure you that we would be able to do so. These exposures are directly related to our normal operating and funding activities. Historically and as of September 30, 1999, we have not used derivative instruments or engaged in hedging activities to minimize our market risk. PART II. OTHER INFORMATION Item 5. Other Information. Notice is hereby given to the shareholders of the Company, that the Company's Annual Meeting of Shareholders scheduled to be held in April, 2000 has been postponed. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits. 3.1 Certificate of Incorporation of the Company, as amended, incorporated by reference to Exhibit 3.1 to Registration Statement No. 33-16453 (the "Registration Statement"). 3.2 By-Laws of the Company incorporated by reference to Exhibit 3.2 of the Registration Statement. 27 Financial Data Schedule. (b) Reports on Form 8-K. During the quarter ended March 31, 2000, the registrant did not file any reports on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENTECH INTERNATIONAL INC. Dated: May 22, 2000 By:s/William Visone William Visone, Executive Vice President - Strategic Planning (Duly authorized officer and Chief Financial Officer) EXHIBIT INDEX Exhibit 27 Financial Data Schedule -----END PRIVACY-ENHANCED MESSAGE-----