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, 1995
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 (908) 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 18, 1995 was approximately
$25,421,835 based on the average of the bid and asked quotations of the
registrant's Common Stock, par value $.01 share, as reported by NASDAQ on
December 18, 1995.
On September 30, 1995, there were outstanding 10,496,758 shares of the
registrant's Common Stock.
The Proxy Statement of the registrant to be filed on or before January
29, 1996 is incorporated herein by reference.
PART I
Item 1. BUSINESS
(a) Pentech International, Inc. (the "Company") was formed in
April 1984 to design and market writing and drawing instruments and
other stationery products. In November 1989, the Company formed a
wholly-owned subsidiary, Sawdust Pencil Co., to manufacture certain
of the Company's writing instruments. In October 1993, the Company
formed a wholly-owned subsidiary, Pentech Cosmetics, Inc., to
manufacture and distribute a line of cosmetic products. 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 and other
writing instruments and related products and miscellaneous cosmetic
products, primarily to major mass market retailers located in the
United States, under the "Pentech" name and a related product name
and logo. For financial information relating to this business
segment, please refer to the financial statements contained
elsewhere herein.
(c) The Company's product line consists of pens, markers,
pencils, other writing instruments, children's activity kits,
related products and miscellaneous cosmetic products. These
products compete on the basis of special features, packaging
design, quality and price, or a combination of these
characteristics. The Company believes its reputation and ability
to develop marketing programs for its products, through the
industry experience and marketing expertise of its management, are
principal factors in its business.
(d) The Company also has obtained license agreements with
owners of established trademarks to develop marketing programs with
the Company's products utilizing these trademarks. The Company
views the use of these established trademarks as providing further
product recognition as well as offering a new strategic direction
for the Company.
(i) The Company presently markets several types of pens,
markers, pencils, other writing instruments, children's activity
kits, related products and miscellaneous cosmetic products,
directly and through approximately 100 independent, nonexclusive,
sales representatives throughout the United States. Generally,
sales initiated by the sales representative are made directly to
retail chains, wholesalers and distributors in various areas.
<PAGE>
The percentages of revenues contributed by the following
classes of products over the Company's last three fiscal years are
as follows:
Other Writing Miscellaneous
Instruments and Cosmetic
Pens Markers Pencils Related Products Products
FY 1993 27.7% 28.0% 30.2% 14.1% -
FY 1994 17.9% 26.9% 35.3% 17.9% 2%
FY 1995 18.6% 23.0% 34.1% 20.3% 4%
(ii) The Company engages in ongoing market research to
identify writing instruments and related products that elicit
strong demand in the American marketplace. The Company, once it
identifies a product, generally either selects an overseas
manufacturer which it believes to be most suitable to manufacture
the product and works with such manufacturer to develop the product
to the Company's specifications or elects to manufacture the
product itself.
The Company's domestic pencil and marker manufacturing
facility, Sawdust Pencil Company ("Sawdust") is presently being
utilized by the Company to manufacture a significant portion of the
Company's writing instruments. Sawdust's capacity (on a two shift
basis) is approximately $34,500,000 (wholesale value) of pencils,
markers and other writing instruments. During its fiscal year
ended September 30, 1995 ("Fiscal 1995"), the Company manufactured
approximately $20,000,000 wholesale value of products at Sawdust,
which represents 58% of its current capacity and approximately 36%
of the Company's current requirements. During periods when Sawdust
is not being utilized at full capacity, it scales down its
workforce.
During Fiscal 1995, the Company manufactured at Sawdust
approximately 36% of the wholesale value of the products it sold,
down from approximately 41% for Fiscal 1994.
During its fiscal year ended September 30, 1994 ("Fiscal
1994"), the Company established a second pencil manufacturing
facility which also has the capability to manufacture cosmetic
pencils.
The Company emphasizes its unique packaging style that
graphically reinforces the Company's image as a marketer of well-
designed, high quality, reasonably priced pens and markers.
Management believes that the Company's packaging designs are
important to its efforts at penetrating the American marketplace
for writing instruments.
<PAGE>
Once a product's design is finalized, the Company develops
packaging for the product. Designs for these packages are then
shipped to the manufacturer which generally prints the packaging
and packages the product prior to its shipment to the Company.
With respect to products manufactured domestically at Sawdust, the
Company does its own packaging as well as arranges to print some of
its packaging with independent entities.
(iii) The Company utilizes foreign manufacturers to supply a
large percentage of pens, markers, other writing instruments and
related products and miscellaneous cosmetic products that it sells
throughout the United States. It continues to acquire a majority
of its products from contract manufacturers located in Korea,
Italy, India, Taiwan and other foreign countries. Such products
are manufactured to the Company's order with the "Pentech" logo and
label. The Company generally acquires its imported products
pursuant to purchase orders, which typically provide for delivery
within 60 days to 90 days after the order. Most of these purchases
are paid by posting a letter of credit payable from zero to 120
days after shipment.
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 than was normally available. The Company
is unable to predict whether it will experience any other similar
or worse 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 one
overseas manufacturer or any other reason. The Company has
achieved this through building Sawdust and developing multiple
sources in Korea, Italy, India, Taiwan and other countries. As a
result, the loss of any one overseas manufacturer would unlikely
create any long-term disruptions in the Company's ability to ship
its goods to its customers on a timely basis. Management believes
that it is not now dependent, nor is it likely to become dependent,
upon any one manufacturer for its product lines. It believes that
products of quality comparable to its present products could, if
necessary, be acquired from a variety of manufacturers located
primarily in Korea, Italy, Taiwan, India and Japan, or other
locations at comparable rates.
The Company obtains raw materials for Sawdust from domestic
and foreign suppliers of these materials. It has not faced any
material supply shortages, and it generally has multiple sources
for most of its product requirements. Due to a recent
determination by the United States International Trade Commission
(the "ITC") that certain manufacturers of Chinese pencils were
dumping them in the United States, the Company has been required to
develop additional sources for its supply of certain of its
pencils, which, to date, it has been successful in doing. In some
instances, this has resulted in increasing the Company's costs for
wood for its pencils.
(iv) The primary focus of the Company's marketing efforts is
to market its products under the individual product's name and the
Company's name. In the event opportunities present themselves
which the Company determines are advantageous for it to import
certain products in bulk on a private label basis (i.e., store
brand), the Company may capitalize on such opportunity. In such
event, the Company may request an advance deposit from the customer
before effecting such transaction, depending on the credit-
worthiness of the customer. This, historically, has been a small
segment of the Company's business.
The Company's marketing efforts include the development of
special promotions in connection with purchases of merchandise by
certain major chain stores. These promotions often feature
advertising allowances, free goods and free displays or permit the
sale of several of the Company's products at one favorable price.
The funding for these special promotions is substantially derived
from the revenues to be received from the sales themselves, and
generally the Company is not required to allocate any portion of
its working capital to such efforts. The Company also has designed
point of purchase product displays which it offers to its
customers.
In addition to the Company's licenses with the Walt Disney
Company, the Company has entered into licensing agreements for its
writing instruments with the NBA (National Basketball Association)
and NHL (National Hockey League) to use each league's team logos on
the Company's products, as well as the Coca-Cola Company, using
this trademark name on the Company's products. The Company has
also entered into a licensing agreement with the Fisher-Price Co.
to manufacture arts and crafts kits containing the Company's
products, which license has been modified to reflect a slower than
expected start-up due to technical issues.
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. Petitions have been
filed with the U.S. Patent and Trademark Office to cancel the
Federal trademark registration of the Company's "Pentech"
trademark. See Item 3. "Legal Proceedings."
<PAGE>
(v) The business of the Company has certain seasonal aspects.
Sales tend to increase during the months of May through August,
because retailers buy in anticipation of fall school opening, and
to decrease during the months of September through December. The
Company has been developing marketing programs to reduce this
seasonality.
(vi) The Company has changed during Fiscal 1995 from
utilizing an unaffiliated warehouse to store and ship its products
on a contract basis, to leasing and maintaining a warehouse in
North Brunswick, New Jersey.
Generally, the Company does not require any of its customers
to post any letters of credit or to advance any deposits on orders,
except in certain instances, depending upon the creditworthiness of
the customer, for special orders. The Company analyzes each
special order customer independently to determine whether any
deposits should be paid. The Company considers credit rating,
location, and amount of order, among other factors, to determine
whether a deposit is required. Normal credit terms are "net 30
days." The Company, in certain instances, follows the industry
practice of "School Dating," which is the shipment of products from
May through August, for which payment is not due until September or
October. The Company reviews its credit practices regularly and
currently attempts to insure 80% of its receivables through credit
insurance. In the past, except for the Phar-Mor bankruptcy in
Fiscal 1992, the Company has experienced a limited amount of bad
debts from its customers, usually as a result of a bankruptcy. In
such a case the Company's policy has been to liquidate its claims
as promptly as reasonable under the circumstances. This has been
further ameliorated since the Company obtained credit insurance.
The Company believes it has sufficient resources to manage its
credit functions.
(vii) The Company's primary customers include major mass
market retailers in the United States. In Fiscal 1995, 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:
- Eckerd Drug - Walgreen Drug
- Walmart - CVS Stores
- Target - K-Mart
The above list of customers does not include independent
distributors nor products the Company sells to the stationery,
military and college store markets.
The Company advertises in trade journals on a limited basis
and maintains display booths for use at trade shows. It owns
several booths that attractively display its line of products for
such trade shows. The Company has no current plans for any other
major advertising campaign, but it is investigating additional
advertising avenues.
The Company warrants its merchandise against manufacturing
defects. In the event of any such returns the Company evaluates
the problem and attempts to rectify the problem for the customer,
if possible. The Company believes it maintains adequate product
liability insurance.
(viii) As of December 1995 and December 1994, the Company's
backlog of firm written orders was approximately $3,100,000 and
$2,600,000, respectively. This backlog is comprised of the normal
delay between receipt and processing of orders and orders for
delayed delivery. All orders were delivered or are expected to be
filled within the applicable fiscal year.
(x) The industry in which the Company is engaged is highly
competitive. The Company competes with a large number of
companies, including such well known companies as Bic Pen Company,
Papermate, Pilot Pen, Newell, some of which may have far greater
financial resources and sales. The Company generally competes on
the basis of the special features of its products, quality,
packaging design (which includes the individual product's name and
the Company's name and logo) and price.
(xiii) As of November 30, 1995, the Company had approximately
185 employees, including Messrs. Norman Melnick, David Melnick,
John Linster and John F. Kuypers. The Company's sales are made
primarily by independent sales organizations which are compensated
exclusively on a commission basis with commissions ranging from two
and one half to seven percent. The Company does not anticipate a
substantial increase in the number of its employees in the near
future. The Company considers its relations with its employees to
be good. In December 1992, the production and maintenance
employees of the Company's wholly-owned subsidiary, Sawdust Pencil
Co. ("Sawdust"), voted to join Local 478 of the International
Brotherhood of Teamsters (the "Union"). In Fiscal 1993, Sawdust
entered into a labor agreement with Union representatives for the
benefit of these employees which expires August 31, 1996.
(e) The Company exports approximately 2 percent of its sales,
primarily to customers in Canada, Europe, Brazil and Mexico.
Item 2. PROPERTIES
The Company's present offices are located at 195 Carter Drive,
Edison, New Jersey 08817, where it occupies general office, sales
and warehouse space of approximately 40,500 square feet pursuant to
a five year lease expiring March 1, 1998. Management believes that
the space under lease will be adequate for the Company's operations
for the term of the lease. See sub-item (vi) under Item 1.
"Business" for information concerning the Company's other
warehousing practices.
The Company exercised its first option and extended its lease
for five years (the "Lease") with an unaffiliated company for
approximately 50,000 square feet which commenced on June 1, 1995
for Sawdust's premises located at 44 National Road, Edison, New
Jersey 08817. The Lease, which is triple net, requires annual
rental payments of $170,856 for the first year until May 31, 1996,
with yearly moderate increment additions in each subsequent year of
the Lease's term. The Lease contains an option to renew on terms
providing for moderate increases in rent for up to an additional
five years.
The Company entered into a five year lease for a warehouse at
1101 Corporate Road, North Brunswick, New Jersey (the "Warehouse
Lease") with an unaffiliated Company for approximately 130,000
square feet which commenced on September 1, 1995. The Warehouse
Lease provides for annual based rent of approximately $410,000 with
an increase to approximately $436,000 per year after the first
year.
The Company entered into a four year lease for a sales office
in Madison, Wisconsin (the "Madison Lease"). The Madison Lease,
which is with an unaffiliated party, is for approximately 1,140
square feet and commenced December 1, 1992. The Madison Lease
calls for a second year annual rental of $15,120, which increases
by five percent each subsequent lease year until termination.
The Company sublet premises located at 2 Ethel Road, Edison,
New Jersey, which it originally leased from a company controlled by
Messrs. Norman and David Melnick (the "Sublease"). The Company's
sublease is triple net and provides for base rent of $3,930 per
month. The Sublease, which commenced on December 1, 1993, is to an
unaffiliated company and is currently continuing on a month-to-
month basis. The Company receives a monthly rental of $2,750 from
this sublet. The Company had used these premises as its corporate
offices for four years prior to its move to 195 Carter Drive,
Edison, New Jersey, during Fiscal 1993.
<PAGE>
Item 3. LEGAL PROCEEDINGS
(a) In November 1986, a petition for cancellation of the
Company's trademark "Pentech" was filed by Pentel Kabushiki Kaisha
d/b/a Pentel Co., Ltd. ("Pentel") with the U.S. Patent and
Trademark Office (the "PTO") seeking to cause the Company's
"Pentech" Federal trademark to be canceled. The Company received
notice of the filing of the Petition on February 24, 1987. The
Petition alleges that the Pentech trademark was not used in the
United States prior to January 12, 1984, long after Pentel's
trademarks were issued, and that the "Pentech" trademark so closely
resembles the "Pentel" trademark as to cause confusion and to be
misleading. In November 1995, after the PTO refused to grant any
further extension, the Company moved to dismiss this Petition on
the basis of Pentel's failure to proceed after nine years.
Although unexpected, the Company recognizes the risk of an adverse
decision with respect to this Petition. In such event, it is
likely that Pentel would seek to cause the Company not to use the
trademark "Pentech." The loss of the use of the trademark could
result in a short-term negative impact on the Company as it would
be required to alter its packaging and possibly change its
corporate name. Since all of the Company's products are marketed
under individual product trade names, the Company does not believe
that it would materially adversely impact its sales or financial
position.
(b) In October 1987, the Company commenced an action against
Leon Hayduchok, All-Mark Corporation and Paradise Creations, Inc.,
in the United States District Court for the Southern District of
New York ("USSDNY") seeking a declaratory judgment that U.S. Patent
No. 4,681,471 entitled "Kit Comprising Multicolored Fluid Dispenser
Markers Together With Eradicating Fluid Dispenser" is not
infringed, and is invalid and unenforceable. The defendants
asserted counterclaims against the Company for patent infringement
and misappropriation. The action was bifurcated into two parts:
(i) liability and (ii) damages. A trial on liability was held and
on November 12, 1990 the Court issued an order determining that the
patent was valid, that the Company had infringed the patent but
that no misappropriation was found. A trial on damages must still
be held. The Company established a reserve (the "Reserve Amount")
in anticipation of payment of damages. Although the Company
expects the Reserve Amount to be sufficient based on its analysis,
there is no assurance that such amount will be adequate and that
the USSDNY will not find the Company liable for damages in excess
of the Reserve Amount.
Other than as set forth above, 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 SHAREHOLDERS
Not applicable.
<PAGE>
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
1994
1st Quarter 6 1/4 4 11/16
2nd Quarter 6 3/4 5 1/2
3rd Quarter 6 3/4 5 1/4
4th Quarter 6 1/4 4 3/4
1995
1st Quarter 5 1/4 3 1/2
2nd Quarter 4 1/4 3 3/8
3rd Quarter 4 1/4 2 3/4
4th Quarter 3 1/2 1 7/8
On December 18, 1995, the closing "bid" and "ask" prices for
the Common Stock were $2 3/8 and $2 7/16 respectively, as reported
by NASDAQ.
(b) On December 18, 1995, the number of shareholders of
record of the Common Stock was 509.
(c) The Company has not declared a cash dividend in the past
and is not permitted to do so without the consent of European
American Bank, N.J. (the "Bank"), one of the banks with whom the
Company maintains a short-term line of credit. See Item 7.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following summary of financial information should be read
in conjunction with the Financial Statements and notes thereto
included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Fiscal Years Ended September 30,
1995 1994 1993 1992 1991
($ 000s omitted except per share amounts)
<S> <C> <C> <C> <C> <C>
Net
sales $54,892 $62,136 $51,321 $39,130 $33,847
Net (loss)
income (1,059) 4,701 3,986 2,789 4,111
Net (loss)
income
per share ($.10) $.40 $.34 $.23 $.34
Weighted
average
number
of shares
outstanding
including
common
stock
equi-
valents 10,661 11,855 11,876 12,201 12,089
Dividends - - - - -
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA
September 30,
1995 1994 1993 1992 1991
($ 000s omitted except per share amounts)
<S> <C> <C> <C> <C> <C>
Working
capital $16,928 $21,451 $18,490 $15,756 $14,539
Total
assets 44,518 42,558 42,130 32,267 25,721
Notes
payable
(included
in current
liabil-
ities) 15,169 9,163 10,882 6,577 3,505
Long-
term
debt - - - - -
Share-
holders'
equity 21,345 26,479 23,502 20,121 17,637
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 1995 Compared to Fiscal 1994
Net sales for Fiscal 1995 were $54,891,592 as compared to
$62,136,134 for Fiscal 1994, reflecting a decrease of $7,244,542 or
approximately 11.7%. The decrease in sales in Fiscal 1995 was
principally related to the overall softness in the retail industry,
evidenced by Chapter 11 filings by several retailers and corrective
inventory measures taken by other major mass merchandisers.
Despite this softness, the Company's relationships with many of its
customers remains strong and the Company did see positive sales
growth with many customers due primarily to the successful
introduction of its Pro Sports Licensed Products.
In Fiscal 1995, the Company incurred a loss from operations of
$474,368 as compared to income from operations of $8,361,628 for
Fiscal 1994, reflecting a decrease of $8,835,996. The Company's
gross profit of 28.8% in Fiscal 1995 was down from 35.1% in Fiscal
1994. The decline in gross profit can be attributed to the
Company's decision to eliminate about 500 items from its product
line and the related increase in the reserve for slow-moving
inventory by approximately $1.3 million. In addition, the Company
continued to invest in its emerging cosmetic business and incurred
a loss of about $500,000. The gross profit was also impacted by
higher manufacturing unit costs at its domestic facility due to the
lower sales volume. Finally, gross profit was affected by higher
than usual return levels. In some instances, retailers consider
stationery merchandise to be highly promotional and seasonal and
sometimes request to return the unsold goods.
The Company's selling, general and administrative ("SG&A")
expenses increased during Fiscal 1995 to $15,871,636 from
$13,459,402 in Fiscal 1994, reflecting an increase of $2,412,234.
SG&A as a percentage of sales increased to 28.9% from 21.7%. The
increase was primarily related to the continued higher royalty
costs associated with many of its new products. In addition, the
Company had higher freight costs, higher distribution costs
associated with the Company relocating its distribution center, and
higher advertising allowances associated with more aggressive
pricing campaigns by many of its customers. Finally, the Company
continued to invest in its creative, sales and product development
team with the goal of marketing longer lived products and gaining
deeper penetration of its existing client base.
During Fiscal 1995, the Company increased its short-term
borrowings to an average level of $15,618,000 from $12,250,000 in
the prior year. The increase was primarily due to increased
borrowings to finance the Company's stock buy back program of
approximately 1,000,000 shares for approximately $4,000,000. In
addition, the Company's effective interest rate increased from 6.0%
to 8.1% due to the overall rise in short-term interest rates. As
a result, interest expense increased during Fiscal 1995 from
$740,953 to $1,259,145.
Finally, primarily as a result of the peso devaluation in
Mexico in the Company's first fiscal quarter, the Company sustained
a write-down of $407,000 on its receivable position with its
Mexican affiliate for Fiscal 1995. This affiliation was ended in
Fiscal 1995.
Based on the above factors, the Company incurred a loss of
$1,058,946 in Fiscal 1995 as compared to net income of $4,700,598
in Fiscal 1994, reflecting a decrease of $5,759,544.
With respect to the Company's new line of cosmetic products,
the Company achieved several goals it established for Fiscal 1995.
The Company developed its new "Fun" Cosmetics line of product,
established a regional network of sales representatives and
launched a new advertising campaign. Sales of its line of
miscellaneous cosmetic products increased to $2.3 million (or
approximately 4% of net sales) up from $1.3 million (approximately
2% of net sales) in Fiscal 1994. This product line did incur a loss
of approximately $500,000 due to start-up costs.
During Fiscal 1996, the Company's goal regarding its line of
miscellaneous cosmetic products is to continue to increase the
sales of the cosmetic company by the introduction of its product
line to new customers and to improve the overall profitability of
this product line.
Fiscal 1994 Compared to Fiscal 1993
Net sales for Fiscal 1994 were $62,136,134 as compared to
$51,320,794 for Fiscal 1993, reflecting an increase of $10,815,340
or approximately 21.1%. The increase in sales in Fiscal 1994 was
principally related to the seasonal sales promotions in the first
half of the fiscal year and growth in the Company's bulk pencil
program and Color Club line.
Income from continuing operations was $8,361,628 for Fiscal
1994 as compared to $6,979,450 for Fiscal 1993, reflecting an
increase of $1,382,178. The Company's gross profit of 35.1% in
Fiscal 1994 remained relatively constant from 35.0% in Fiscal 1993.
Lower manufacturing costs at Sawdust were offset by higher costs
associated with the Company's new cosmetic operations and higher
freight-in cost associated with its chalk products. Gross profit
on imported products remained constant during the two periods.
The Company's SG&A expenses increased during Fiscal 1994 to
$13,459,402 from $10,992,105 in Fiscal 1993, reflecting an increase
of $2,467,297. SG&A as percentage of sales increased to 21.7% from
21.4% primarily because of higher office and rent expenses since
the Company was in its expanded office location for a full twelve
months this year as compared to three months during Fiscal 1993.
In addition, the Company had higher royalty payments due to an
increase in sales of licensed products, higher freight costs due to
shipping certain products and higher legal fees.
During Fiscal 1994, the Company increased its short-term
borrowings to an average level of $12,250,000 from $9,686,000 in
the prior year, primarily to finance its increase in receivables
and inventory. In addition, the Company's effective interest rate
increased from 5.3% to 6.0%. As a result, interest expense
increased during Fiscal 1994 from $517,960 to $740,853.
Based on the above factors, net income for Fiscal 1994 was
$4,700,598 as compared to $3,985,887 in Fiscal 1993, reflecting an
increase of $714,711 or 17.9%.
(b) Liquidity and Capital Resources
Cash and cash equivalents decreased to zero at September 30,
1995 from $697,545 at September 30, 1994. The Company uses its
cash to reduce its outstanding borrowings in order to reduce
interest costs. Accounts receivable decreased to $12,450,960 at
September 30, 1995 from $13,129,842 at September 30, 1994,
primarily due to decreased sales in the fourth quarter, and the
write-off of certain Mexican receivables. 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 increased to $22,844,482 at September 30, 1995 from
$21,326,694. The Company's finished goods inventory increased
primarily due to the increase of its Cosmetic Product line and the
Company's continued expansion of licensed products in its
stationary business. This increase was somewhat offset by the
Company's decision to eliminate about 500 items from its product
line and increase its reserve for slow-moving inventory by $1.3
million. The decrease to $4,805,175 for equipment at September 30,
1995 from $5,000,870 at September 30, 1994 primarily reflects a
slowing of the Company's equipment purchases. Notes payable at
September 30, 1995 were $15,169,103 as compared to $9,162,724 at
September 30, 1994. This is due primarily to the Company's
decision to buy-back approximately 1,000,000 shares of its own
stock for approximately $4,000,000.
Net cash used in operating activities for the year ended
September 30, 1995 was $1,906,872 as compared to cash provided by
operating activities for Fiscal 1994 of $4,187,060. This change
was primarily due to a loss this year of $1,058,946 as compared to
a net income of $4,700,598 in Fiscal 1994. In addition, there was
an increase in income tax receivables and an increase in inventory.
This was partially offset by an increase in accounts payable and a
decrease in accounts receivable.
Cash used in investing activities during Fiscal 1995 of
$721,762 was less than the prior year due to the decrease in fixed
asset additions. This primarily represented the slowdown in fixed
asset additions for Sawdust and the cosmetic product line.
The cash provided by financing activities during Fiscal 1995
was $1,931,089 as compared to cash used in financing activities of
$3,442,947 in Fiscal 1994. The increase in cash used in financing
activities was primarily due to the Company increasing its short-
term borrowings to finance the stock buy-back program and the cash
used in operating and investing activities. As a result of these
activities, cash and cash equivalents decreased $697,545 during
Fiscal 1995 as compared to a decrease of $145,804 during Fiscal
1994.
The Company's working capital decreased to $16,928,685 at
September 30, 1995 from $21,451,147 at September 30, 1994. This
decrease was primarily due to the stock buy-back program and the
net loss sustained for the year.
The Company maintains short-term lines of credit facilities
with European American Bank ("EAB") and Chemical Bank New Jersey
N.A. (the "Banks"). During Fiscal 1995, the Company increased its
lines of credit to a maximum amount of $34,000,000. These lines of
credit are available at the Banks' discretion and are subject to
limitations based upon eligible inventory and accounts receivable
as defined by the Banks. The obligations are collateralized by a
security interest in substantially all of the assets of the
Company. In connection with these lines of credit, the Company has
agreed, among other things, to the maintenance of certain minimum
amounts of tangible net worth and working capital, a maximum ratio
of total liabilities to tangible net worth, restriction on dividend
payment and maintenance of Key Man Life Insurance. During Fiscal
1995, the Company violated certain of its covenants with EAB,
primarily because of the stock buy-back program, which violations
have been waived by EAB so as to remain in compliance. The Company
and EAB amended the covenants through March 31, 1996 (the
termination of the credit agreement) and the Company presently
expects to be in compliance with the covenants in its Fiscal year
ending September 30, 1996. The Company's lines of credit are
renewable annually. The Company believes its lines of credit will
be renewed for its current fiscal year with substantially similar
terms.
As a result of the seasonal nature of the Company's business,
the Company's use of these lines of credit increases significantly
in the months of May, June and July as the Company finances its
inventory and receivables, and declines in September and October
upon collection of the invoices from its back to school sales.
The Company expects that its lines of credit with the Banks,
together with anticipated income from operations, will be
sufficient to provide liquidity on both a short-term and long-term
basis to finance current and future operations. The Company
believes these resources are sufficient to support its needs for
letters of credit usually required on its overseas purchases, to
finance its operations at the Factory and to support its other
operating expenses. However, the Company is considering a new-long-
term facility with the Banks to better structure its debt. There
is no assurance, however, that the Company will be able to
successfully negotiate such a facility.
The Company has periodically repurchased its securities in the
public market. The Company announced a program to repurchase
500,000 shares of its stock on August 16, 1994. On December 8,
1994, the Company announced a second program to repurchase an
additional 500,000 shares. During Fiscal 1995, the Company
completed both of those stock repurchase programs. For the Fiscal
year ended September 30, 1995, the Company repurchased 999,400
shares for $4,067,790.
Item 8. FINANCIAL STATEMENTS
This information is contained on pages F-1 through F-22
hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE>
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,
1996.
<PAGE>
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) Financial Statements
Page
Independent Auditors' Report............................ F-1
Consolidated Balance Sheets as of September 30, 1995 and
1994....................................................... F-2-3
Consolidated Statements of Operations for the
years ended September 30, 1995, 1994 and 1993 ............. F-4
Consolidated Statements of Shareholders' Equity for
the years ended September 30, 1995, 1994 and 1993.......... F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 1995, 1994, and 1993............. F-6-8
Notes to Consolidated Financial Statements................. F-9-21
(a) (2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves.................................................. F-22
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 Incentive Stock Option Plan incorporated by reference to
Exhibit 10.8 of Form S-18.
10.2 1989 Stock Option Plan incorporated by reference to the
Registration Statement No. 33-27009 filed on Form S-8.
10.3 1993 Stock Option Plan incorporated by reference
to the 1992 Form 10-K.
10.4 Letter dated December 22, 1995 between the Company and
European-American Bank, NJ.
10.5 Loan Commitment dated January 31, 1995 between the
Company and Chemical Bank New Jersey N.A.
10.6 Employment Agreement dated November 3, 1995, between the
Company and John W. Linster.
10.7 Lease Agreement for the Premises located at 1101
Corporate Road, North Brunswick, New Jersey, between the
Company and Sudler Companies, dated August 28, 1995.
21. Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP dated December 27, 1995.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.
PENTECH INTERNATIONAL, INC.
December 21, 1995 By: s/John W. Linster
John W. Linster,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed below by the
following persons in the capacities and on the dates indicated.
s/Norman Melnick Chairman of the Board December 20, 1995
Norman Melnick of Directors
s/John W. Linster President and Chief Executive December 21, 1995
John W. Linster Officer (principal executive
officer)
s/David Melnick Chief Operating Officer and December 21, 1995
David Melnick Director (principal operating
officer)
s/ John F. Kuypers Executive Vice President-
John F. Kuypers Sales and Director December 21, 1995
s/Richard S. Kalin Secretary and Director December 26, 1995
Richard S. Kalin
Director December , 1995
Jerry Della Femina
Director December , 1995
Roy L. Boe
s/William Visone Treasurer (principal December 21, 1995
William Visone accounting officer)
ptk\10K.95
<PAGE>
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,
1995 and 1994 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 1995. 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, 1995 and 1994, and the consolidated results of
their operations and their cash flows for each of the three years
in the period ended September 30, 1995, 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 11, 1995
F-1
<PAGE>
<TABLE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets (Note 3)
September 30,
1995 1994
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 697,545
Accounts receivable, net $12,450,960 13,129,842
of allowance for doubtful
accounts ($70,314 and $54,565
in 1995 and 1994, respect-
ively)
Inventory (Note 2) 22,844,482 21,326,694
Income taxes receivable 1,823,041 369,119
Deferred tax assets (Note 5) 990,545 358,000
Prepaid expenses and other 1,227,429 1,308,016
Total current assets 39,336,457 37,189,216
Equipment:
Equipment and furniture 7,542,211 6,890,174
Less accumulated depreciation (2,737,036) (1,889,304)
4,805,175 5,000,870
Other assets:
Trademarks, net of
amortization 266,912 288,960
Due from officer 109,511 78,512
376,423 367,472
$44,518,055 $42,557,558
accompanying notes.
F-2
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
September 30,
1995 1994
<S>
Current liabilities: <C> <C>
Notes payable (Note 3) $15,169,103 $ 9,162,724
Bankers' acceptances
payable (Note 3) 1,841,985 1,860,196
Accounts payable 2,382,959 1,425,166
Accrued expenses (Note 9) 3,013,725 2,931,983
Total current liabilities 22,407,772 15,380,069
Deferred income taxes payable 765,132 698,102
(Note 5)
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
10,496,758 shares in 1995 and
11,692,958 shares in 1994 104,968 116,930
Capital in excess of par 5,845,781 6,512,044
Retained earnings 15,394,402 20,893,681
Treasury stock (1,043,268)
21,345,151 26,479,387
$44,518,055 $42,557,558
See accompanying notes.
F-3
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Net sales (Note 7) $54,891,592 $62,136,134 $51,320,794
Cost of sales 39,087,504 40,315,104 33,349,239
Gross profit 15,804,088 21,821,030 17,971,555
Selling, general and
administrative expenses 15,871,636 13,459,402 10,992,105
Loss on Mexican
affiliate (Note 11) 406,820
(Loss) Income from
operations (474,368) 8,361,628 6,979,450
Other (income) expense:
Interest expense 1,259,145 740,953 517,960
Interest income (35,215) (16,582) (8,040)
1,223,930 724,371 509,920
(Loss) Income before
taxes (1,698,298) 7,637,257 6,469,530
Income tax (benefit)
expense (Note 5) (639,352) 2,936,659 2,483,643
Net (loss) income $(1,058,946) $4,700,598 $3,985,887
(Loss) Earnings per common
and common equivalent
share (Note 1) ($.10) $.40 $.34
See accompanying notes.
F-4
<PAGE>
<CAPTION>
Pentech International, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
Years ended September 30, 1995, 1994 and 1993
Capital
Common Stock in
Number of Shares Excess Retained Treasury Stock
Authorized Issued Amount of Par Earnings Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October 1, 1992 20,000,000 11,849,764 $118,498 $5,993,781 $14,008,488
Issuance of common stock
pursuant to exercise of
options (Note 4) 35,000 350 57,450
Purchase of treasury stock 147,000 $696,233
Retirement of treasury stock (147,000) (1,470) (74,353) (620,410) (147,000) (696,233)
Tax benefit of exercise
of options (Note 5) 34,000
Net income 3,985,887
Balance, September 30, 1993 20,000,000 11,737,764 117,378 6,010,878 17,373,965
Issuance of common stock
pursuant to exercise of
stock options (Note 4) 177,000 1,770 614,730
Purchase of treasury stock 418,606 2,339,932
Retirement of treasury stock (221,806) (2,218) (113,564) (1,180,882) (221,806) (1,296,664)
Net income 4,700,598
Balance, September 30, 1994 20,000,000 11,692,958 116,930 6,512,044 20,893,681 196,800 1,043,268
Retirement of common
stock options (7,500)
Purchase of Treasury Stock 999,400 4,067,790
Retirement of Treasury Stock (1,196,200) (11,962) (666,263) (4,432,833) (1,196,200) (5,111,058)
Net loss (1,058,946)
Balance, September 30, 1995 20,000,000 10,496,758 $104,968 $5,845,781 $15,394,402 - -
See accompanying notes.
F-5
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating
activities
Net (loss) income $(1,058,946) $ 4,700,598 $ 3,985,887
Adjustments to reconcile
net (loss) income to net cash
(used in) provided by
operating activities:
Depreciation and amortiza- 939,505 823,933 638,289
tion
Provision for losses on 62,467 97,880 218,350
accounts receivable
Provision for slow moving 1,286,000
inventory
Tax benefit resulting from 34,000
exercise of options 34,000
Provision for deferred
income taxes (565,515) 57,810 301,292
Change in assets and
liabilities:
Decrease (increase) in 616,415 2,713,493 (5,854,103)
accounts receivable
(Increase) in inventory (2,803,788) (2,738,432) (1,913,508)
Decrease (increase) 80,587 154,743 (882,871)
in prepaid expenses
and other
(Increase) in due from (30,999) (8,303)
officer
(Decrease) increase in (18,211) (796,101) 40,164
bankers' acceptances
payable
Increase (decrease) in 957,793 (822,444) 1,333,471
accounts payable
Increase in 81,742 538,002 354,515
accrued expenses
Change in income (1,453,922) (534,119) 362,483
taxes payable/
receivable
Net cash (used in) pro-
vided by operating (1,906,872) 4,187,060 (1,382,031)
activities
See accompanying notes.
F-6
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (cont'd)
Year ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Cash flows from investing
activities
Purchase of equipment and (652,037) (1,145,984) (1,321,779)
furniture
Increase in trademarks (69,725) (68,852) (140,634)
Decrease (increase) in 324,919 (105,103)
deposits
Net cash used in investing (721,762) (889,917) (1,567,516)
activities
Cash flows from financing
activities
Net increase (decrease) in $6,006,379 $(1,719,515) $4,305,686
notes payable
Proceeds from the issuance 10,250 57,800 of
common stock and
of options and
warrants
Payments to acquire (4,067,790) (1,733,682) (696,233)
treasury stock
Payments to acquire
common stock options (7,500)
Net cash provided by 1,931,089 (3,442,947) 3,667,253
financing activities
Net (decrease) increase (697,545) (145,804) 717,706
in cash and cash equi-
valents
Cash and cash equivalents, 697,545 843,349 125,643
beginning of year
Cash and cash equivalents, $ -0- $ 697,545 $ 843,349
end of year
See accompanying notes.
F-7
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (cont'd)
Year ended September 30,
1995 1994 1993
<S> <C> <C> <C>
Supplemental disclosures
of cash flow information
Non-cash investing activities:
Acquisition of treasury $ 606,250
stock
Issuance of common stock 606,250
pursuant to exercise
of options
Retirement of treasury $ 5,111,058 1,296,664 $ 696,233
stock
Cash paid during the year for:
Interest 1,259,145 740,953 517,960
Income taxes 1,380,085 3,385,550 1,762,223
See accompanying notes.
</TABLE>
F-8
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1995
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. The Company and its
subsidiary are engaged in the production, design, and marketing of
writing and drawing instruments. In October 1993, the Company
formed a wholly-owned subsidiary, Pentech Cosmetics, Inc., to
manufacture and distribute cosmetic pencils.
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 improve- ments 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.
Reclassification
Certain 1994 amounts have been reclassified to conform to the
1995 presentation.
F-9
1. Summary of Significant Accounting Policies (cont'd)
(Loss) Earnings Per Common and Common Equivalent Share
Primary and fully diluted (loss) earnings per share are
computed on the basis of the weighted average number of shares
outstanding plus the common stock equivalents which would arise
from the exercise of stock options and warrants.
The average number of shares used was:
Primary Fully Diluted
Year ended September 30, 1995 10,660,988 10,660,988*
Year ended September 30, 1994 11,855,700 11,855,700*
Year ended September 30, 1993 11,876,244 11,876,244*
* In 1995, 1994 and 1993 fully diluted was anti-dilutive.
2. Inventory
1995 1994
Raw materials $ 8,644,695 $ 7,711,951
Work-in-process 1,746,149 1,203,002
Finished goods 13,839,638 12,511,741
Allowance for slow-
moving items (1,386,000) (100,000)
$22,844,482 $21,326,694
3. Notes and Bankers' Acceptances Payable
September 30, September 30,
Interest 1995 Interest 1994
Notes payable 7.875% $ 9,000,000
Notes payable 8.75% $ 6,169,103 7.75% $ 9,162,724
Total $15,169,103 $ 9,162,724
Bankers' None $ 1,841,985 None $ 1,860,196
acceptances
payable
F-10
3. Notes and Bankers' Acceptances Payable (cont'd)
Notes and bankers' acceptances payable are advanced under a
$34,000,000 line of credit which is available at the banks'
discretion. The $34,000,000 is subject to limitations based upon
eligible inventory and accounts receivable as defined by the banks.
The obligations are collateralized by a security interest in
substantially all of the assets of the Company. In connection with
this line of credit, the Company has agreed, among other things, to
the maintenance of certain minimum amounts of tangible net worth
and working capital, a maximum ratio of total liabilities to
tangible net worth, restrictions on dividend payments and
maintenance of keyman life insurance.
During Fiscal 1995, the Company violated certain of its
covenants with EAB Bank, which violations have been waived so as to
remain in compliance. The Company and EAB Bank amended the
covenants through March 31, 1996 (the termination of the credit
agreement) and the Company presently expects to be in compliance
with the covenants in its Fiscal year ending September 30, 1996.
The weighted average interest rate during the periods on the
outstanding short-term borrowings was 8.1% and 6.0% for fiscal
years ended September 30, 1995 and 1994, respectively.
4. Shareholders' Equity
Stock Options
During Fiscal 1993, the Company granted options covering in
the aggregate 60,000 shares of common stock at an exercise price of
$6.75 per share (representing fair market value at date of grant).
During Fiscal 1994 and 1995, there were no options granted. During
this period, 33,000 options were exercised resulting in the
issuance of 33,000 shares of common stock and proceeds of $53,400.
At September 30, 1995, 175,000 options remain outstanding at prices
ranging from $5.50 to $7.375 per share of which 100,000 are
exercisable.
F-11
<PAGE>
4. Shareholders' Equity (cont'd)
Stock Option Plans
On October 1, 1984, the Company adopted an incentive stock
option plan ("1984 Plan"). The 1984 Plan provided for options to
be granted to issue up to 600,000 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 voting
securities (a "10% Holder"), nor may options be exercised more than
ten years from the date of grant (five years for a 10% holder).
The 1984 Plan terminated on October 1, 1994. All shares that were
eligible for exercise expired.
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
determination of the exercise price and terms of the options
granted under the 1989 Plan are the same as those of the 1984 Plan.
No SARs have been granted. The 1989 Plan will terminate on January
5, 1999.
On April 14, 1993, the Company adopted a Stock Option Plan
("1993 Plan"). The 1993 Plan provides for the issuance of
incentive and nonstatutory stock options to employees, consultants,
advisors and/or directors for a total up to 700,000 shares of
common stock. The exercise price of options granted may not be
less than the fair market value of the shares on the date of grant
(110% of such fair market value for a holder of more than 10% of
the Company's common stock), nor may options be exercised more than
five years from date of grant. The 1993 Plan will terminate on
January 4, 2003.
F-12
<PAGE>
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1984 Plan:
<TABLE>
<CAPTION>
Year ended Year ended Year ended
Sept. 30, 1995 Sept. 30, 1994 Sept. 30, 1993
Price range Shares Price range Shares Price Range Shares
<S> <C> <C> <C> <C> <C> <C>
Outstanding, $6.50 2,500 $6.50 2,500 $.88-6.50 17,500
beginning of year
Options granted
Cancelled $6.50 (2,500) .88 (10,000)
Exercised .88 (5,000)
Outstanding, $6.50 0 $6.50 2,500 $6.50 2,500
end of year
Eligible for $6.50 0 $6.50 2,500 $6.50 500
exercise
currently
</TABLE>
F-13
<PAGE>
4. Shareholders' Equity (cont'd)
<TABLE>
<CAPTION>
The table below presents option information for the 1989 Plan:
Year ended Year ended Year ended
September 30, 1995 September 30, 1994 September 30, 1993
Price range Shares Price range Shares Price Range Shares
<S> <C> <C> <C> <C> <C> <C>
Outstanding, $4.00-$7.875 397,000 $3.19-$7.875 575,000 $3.19-$7.875 539,000
beginning of year
Options granted 4.875-5.25 30,000 4.50-4.875 76,000
Cancelled 6.50 (5,000) 4.25-7.875 (31,000) 5.94-7.875 (40,000)
Exercised 3.19-5.13 (177,000)
Outstanding, $4.00-7.875 392,000 $4.00-7.875 397,000 $3.19-7.875 575,000
end of year
Eligible for $4.00-7.875 267,000 $4.00-7.875 214,600 $3.19-7.875 322,000
exercise
currently
</TABLE>
F-14
<PAGE>
4. Shareholders' Equity (cont'd)
<TABLE>
<CAPTION>
The table below presents option information for the 1993 Plan:
Year ended Year ended Year ended
September 30, 1995 September 30, 1994 September 30, 1993
Price range Shares Price range Shares Price Range Shares
<S> <C> <C> <C> <C> <C> <C>
Outstanding, $4.50-6.125 678,750 $4.50-4.95 272,500
beginning of
year
Options 4.875-6.125 421,250 $4.50-4.95 272,500
granted
Cancelled 5.25 (10,000) 4.50 (15,000)
Exercised
Outstanding, $4.50-6.125 668,750 $4.50-6.125 678,750 $4.50-4.95 272,500
end of year
Eligible for $4.50-6.125 273,000 4.50-4.95 53,000 - -
exercise currently
</TABLE>
F-15
<PAGE>
5. Income Taxes
1995 1994 1993
(Benefit)/Expense (Liability (Liability (Deferred
Method) Method) Method)
Federal:
Current $ (73,837) $2,395,908 $1,920,643
Deferred (503,308) 45,400 159,292
State:
Current -- 482,941 366,708
Deferred (62,207) 12,410 37,000
(639,352) $2,936,659 $2,483,643
During the fiscal years ended September 30, 1995, 1994 and 1993, non-
qualified options were exercised resulting in an aggregate income tax
reduction of $0, $0 and $34,000 respectively, which were credited to
"capital in excess of par."
Reconciliations of the statutory federal income tax rate of 34% to
the effective tax rates are as follows:
1995 1994 1993
Statutory tax rate (34.00%) 34.00% 34.00%
State income taxes, net
of federal tax benefit (3.63) 4.45 4.39
Effective tax rate (37.63%) 38.45% 38.39%
Effective October 1, 1993, the Company adopted FASB Statement
No. 109, Accounting for Income Taxes. Under Statement 109, the
liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined
based on the difference between financial reporting and tax bases
F-16
5. Income Taxes (cont'd)
of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. Prior to the adoption of Statement 109,
income tax expense was determined using the deferred method.
Deferred tax expense was based on items of income and expense that
were reported in different years in the financial statements and
tax returns and were measured at the tax rate in effect in the year
the differences originated.
As permitted by Statement 109, the Company has elected not to
restate the financial statements for prior years. The effect of
the change on pre-tax income from continuing operations for the
year ended September 30, 1994 was not material.
Significant components of the Company's deferred tax liability
as of September 30, 1995 and 1994 are as follows:
September 30,
1995 1994
Deferred tax liability:
Depreciation $765,132 $698,102
Deferred tax assets:
Bad debts 26,719
Reserve for lawsuit 140,600 99,000
Inventory reserve 520,453 37,000
Reserve for returns and
allowances 259,886 124,000
Unicap 34,200 16,000
Loss on foreign affiliate 76,000
Other 8,687 6,000
990,545 358,000
Deferred income tax asset $225,413 ($340,102)
(liability) net
F-17
<PAGE>
6. Commitments and Contingencies
Letters of Credit
The Company was contingently liable for outstanding letters of
credit of $2,750,655 at September 30, 1995.
Leases
Rent expense for the years ended September 30, 1995, 1994 and
1993 amounted to $487,959, $435,742 and $377,958, 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 sixty month periods. In March 1993, the
Company exercised its first option and extended the lease for an
additional 60 months.
In March 1993, the Company entered into a 60 month lease for
office, warehouse and manufacturing space. The lease provides for
all real estate taxes and operating expenses to be paid by the
Company and it contains an option to renew for an additional 60
month period.
In August, 1995, the Company entered into a 60 month lease for
its new 130,000 square foot distribution center. The lease
provides for all real estate taxes and operating expenses to be
paid by the Company and it contains two options to renew for two
five year periods.
F-18
<PAGE>
6. Commitments and Contingencies (cont'd)
Future minimum rental payments under operating leases are as
follows:
1996 $ 738,329
1997 739,151
1998 658,302
1999 614,416
2000 556,624
Thereafter 36,000
$3,342,822
Trademark Litigation
On November 24, 1986, a petition for cancellation of the
Company's trademark "Pentech" was filed by another company which
alleges that the Company's use of "Pentech" as it relates to the
Company's products, might cause confusion, mistake or deception.
In November 1995, the Company filed a motion to dismiss this
petition for failure to proceed by the petitioner. The Company
recognizes the risk of an adverse decision with respect to this
petition; the loss of the use of the trademark could result in a
short-term negative impact on the Company as it would be required
to alter its packaging and possibly to change its corporate name.
Although the ultimate outcome of the petition cannot be predicted
nor the amount of loss, if any, estimated, the Company does not
believe that an adverse decision is likely due to the relatively
inactive status of this petition and in the unlikely event of an
adverse decision the Company does not believe that such decision
would materially adversely impact its sales or financial position,
since all of the Company's products are marketed under individual
product trade names. The Company intends to vigorously defend
itself against this petition.
In October 1987, the Company commenced an action against
certain individuals and entities seeking a declaratory judgment
that a patent entitled "Kit Comprising Multicolored Fluid Dispenser
Markers Together With Eradicating Fluid Dispenser" is not
infringed, and is invalid and unenforceable. The defendants
asserted counterclaims against the Company for patent infringement.
In November 1990, an opinion and order findings of
F-19
6. Commitments and Contingencies (cont'd)
fact and conclusions of law were released finding that Pentech
infringed said patent. The Court of Appeals affirmed this decision
in September 1992.
A trial as to damages, if any, must still be held. The
Company intends to vigorously defend itself at such trial, and has
provided for a loss contingency in the event it does not prevail.
7. Major Customer and Concentration of Credit Risk
For the years ended September 30, 1995, 1994 and 1993, the
Company had one customer who accounted for 9%, 23% and 23%,
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.
8. 401(k) Plan
The Company adopted a defined contribution 401(k) plan
effective April 1, 1993, covering substantially all employees not
covered under a collective bargaining agreement. The plan provides
employees an opportunity to make pre-tax payroll contributions to
the plan. The Company has the option to make a contribution at its
discretion. During 1995, 1994 and 1993, the Company did not make
contributions.
9. Accrued Expenses
September 30,
1995 1994
Accrued returns and advertising $2,062,948 $2,268,851
rebates
Other accrued expenses 950,777 663,132
3,013,725 $2,931,983
F-20
<PAGE>
10. Unaudited Summarized Quarterly Information
Unaudited summarized quarterly financial information for the years
ended September 30, 1995 and 1994 are as follows:
(000's except for per share information)
Three Months Ended
December March June September
31, 1994 31, 1995 30, 1995 30, 1995(a)
Net sales $ 9,644 $12,249 $20,013 $12,986
Gross profit 3,436 4,295 6,805 1,268
Net income/(loss) 283 375 910 (2,626)
Earnings per
common share .03 .04 .09 (.25)
Three Months Ended
December March June September
31, 1993 31, 1994 30, 1994 30,1994
Net sales $12,074 $11,153 $22,928 $15,981
Gross profit 4,145 4,332 8,215 5,129
Net income 833 714 2,280 874
Earnings per
common share .07 .06 .19 .08
(a) Fourth quarter results reflect various advertising and volume
rebate activity which is not earned by customers until the end of
the fiscal year. In addition, in the fourth quarter, the Company
reviewed its product line and decided to increase its reserve for
slow-moving inventory by $1.3 million, its Cosmetic Division
incurred a loss and certain unfavorable domestic manufacturing
variances were incurred.
11. Loss on Mexican Affiliate
In 1992, the Company began an affiliation with a Mexican
distributor to sell its products in Mexico. As a result of the Pesos
devaluation and the eventual termination of the relationship in Fiscal
1995, the Company incurred a loss of $407,000.
F-21
<PAGE>
<TABLE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1995, 1994 and 1993
Column A Column B Column C Column D Column E
Charged
Balance at to Costs Balance
Beginning and End of
Description of Period Expenses Deductions Period
<S> <C> <C> <C> <C>
Year ended September 30, 1995
Allowance for doubtful
accounts $ 54,565 $ 62,467 $ 46,718 $ 70,314
Allowance for slow moving items $100,000 $1,286,000 $1,386,000
Year ended September 30, 1994
Allowance for doubtful
accounts $300,768 $ 97,880 $344,083 $ 54,565
Allowance for slow moving items $100,000 - - $ 100,000
Year ended September 30, 1993
Allowance for doubtful
accounts $573,266 $ 218,350 $490,848(1) $300,768
Allowance for slow moving items $100,000 - - $100,000
(1) Amount represents various accounts written off during the year, net of recoveries.
</TABLE>
F-22
<PAGE>
EXHIBIT INDEX
Exhibit 10.4 - Letter dated December 22, 1995 from European-American
Bank, NJ.
Exhibit 10.5 - Loan Commitment dated January 31, 1995 between the
Company and Chemical Bank, New Jersey N.A.
Exhibit 10.6 - Employment Agreement dated November 3, 1995 between the
Company and John W. Linster.
Exhibit 10.7 - Lease Agreement for the premises located at 1101
Corporate Road, North Brunswick, New Jersey between the
Company and The Sudler Companies dated August 28, 1995.
Exhibit 21 - Subsidiaries of the Company.
Exhibit 23.1 - Consent of Ernst & Young, LLP.
<PAGE>
EXHIBIT 10.4
EAB
December 22, 1995
Mr. David Melnick
President
Pentech International, Inc.
195 Carter Drive
Edison, NJ 08817
Re: $18,000,00 line of credit
Dear David:
European American Bank ("EAB") is pleased to advise you it holds
available for Pentech International, Inc. a line of credit (the
"Line") in the amount of $18,000,000, subject to the following
terms and conditions:
1. Borrower:
The Borrower shall be Pentech International, Inc., a
corporation organized and in good standing under the laws of the
State of Delaware.
2. Description of the Line:
The Line shall be available for documentary sight and
time letters of credit (each, an "L/C" and collectively, the
"L/Cs"). Each L/C issued under the Line shall be evidenced by
EAB's standard Letter of Credit Application. The maximum tenor of
each L/C shall be 180 days. There shall be payable in respect of
each L/C, a fee equal to $50.00 upon the opening and 1/4% upon the
negotiation thereof (minimum $50.00) together with EAB's standard
fees and charges therewith including, but not limited to, EAB's
amendment fee of $30.00.
There shall be available under the Line a sublimit (the
"Direct Debt Sublimit") in the aggregate amount of $16,000,000.
The Direct Debt Sublimit shall be available for own note borrowings
and bankers acceptances.
Own note loans provided under the Line shall be evidenced
by EAB's standard Master Note for Eurodollar/Prime Rate Borrowings
(the "Note") which Note shall bear interest at a rate (the
"Interest Rate") equal to either (a) EAB's Prime Rate (the rate of
interest stated by EAB to be its Prime Rate in effect from time to
time and adjusted when said Prime Rate changes) or (b) LIBOR +
1.50% per annum as may be quoted for 30, 60, 90, 180 or 360 day
interest periods. Interest on any borrowings shall be computed on
the basis of actual days elapsed in a 360 day year.
Interest on the unpaid principal balance of the Note from
time to time outstanding shall be payable monthly in arrears
commencing on the first day of the month following the date of the
first advance under the Note. Any advance under the Line made by
EAB in its discretion shall be in an amount not less than $10,000
for Prime Rate loans and not less than $50,000 for LIBOR loans.
The Borrower may prepay, in full or in part, at any time, any Prime
Rate loans outstanding under the Line in increments of not less
than $10,000 without premium or penalty. LIBOR loans shall be held
to maturity. Availability under the Line shall be subject to the
discretion of EAB and nothing contained herein shall obligate EAB
to fund a request for an advance.
B/As shall be evidenced by EAB's standard Acceptance
Credit Agreement which shall provide for the payment of a
commission, upon the acceptance of each draft which shall
constitute a B/A equal to 1.5% per annum for B/As created under
time L/C's, with a minimum commission for each B/A of $75.00. Each
B/A shall have a maximum tenor of 180 days.
Notwithstanding any indications herein to the contrary,
the maximum availability for loans and B/As in the aggregate shall
not exceed an amount determined with application to the following
borrowing base formula:
The sum of (i) 85% of the Borrower's Eligible Accounts
Receivable" and (ii) 50% of the Borrower's "Eligible Inventory"
subject to a cap of $11 million on borrowings against inventory
with a seasonal cap of $13 million during the calendar months of
April and May. "Eligible Accounts Receivable" shall mean all
accounts of the Borrower less (i) uncollectible accounts; (ii)
accounts remaining unpaid after a date which is more than 90 days
after the due; and (iii) receivables deemed ineligible by EAB in
its sole reasonable discretion.
"Eligible Inventory" shall be defined as goods on hand
and/or goods in transit for which payment has been made by or on
behalf of the Borrower or its wholly-owned subsidiaries, Sawdust
Pencil Co., Inc. or Pentech Cosmetics, Inc. less any inventory
deemed ineligible by EAB in its sole discretion.
There shall be available under the Direct Debt Sublimit
a sublimit for standby letters of credit (each an "SBLC" and,
collectively, the "SBLCs") in an amount not exceeding $105,000.
The maximum tenor of each SBLC shall be one (1) year. Each SBLC
issued under the Line shall be evidenced by EAB's standard Standby
Letter of Credit Application. There shall be payable in respect of
each SBLC, a fee equal to one percent (1%) per annum.
<PAGE>
The Borrower acknowledges and agrees that the Line is
uncommitted and requests for advances of extensions of credit
thereunder shall be approved in the discretion of EAB, which may
refuse to make an extension of credit under the Line at any time
without prior notice to the Borrower, and that the performance or
compliance by the Borrower of the agreements contained in this
letter, or in any other document or agreement evidencing or
securing such advances or extensions of credit, shall not obligate
EAB to make an advance or provide an extension of credit
thereunder.
Subject to the terms and conditions of the Note, the Line
shall be available until March 31, 1996.
3. Guarantors:
Repayment of all loans, extensions of credit, and
financial accommodations provided under the Line together with
interest and cost thereon shall be guaranteed, jointly and
severally, by Sawdust Pencil Company, Inc. and Pentech Cosmetics,
Inc. (collectively, the "Guarantors") pursuant to EAB's standard
Guarantee of All Liability (the "Guarantee") and General Security
Agreement under which the Guarantors shall secure their obligations
under the Guarantee with a lien in favor of EAB on all their
accounts and inventory.
4. Purpose of the Line:
The purpose of the line shall be to finance the
importation of merchandise from foreign suppliers and the post-
financing required through the asset conversion cycle. In
addition, the Line shall support the working capital needs of the
Borrower.
5. Security for the Line:
The Line shall be secured by a first priority security
interest in all assets and personal property of the Borrower
pursuant to a EAB's standard General Security Agreement and duly
filed UCC-1 Financing Statements which shall be shared pro rata
with Chemical Bank New Jersey NA through an intercreditor agreement
in form and substance satisfactory to EAB.
6. Condition Precedent:
Availability under the Line shall be subject to, among
other things, the execution of all documents and agreements
required by EAB to evidence and secure the Line including, without
limitation, an Assignment of Life Insurance Policy as Collateral by
which the life insurance policies covering the lives of Norman
Melnick and David Melnick in the respective amounts of $1,000,000
shall be assigned to EAB.
<PAGE>
7. Financial Reporting:
The Borrower shall provide to EAB:
(i) As soon as available, but in any
event within 90 days after the last day of its September 30, 1995
fiscal year, a balance sheet of the Borrower, as of such last day
of the fiscal year, and statements of income and retained earnings
and cash flows for such fiscal year prepared in accordance with
generally accepted accounting principles consistently applied, in
reasonable detail, such statements to be audited by a firm of
independent certified public accountants satisfactory to EAB.
(ii) As soon as available, but in any
event within 60 days after the end of the first three calendar
quarters for each fiscal year, a balance sheet of the Borrower and
statements of income and retained earnings and cash flow of the
Borrower for each quarter, and the portion of the fiscal year
through such date all in reasonable detail, such statements to be
prepared on an unaudited basis consistent with the report 10Q filed
by the Borrower with the Securities and Exchange Commission
("SEC").
Each of the financial statements specified in
Sections (i) and (ii) above shall be accompanied by a certificate
signed by the president or chief financial officer of the Borrower
to the effect that such statements fairly present the financial
condition of the Borrower as of the balance sheet date and results
of the operations of the Borrower for the periods then ended in
accordance with generally accepted accounting principles
consistently applied.
(iii) Copies of the filings with the SEC,
including forms 10K and 10Q, to be submitted within a reasonable
time after filing with the SEC.
(iv) As soon as available, but in any
event within 15 days after the end of each calendar month, a
schedule of accounts receivable aged to show the number of days
each such account has been outstanding from its due date, and a
Borrowing Base Certificate, all in form satisfactory to EAB.
(v) As soon as available, but in any
event within 20 days after the end of each calendar month, a
statement in such form and in such detail as EAB may reasonably
require, setting forth a description of the Borrower's and
Guarantors' inventory and their valuation as of the end of such
month accompanied by a certificate signed by the Borrower's
president or chief financial officer to the effect that such
statement is true and correct and, for all statements after the
first such statement has been prepared, in accordance with the
Borrower's prior methods and procedures.
(vi) Such other financial or additional
information as EAB may from time to time request.
8. Special Requirements:
a. The Borrower agrees to maintain at all times:
(i) a minimum working capital (the excess
of current assets over current liabilities) of not less than
$16,250,000. Minimum working capital shall not include receivables
due from stockholders, officers or affiliates but will include
amounts due pursuant to the Note.
(ii) a "tangible net worth" (the sum of
capital surplus, earned surplus, capital stock and such other items
as are allowable under generally accepted accounting principles
minus deferred charges, intangibles, receivables due from
stockholders, officers or affiliates and treasury stock) in an
amount not less than $20,500,000.
(iii) a maximum leverage ratio (the ratio
of total liabilities to tangible net worth) of not greater than 1.5
to 1.
(iv) Maximum advised credit lines
available for Loans, B/As, L/Cs and SBLCs from any bank or
financial institution, including EAB, and/or other lending
institution in an amount not greater than $36,000,000.
(v) Maximum direct debt (the sum of Loans
and B/As) from any bank, including EAB, and/or other lending
institution whatsoever of not greater than $30,000,000.
b. The Borrower agrees:
(i) To maintain hazard insurance on its
inventory with a financially sound and reputable insurance company
in such amounts as are necessary to cover not less than the
replacement cost of such inventory, and covering such risks as are
usually carried by companies engaged in the same or similar
business which insurance policy shall be endorsed to name EAB
lender loss payee.
(ii) To maintain life insurance policies
in an amount not less than $1,000,000 covering the lives of David
Melnick and Norman Melnick issues by an insurance company
satisfactory to EAB which policies shall remained assigned to EAB
pursuant to a form Assignment of Life Insurance Policy as
Collateral satisfactory to EAB.
(iii) To maintain, to the satisfaction of
EAB, a demand deposit account with EAB.
<PAGE>
9. No Prior Agreements:
This letter replaces and supersedes that certain
letter agreement dated November 30, 1995 between the Borrower and
EAB.
10. Acceptance:
If the foregoing is acceptable, please so indicate
by signing and returning this letter before December 31, 1995, the
date this letter will otherwise expire, unless extended in writing
by EAB.
Very truly yours,
EUROPEAN AMERICAN BANK,
By: /s/Thomas Keith
Thomas Keith
Vice President/Group Credit Mgr.
By: /s/Peter J. McGovern
Peter J. McGovern
Vice President
ACCEPTED AND AGREED:
PENTECH INTERNATIONAL, INC.
/s/William Visone
<PAGE>
EXHIBIT 10.5
CHEMICAL
Chemical Bank New Jersey NA Michael J. Miler
East 36 Midland Avenue Vice President
Paramus, New Jersey 07652
201/599-6838
January 31, 1995
Mr. David Melnick, President
Pentech International, Inc.
195 Carter Drive
Edison, New Jersey 08817
Dear David:
We are pleased to advise you that based upon your annual financial
statement for the fiscal year 9/30/94 Chemical Bank New Jersey,
National Association (the "Bank") has approved your request for a
line of credit in the aggregate amount of $16,000,000. Our
officers may, in their discretion, make short-term loans to Pentech
International, Inc. in the amount of $14,000,000 on such terms as
are mutually agreed upon between us, from time to time.
Borrowings under this line of credit are intended to be used to
meet the normal short term working capital needs of Pentech
International, Inc.
As this line is not a commitment, credit availability is, in
addition, subject to your execution and delivery of such
documentation as the Bank deems appropriate and the receipt and
continuing satisfaction with current financial information, which
information will be furnished to the Bank as it may from time to
time reasonably request. This line of credit expires on January
31, 1996.
The approved line of credit is to be secured by a blanket lien on
all asset of Pentech International, Inc., Sawdust Pencil, Co., and
Pentech Cosmetics, Inc., and furthermore, will be guaranteed by
Sawdust Pencil, Co. and Pentech Cosmetics, Inc.
The Bank will require reviewed quarterly statements and an audited
fiscal year end 9/30/95 and a $2500 administrative fee for
processing this line of credit.
We are pleased to be of service and trust you will call upon us to
assist in any of your banking requirements.
Very truly yours,
Michael J. Miller
<PAGE>
EXHIBIT 10.6
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT dated as of November 3, 1995 by and
between PENTECH INTERNATIONAL, INC., a Delaware corporation,
(referred to as the "Company") and JOHN W. LINSTER of 62 Teresa
Road, Hopkinton, MA 01748 (the "Executive").
W I T N E S S E T H :
WHEREAS, the Company is in the business of marketing pens,
pencils and markers throughout the United States and the world;
WHEREAS, the Executive is an experienced executive in the
business of selling goods in the stationery departments of mass
market retailers and others; and
WHEREAS the Company and the Executive desire to establish an
employment relationship with each other.
NOW, THEREFORE, in consideration of the premises and the
mutual covenants hereinafter set forth, the parties hereto agree as
follows:
1. Employment. The Company agrees that the Company shall
employ the Executive, and the Executive accepts employment with the
Company, on the terms and conditions set forth herein.
2. Term. The term of employment (the "Employment Term")
under this Agreement shall commence as of the date hereof and
continue, subject to the terms and conditions of this Agreement,
for a period of eight years from such date.
3. Position. The Company shall employ the Executive for the
Employment Term as its President and Chief Executive Officer, to be
located at the Company's headquarters facility, presently in
Edison, New Jersey, to perform when and where necessary such duties
relating to the overall operation of the Company as may from time
to time be assigned to the Executive by the Board of Directors.
These duties shall include duties related to the "First Six Month's
Agenda" attached hereto as Exhibit A. The Executive agrees to
accept such employment and to devote his best efforts in and to the
faithful performance of his duties hereunder to the exclusion of
all other employment, subject to the general direction and control
of the Board of Directors of the Company.
4. Elected to Board. The Company shall use its best efforts
to cause the Executive to be elected to the Board of Directors of
the Company at the next Annual Meeting of Shareholders of the
Company.
5. Compensation. (a) In consideration of the services to
be rendered by the Executive for his duties pursuant to Section 3
of this Agreement, including, without limitation, any services
rendered by the Executive as a director, officer or employee of the
Company or of any of its subsidiaries, divisions or affiliated
companies, and in full payment for the due and faithful performance
of said services, the Company shall pay the Executive and the
Executive agrees to accept a salary at the rate of $250,000 per
year for the Employment Term (the "Base Compensation"). The Base
Compensation shall commence as of November 27, 1995. The Base
Compensation will be evaluated on at least an annual basis during
the Employment Term by the Board of Directors and may be increased
in the sole discretion of the Board of Directors.
(b) Payments to the Executive of his Base Compensation
hereunder shall be made periodically on the dates established by
the Company for payment of other executive employees, but not less
frequently than once a month. All payments under this agreement
shall be subject to all deductions and withholdings required by
law.
(c) The Executive shall be entitled to reimbursement for
reasonable expenses incurred by him in connection with his
employment hereunder, upon the presentation of proper vouchers
therefor in accordance with the usual procedures of the Company.
(d) The Executive shall be entitled to participate in and
receive benefits (including vacation benefits) under and in
accordance with the provisions of any of the Company's employee
benefit plans or programs now or hereafter in effect, to the same
extent that employees of The Company in positions similar to that
of the Executive have the right to participate in such plans and
programs. Such plans and programs presently include medical and
life insurance plans.
(e) The Executive shall be entitled to term life
insurance on his life during the Employment Term in the amount of
$500,000, the beneficiary of which shall be determined by the
Executive.
(f) The Executive shall be entitled during the
Employment Term to a Company-supplied automobile, including
insurance and maintenance, comparable to a Lexus 400 in quality.
(g) The Executive shall be entitled to an option to
purchase an aggregate of 200,000 shares of Common Stock of the
Company, exercisable as to 25,000 shares per year commencing one
year from the date hereof, except in the event of termination of
this Agreement before one year from the date hereof in which case
the Executive shall be entitled to exercise the option as to 25,000
shares of Common Stock (the "Option"). The exercise price of the
Option shall be at $3.125 per share, that being the fair market
value of a share of Common Stock as of the date hereof.
6. Termination. The employment of the Executive may be
terminated by the Company upon the ocurrence of any of the
following events:
(a) The Company may terminate such employment at any
time without good cause upon written notice to the Executive;
(b) Such employment shall terminate automatically on the
death of the Executive;
(c) The Company may terminate this employment
immediately upon written notice to the Executive for good cause.
For purposes of this Agreement "good cause" shall include the
following circumstances:
(i) If there is a repeated and demonstrable failure
on the part of the Executive to perform material duties of
Executive's management position in a competent manner and where the
Executive fails to substantially remedy the failure within a
reasonable period of time after receiving written notice of such
failure from the Company;
(ii) If the Executive is convicted of a criminal
offense involving fraud or dishonesty;
(iii) If the Executive or any member of his family
makes any personal profit at the expense of the Company without
prior written consent of the Company.
(iv) If the Executive fails to fully observe the
fiduciary duties appropriate to his position; and
(v) If the Executive disobeys reasonable
instructions given in the course of employment by the Board of
Directors of the Company that are not inconsistent with the
Executive's management position and not remedied by the Executive
within a reasonable period of time after receiving written notice
of such disobedience.
(d) The Executive may terminate his employment hereunder
upon three months prior written notice to the Company.
7. Payments on Termination; Change of Control.
(a) Upon termination of the Executive's employment for
any reason, the Company shall pay to the Executive, or if the
termination is as a result of the death of the Executive, to his
personal representative, any accrued but previously unpaid Basic
Compensation prorated to the effective date of such termination.
In the event the Company terminates the Executive's employment
without good cause on or before December 31, 1996, the Company
shall make severance payments equal to and in the same manner as
the Executive's Basic Compensation in effect at the time of such
termination for a period of 12 months from the effective date of
such termination, and the Executive shall be entitled to receive
the services of an outplacement firm at a total cost to the Company
which shall not exceed 15% of the Executive's Base Compensation in
effect at the time of such termination. In the event the Company
terminates the Executive's employment without good cause after
December 31, 1996, the Company shall make severance payments equal
to and in the same manner as the Executive's Base Compensation in
effect at the time of such termination for a period of three months
from the effective date of such termination; if such termination
occurs during 1997, four months from such date; if such termination
occurs during 1998 or 1999, five months from such date; if such
termination occurs during 2000 or 2001 and six months from such
date if such termination occurs during 2002 or 2003.
(b) In the event of a Change of Control, the Executive
shall, during the three month period following such Change of
Control, have the right to terminate his employment by giving 30
days prior written notice of such termination to the Company. In
the event of such termination, the Executive shall be entitled to
receive the severance payments described in subparagraph (a) above
for 12 months from such termination. In addition, the Company
agrees that the Executive shall have the right to exercise the
Option as if the Executive's interest in the Option had vested for
two additional years and otherwise in accordance with the terms of
the Option. "Change of Control" shall mean the acquisition by any
corporation, person or entity or any associated group acting in
concert not affiliated with the current owners of the Company to
(A) gain a majority of the outstanding voting shares, whether by
purchase, merger, consolidation, reorganization or other similar
transaction, or (B) all or substantially all of the assets of the
Company.
8. Covenant Not to Compete.
(a) The Executive agrees that during the Employment
Term, he will not, directly or indirectly, have any ownership
interest of five percent or more in a corporation, firm, trust,
association or other entity which is in competition with the
Company.
(b) The Executive shall not, during the Employment Term
and at any time within one year after the termination of his
employment with the Company, in any manner, engage or become
interested in (as owner, stockholder, partner, director, officer,
employee, consultant or otherwise) any business which is
competitive with the business conducted by the Company or any of
its affiliates at the time of the termination of his employment
hereunder. The Executive's ownership of less than five percent of
the stock of a publicly-owned company which competes with the
Company shall not be considered a violation of the provisions of
this Section 8(b).
(c) Without limiting the rights of the Company
hereunder, the parties agree that in the event the Executive
violates (in other than a willful violation) any of the provisions
of this Section 8, the Company may give the Executive 30 days
notice of such violation and opportunity to cure it; in the event
the violation is not cured within such 30-day period, such
violation will be grounds for termination of this Agreement and the
Executive's employment hereunder for cause.
9. Inventions.
(a) For purposes of this Agreement, "Invention" shall
mean any and all machines, apparatuses, compositions of matter,
methods, know-how, processes, designs, configurations, uses, ideas,
concepts, or writings of any kind, discovered, conceived,
developed, made, or produced, or any improvements to them, and
shall not be limited to the definition of an invention contained in
the United States Patent Laws.
(b) The Executive understands and agrees that all
Inventions, or trademarks or copyrights relating thereto, which
reasonably relate to the business of the Company and which are
conceived or made by him during his employment by the Company
either alone or with others, are the sole and exclusive property of
the Company. The Executive understands and agrees that all
Inventions, trademarks, or copyrights described above in this
Section 9(a) are the sole and exclusive property of the Company
whether or not they are conceived or made during regular working
hours.
(c) The Executive agrees that he will disclose promptly
and in writing to the Company all Inventions within the scope of
this Agreement, whether he considers them to be patentable or not,
which he, either alone or with others, conceives or makes (whether
or not during regular working hours). The Executive hereby assigns
and agrees to assign all his right, title, and interest in and to
those Inventions which relate to the business of the Company and
agrees not to disclose any of these to others without the written
consent of the Company, except as required by the conditions of his
employment.
(d) The Executive agrees that he will at any time during
his employment hereunder, or after this Employment Agreement
terminates, on the request of the Company, (i) execute specific
assignments in favor of the Company, or its nominee, of any of the
Inventions covered by this Agreement, (ii) execute all papers and
perform all lawful acts the Company considers necessary or
advisable for the preparation, application procurement,
maintenance, enforcement, and defense of patent applications and
patents of the United States and foreign countries for these
Inventions, for the perfection or enforcement of any trademarks or
copyrights relating to such Inventions, and for the transfer of any
interest the Executive may have, and (iii) execute any and all
papers and lawful documents required or necessary to vest sole
right, title, and interest in the Company or its nominee of the
above Inventions, patent applications, patents, or any trademarks
or copyrights relating thereto. The Executive will, at the
Company's expense, execute all documents (including those referred
to above) and do all other acts necessary to assist in the
preservation of all the Company's interests arising under this
Agreement.
10. Secrecy.
(a) For purposes of this Agreement, "proprietary
information" shall mean any information relating to the business of
the Company that has not previously been publicly released by duly
authorized representatives of the Company and shall include (but
shall not be limited to) Company information encompassed in all
drawings, designs, plans, proposals, marketing and sales plans,
financial information, costs, pricing information, customer
information, and all methods, concepts, or ideas in or reasonably
related to the business of the Company.
(b) The Executive agrees to regard and preserve as
confidential all proprietary information pertaining to the
Company's business that has been or may be obtained by the
Executive prior to or during his employment by the Company (whether
before, during or after the Employment Term hereof), whether he has
such information in his memory or in writing or other physical
form. The Executive will not use for his benefit or purposes, nor
disclose to others, either during the Employment Term or
thereafter, except as required by the conditions of his employment
hereunder, any proprietary information connected with the business
or developments of the Company. This provision shall not apply
after the proprietary information has been voluntarily disclosed to
the public by the Company or upon its express authorization or has
been independently developed and disclosed by others.
(c) The Executive agrees not to remove from the premises
of the Company, except as an employee of the Company in pursuit of
the business of the Company or any of its subsidiaries, or except
as specifically permitted in writing by the Company, any document
or object containing or reflecting any proprietary information of
the Company. The Executive recognizes that all such documents and
objects, whether developed by him or by someone else, are the
exclusive property of the Company. Upon termination of his
employment hereunder, the Executive shall forthwith deliver up to
the Company all proprietary information, including, without
limitation, all lists of customers, correspondence, accounts,
records and any other documents or property made or held by him or
under his control in relation to the business or affairs of the
Company or its affiliates, and no copy of any such proprietary
information shall be retained by him.
11. Injunctive Relief. The Executive acknowledges that in
the event of a breach or threatened breach by the Executive of any
of the provisions of Sections 8, 9 or 10, monetary damages will not
adequately compensate the Company and the Company shall be entitled
to an injunction restraining the Executive from the commission of
such breach.
12. Relocation Allowance. In connection with the Executive's
agreement to relocate to New Jersey, it is the Company's intention,
other than as to the underlying value of the Executive's home in
Massachusetts, that the Executive not incur any loss or receive any
profit solely as a result of such move. In order to simplify this
process the Company has agreed to the following:
(a) The Company will pay for a suitable apartment
for the Executive for up to six months from the time he moves to
New Jersey until the Executive moves into a permanent residence in
New Jersey.
(b) The Company will pay or reimburse the Executive
for the sales commission to the real estate broker who assists the
Executive to sell his house in Massachusetts.
(c) In respect of all other costs related to this
move, the Company will pay the Executive $26,000.
The amounts set forth above shall be final unless there is a
substantial difference other than related to points or size of the
Executive's mortgage, for which there will be no adjustment.
13. Notices. Any notice required or permitted to be given
hereunder shall be in writing and shall be delivered by prepaid
registered or certified mail, return receipt requested. Such duly
mailed notice shall be deemed given when dispatched. The address
for mailed notices shall be:
(a) For the Executive - the address set forth above
(b) For the Company - Pentech International, Inc.
195 Carter Drive
Edison, NJ 08817
with a copy to:
Richard S. Kalin, Esq.
KALIN & BANNER
757 Third Avenue - 7th Floor
New York, NY 10017
Any party may notify the other parties in writing of a change of
address by serving notice in the manner provided in this Section.
14. No Conflicting Agreements. Except as set forth herein,
the Executive represents and warrants that neither the execution
and delivery of this Agreement nor the performance of his duties
hereunder violates or will violate the provisions of any agreement
to which he is a party or by which he is bound. The parties
acknowledge that the Executive is subject to a restriction in his
employment agreement with his former employer, Avery Dennison
Corporation ("Avery"). The Executive has advised the Company that
Avery has orally waived the provisions of such restriction to the
extent of the Executive's responsibilities pursuant to this
Agreement. Notwithstanding the foregoing, this Agreement is
immediately cancellable by the Company in the event the Executive
does not deliver to the Company a written confirmation of such
waiver by Avery to the reasonable satisfaction of the Company.
15. New York Law. This Agreement shall be construed
according to the laws of the State of New York, and constitutes the
entire understanding between the parties, superseding and replacing
all prior understandings and agreements between the Company and the
Executive and the parties shall cause such other agreements, if
any, to be terminated. In any event, following the effectiveness
of this Agreement, the Executive shall be entitled to no
compensation from the Company, except as required by this
Agreement. This Agreement cannot be changed or terminated except
by an instrument in writing signed by each of the parties hereto.
16. Amendments. If any provision of this Agreement or the
application thereof shall for any reason be invalid or
unenforceable, such provision shall be limited only to the extent
necessary in the circumstances to make such provision valid and
enforceable and its partial or total invalidity or unenforceability
shall in any event not affect the remaining provisions of this
Agreement which shall continue in full force and effect.
IN WITNESS WHEREOF, the undersigned have duly executed
and delivered this Agreement as of the date first above written.
PENTECH INTERNATIONAL, INC.
By: /s/ David W. Melnick
David W. Melnick,
Chief Operating Officer
/s/ John W. Linster
John W. Linster
EXHIBIT 10.7
AGREEMENT OF LEASE
FOR AND IN CONSIDERATION of the mutual covenants herein
contained, the parties hereto do hereby agree as follows:
1. Incorporated Terms. The following terms are
incorporated by reference into this Agreement:
(a) DATE OF LEASE:
August 28, 1995
(b) NAME AND ADDRESS OF LANDLORD:
PENSUD COMPANY LIMITED PARTNERSHIP
a New Jersey limited partnership
c/o The Sudler Companies
75 Eisenhower Parkway
Roseland, New Jersey 07068-1696
(c) NAME AND ADDRESS OF TENANT:
PENTECH INTERNATIONAL, INC.
a Delaware corporation
195 Carter Drive
Edison, New Jersey 08817
(d) DESCRIPTION OF PROPERTY:
The premises known as 1101 Corporate Road, North
Brunswick, New Jersey on which is located a
building containing approximately 130,275 square
feet commonly known as Block 17, Lot 95.02 on the
Tax Map of North Brunswick, New Jersey and shown on
the Plot Plan Rider.
(e) TERM OF LEASE:
Commencing on September 1, 1995 and expiring
October 31, 2000.
(f) PERMITTED USE:
General warehousing and light assembly and
ancillary offices incidental thereto.
(g) SECURITY DEPOSIT:
$75,000.00.
<PAGE>
(h) BROKER:
Continental Realty Advisors, Inc. and Stanford
Realty Corp.; commission to be paid by Landlord.
(i) RIDERS TO LEASE:
Rent Rider
Extension Options Rider
Plot Plan Rider
Landlord's Work Rider
2. Description of Property. Landlord hereby leases to
Tenant and Tenant hereby hires from Landlord, the land (the
"Land"), building (the "Building") and other improvements described
in Section 1(d) (collectively the "Property").
3. Term. The term of the Lease (the "Term") shall
commence on the date set forth in Section 1(e) (the "Commencement
Date") and terminate on the date set forth in Section 1(e) (the
"Expiration Date"), except as hereinafter provided.
Tenant shall be subject to all of the provisions of this
Lease from the Commencement Date, except that Tenant shall not be
obligated to pay Base Rent until October 16, 1995 (the "Rent Start
Date").
The first Lease Year shall be the period commencing on
the Commencement Date and ending twelve calendar months from the
last day of the month in which the Rent Start Date occurs. Each
succeeding twelve calendar month period thereafter shall be a Lease
Year.
4. Base Rent. Tenant shall pay to Landlord at the
address set forth in Section 1(b), or to such other person or at
such other place as Landlord may from time to time designate,
without previous demand therefor and without counterclaim,
deduction or set-off, the rent ("Base Rent") set forth on the Rent
Rider annexed hereto, such Base Rent to be payable in monthly
installments as set forth on the Rent Rider in advance on the first
day of each month during the term of the Lease. The first monthly
installment of Base Rent is being paid by Tenant on execution of
this Lease.
5. Net Lease. It is the intention of Landlord and
Tenant that this is a net lease and that the Base Rent shall be
absolutely net to Landlord and that Tenant shall be solely
responsible for and pay all costs for the use, operation,
maintenance, care and repair of the Property. All obligations with
respect to the Property payable by Tenant other than the Base Rent
are additional rent under this Lease. The term "rent" means the
Base Rent and additional rent.
<PAGE>
6. Real Property Taxes. (a) Tenant shall pay all real
property impositions during the Term, such payment to be made in
accordance with Section 2 of the Rent Rider. As used herein, the
term "real property impositions" means (i) any tax, assessment or
other governmental charge of any kind which at any time during the
Term may be assessed, levied, imposed upon or become due and
payable with respect to the Property; (ii) any tax on the
Landlord's right to receive, or the receipt of rent or income from
the Property, or against Landlord's business of leasing the
Property; (iii) any tax or charge for fire protection, refuse
collection, streets, sidewalks or road maintenance or other
services provided to the Property by any governmental agency; (iv)
any tax replacing or supplementing in whole or in part any tax
previously included within the definition of real property
impositions under this Lease; and (v) the cost of prosecuting any
appeal of the real property impositions with respect to the
Property, including attorneys' fees, appraisers' fees, and any
administration charge of the managing agent of the Property, if
such appeal is prosecuted at the request of Tenant. During the
first and last years of the Term, the real property impositions
payable by Tenant shall be prorated for the fraction of the tax
fiscal year included in the Term.
(b) If an assessment for public improvements is levied
against the Property, Landlord shall be deemed to have elected to
pay such assessment in the maximum number of installments then
permitted by law (whether or not Landlord actually so elects), and
Tenant shall pay the installments payable during or attributable to
the Term, together with any interest due as a result of the
installment payments. Any installment for a period during which
the Commencement Date or Expiration Date occurs shall be prorated
for the fraction of the period included in the Term.
(c) Real property impositions do not include Landlord's
federal or state income, franchise, inheritance or estate taxes.
7. Insurance. (a) Throughout the Term, Landlord shall
procure and maintain, at Tenant's expense (to be paid in accordance
with Section 2 of the Rent Rider), the following policies of
insurance: (i) insurance covering all risk of physical loss or
damage to the Building in the full amount of its replacement value
(including agreed amount endorsement), but in no event less than
the amount required by any mortgagee of the Property ("Landlord's
Mortgagee") (such policy shall provide protection against all
perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended perils,
including demolition and increased cost of construction, water
damage, sprinkler leakage, and any other perils which Landlord or
Landlord's Mortgagee deems necessary); (ii) rental income insurance
in an amount equal to one year's Base Rent, estimated real property
impositions and insurance premiums; (iii) insurance against loss or
damage by boiler or machinery or internal explosion or breakdown of
boilers, equipment or electrical appurtenances, in an amount
required by Landlord or any Landlord's Mortgagee; (iv) insurance
against breakage of all plate glass on the Property; (v) flood
hazard insurance in the amount of the full replacement cost of the
Building, or if such amount of insurance is not obtainable, in the
maximum amount which is obtainable; and (vi) such other insurance
as Landlord or any Landlord's Mortgagee may reasonably require.
All proceeds payable under any such policy shall be paid to
Landlord or Landlord's Mortgagee, as their respective interests may
appear. Tenant shall be responsible for payment of any deductible
amount under any of the policies maintained in accordance with this
Section 7 in the event of casualty.
(b) Throughout the Term, Tenant shall procure and
maintain, at its expense, a policy of comprehensive public
liability insurance, including contractual liability coverage
insuring Landlord, Sudler Construction Co., Inc., Landlord's
managing agent, Landlord's mortgagee and Tenant against liability
arising out of the ownership, use, occupancy or maintenance of the
Property or in any manner related to the Property or any act or
omission of Tenant. The initial amount of such insurance shall be
at least $5,000,000 in combined single limit with respect to injury
or death in any one accident, and at least $1,000,000 for damage to
property. Such amount shall be subject to periodic increase as
reasonably required by Landlord. However, the amount of such
insurance shall not limit Tenant's liability hereunder. Tenant's
insurance shall be written on an occurrence basis and shall be
primary with respect to the Property.
(c) Each insurance policy shall name as insureds
Landlord, Sudler Construction Co., Inc. and any Landlord's
Mortgagee, as their respective interests may appear. Each policy
shall contain standard mortgagee endorsement clauses. All
insurance policies shall be maintained with insurance companies
authorized to transact insurance business in the state in which the
Property is located and holding a "General Policyholder's Rating"
of A or better, as set forth in the most current issue of "Best's
Insurance Guide". The original all risk insurance policy (or copy
thereof certified by the insurer) and certificates evidencing other
insurance Tenant is required to maintain hereunder shall be
deposited with Landlord at least ten (10) days prior to the
Commencement Date. Evidence of renewals of all policies shall be
deposited with Landlord not less than thirty (30) days prior to the
end of the term of each such policy. Original and renewal policies
or certificates shall be accompanied by proof of payment of the
premiums therefor. Such insurance shall not be subject to
cancellation except after at least thirty (30) days prior written
notice to Landlord and Landlord's Mortgagee, and any loss shall be
payable notwithstanding any act or negligence of Tenant or
Landlord.
(d) Tenant shall obtain for each insurance policy
procured by it regarding the Property or any property located
thereon, an appropriate clause therein or endorsement thereto
pursuant to which each such insurance company waives its
subrogation rights against Landlord, Landlord's managing agent and
Sudler Construction Co., Inc. If waiver of subrogation shall not
be obtainable except at additional charge, Tenant shall pay the
insurer's additional charge therefor.
8. Utilities. Tenant shall pay, directly to the
appropriate supplier, the cost of all light, power, natural gas,
fuel, oil, sewer service, sprinkler stand-by service, water,
telephone, refuse disposal and other utilities and services
supplied to the Property. Landlord shall not be liable to Tenant,
and Tenant's obligations under the Lease shall not be abated, in
the event of any interruption or inadequacy of any utility or
service supplied to the Property.
9. Use of Property. (a) The Property may only be used
for the use set forth in Section 1(f).
(b) Notwithstanding the foregoing, Tenant shall not use
or permit the Property to be used for (i) any unlawful purpose;
(ii) in violation of any certificate of occupancy covering the
Property; (iii) any use which may constitute a public or private
nuisance or make voidable any insurance in force relating to the
Property; or (iv) any purpose which creates or produces noxious
odors, smoke, fumes, emissions, noise or vibrations.
(c) Tenant shall not cause or permit any overloading of
the floors of the Building. Tenant shall not install any equipment
or other items upon or through the roof, or cause openings to be
made in the roof, without Landlord's prior written consent.
(d) No storage of any goods, equipment or materials
shall be permitted outside the Building on the Property except for
one (1) garbage dumpster and the occasioned storage of two (2)
truck trailers.
10. Existing Conditions. Except for any work required
to be performed by Landlord as provided in the Landlord's Work
Rider, Tenant accepts the Property in its "as is" condition as of
the date hereof. Tenant acknowledges that Landlord has not made
any representation as to the condition of the Property or the
suitability of the Property for Tenant's intended use. Landlord
shall have the right to perform items of Landlord's Work after the
Commencement Date. Tenant agrees to cooperate with Landlord by
removing furniture, fixtures, equipment and product from the areas
in which Landlord is performing work.
11. Maintenance and Repairs. (a) Tenant shall keep and
maintain the Property (including all structural, non-structural,
exterior, interior and landscaped areas, and systems and equipment)
in good order, condition and repair during the Term. Tenant shall
promptly replace any portion of the Property or any systems or
equipment thereof which cannot be fully repaired. All repairs and
replacements shall be performed in a good and workmanlike manner.
All of Tenant's obligations to maintain and repair the Property
shall be accomplished at Tenant's sole expense.
(b) Tenant shall keep and maintain all portions of the
Property and the parking areas, sidewalks and landscaped areas, in
an attractive and clean condition free of dirt and rubbish, and
clear the parking areas and sidewalks of accumulations of snow and
ice.
(c) During the Term, Tenant shall procure and maintain
the following service contracts: (i) contract for the inspection,
service, maintenance and repair of all heating, ventilating and air
conditioning equipment installed in the Building (the inspection
pursuant to such contract shall be made at least quarterly); and
(ii) contract for maintenance of the landscaped areas of the
Property. The identity of each contractor and each contract shall
be subject to Landlord's reasonable approval. Copies of reports of
inspections made hereunder shall be promptly supplied to Landlord.
(d) During the Term, Landlord shall procure and
maintain, at Tenant's expense (to be paid in accordance with
Section 2 of the Rent Rider), a contract for inspection and
maintenance of the roof of the Building (the inspections pursuant
to such contract shall be made at least semi-annually). The costs
of any repairs and/or replacements of the roof shall be amortized
on a straight line basis over ten (10) years and Tenant shall, upon
demand, pay Landlord that portion of such costs applicable to the
Term and any extension(s) thereof.
12. Alterations and Improvements. (a) Tenant shall not
make any alterations, additions or improvements to the Property
(the "Alterations") without Landlord's prior written consent,
except for non-structural Alterations which do not exceed $15,000
in cost and which are not visible from the outside of the Building.
In no event shall Alterations reduce the size or cubic content of
the Building or reduce the value of the Property. Tenant shall
submit to Landlord detailed plans and specifications for
Alterations requiring Landlord's consent and reimburse Landlord for
all reasonable expenses incurred by Landlord in connection with its
review thereof. Tenant shall also provide to Landlord for its
reasonable approval the identity of the contractor Tenant proposes
to employ to construct the Alterations. All Alterations shall be
accomplished in accordance with the following conditions:
(1) Tenant shall procure all governmental permits and
authorizations for the Alterations, and obtain and provide to
Landlord an official certificate of occupancy and/or compliance
upon completion of the Alterations, if appropriate.
(2) Tenant shall arrange for extension of the general
liability insurance provided for in Section 7(b) to apply to the
construction of the Alterations. Further, Tenant shall procure and
maintain Builders Risk Casualty Insurance in the amount of the full
replacement cost of the Alterations and statutory Workers
Compensation Insurance covering all persons employed in connection
with the work. All such insurance shall conform to the
requirements of Section 7(c).
(3) Tenant shall construct the Alterations in a good and
workmanlike manner utilizing materials of first class quality for
the particular use and in compliance with all laws and governmental
regulations.
(b) Upon completion of the Alterations, Tenant shall
provide Landlord with "as built" reproducible transparency plans of
the Alterations.
(c) Alterations shall be the property of Landlord and
shall remain on the Property upon termination of the Lease, or, if
Landlord so requires, a portion of or all Alterations shall be
removed by Tenant on or prior to the termination of the Lease and
Tenant shall restore the Property to its condition prior to such
Alterations.
(d) Under no circumstances shall Tenant's furniture and
equipment be deemed an Alteration pursuant to this Section 12.
(e) Notwithstanding anything to the contrary contained
herein, Tenant shall at all times have the right to remove its
trade fixtures and personal property from the Property; provided,
however, that Tenant shall, at its own cost and expense, repair any
damage caused by such removal and shall restore the Property to the
condition that it was in prior to the installation of Tenant's said
trade fixtures and personal property.
13. Covenant Against Liens. Tenant shall not have any
right to subject to Landlord's interest in the Property to any
mechanic's lien or any other lien whatsoever. If any mechanic's
lien or other lien, charge or order for payment of money shall be
filed as a result of the act or omission of Tenant, Tenant shall
cause such lien, charge or order to be discharged or appropriately
bonded within ten (10) days after notice from Landlord thereof, and
Tenant shall indemnify and save Landlord harmless from all
liabilities and costs resulting therefrom.
14. Signs. Tenant shall not place any signs on the
Property without Landlord's prior written approval of its design,
location and manner of installation. In no event shall any sign be
installed on the roof or above the parapet height of the Building.
Tenant shall remove its signs upon termination of this Lease and
restore the Property to its condition prior to installation of the
signs.
15. Compliance with Law. Tenant shall take all
necessary action to conform to and comply with all laws, orders and
regulations of any governmental authority or Landlord's or Tenant's
insurers, or any Landlord's Mortgagee, now or hereafter applicable
to the Property or Tenant's use or occupancy. Tenant shall obtain
all permits, including a certificate of occupancy, necessary for
Tenant's occupancy or use of the Property.
16. Environmental Law Compliance. (a) Tenant shall, at
Tenant's sole cost and expense, comply with the Industrial Site
Recovery Act, N.J.S.A. 13:1K-6 et seq. and the regulations
promulgated thereunder ("ISRA"). Tenant shall, at Tenant's sole
cost and expense, make all submissions to, provide all information
to, and comply with all requirements of, the New Jersey Department
of Environmental Protection ("NJDEP"). If any spill or discharge
of hazardous substances or wastes occurs during the Term, and the
Bureau or other division of NJDEP determines that a cleanup plan be
prepared and a cleanup be undertaken, then Tenant shall, at
Tenant's sole cost and expense, prepare and submit the required
plans and financial assurances, and carry out the approved plans.
Such cleanup shall be to the strictest standard required by NJDEP
regardless of use. Tenant's obligations under this Section shall
arise if there is any closing, terminating or transferring of
operations by any person or entity of an industrial establishment
at the Property pursuant to ISRA, including without limitation a
sale, transfer or conveyance of the Property by Landlord or an
assignment or subletting by Tenant. At no expense to Landlord,
Tenant shall promptly provide all information requested by Landlord
for preparation of non-applicability affidavits and shall promptly
sign such affidavits when requested by Landlord.
(b) Tenant shall indemnify, defend and hold harmless
Landlord from all fines, suits, procedures, claims and actions of
any kind arising out of or in any way connected with any spills or
discharges of hazardous substances or wastes at the Property which
occur during the Term and from all fines, suits, procedures, claims
and actions of any kind arising out of Tenant's failure to provide
all information, make all submissions and take all actions required
by the Bureau or any other division of NJDEP or any other
governmental agency with respect to the Property.
(c) Tenant's obligations under this Section shall
survive the expiration of this Lease.
(d) Anything herein to the contrary notwithstanding,
Landlord shall be responsible for the cleanup of any hazardous
materials or wastes on the Property which were present on the
Property prior to the Commencement Date and the presence of which
was not caused by Tenant or Tenant's agents, employees, invitees,
contractors and/or licensees. Landlord shall indemnify, defend and
hold harmless Tenant from all fines, suits, procedures, claims and
actions of any kind resulting from the existence of any hazardous
materials and/or wastes on the Property which were present on the
Property prior to the Commencement Date and the presence of which
was not caused by Tenant or Tenant's agents, employees, invitees,
contractors and/or licensees.
17. Landlord's Access. Landlord and its representatives
may enter the Property at all reasonable times (or at any time in
the event of emergency) for the purpose of inspecting the Property,
or making any necessary repairs, or to show the Property to
prospective purchasers, investors, encumbrances, tenants or other
parties, or for any other purpose Landlord deems necessary. During
the final six (6) months of the Term, Landlord may place customary
"For Sale" or "For Lease" signs on the Property.
18. Assignment and Subletting. (a) Except as otherwise
provided in this paragraph, Tenant shall not assign or encumber
Tenant's interest in this Lease, or sublet any portion of the
Property, or grant concessions or licenses with respect to the
Property, without Landlord' s prior written consent, which consent
shall not be unreasonably withheld or delayed. The cumulative
change of more than twenty-five (25%) percent of the ownership
interest of Tenant shall be deemed to be an assignment of this
Lease requiring Landlord's consent. However, Tenant may assign
this Lease or sublet the Property, without Landlord's consent, to
any corporation which controls, is controlled by or is under common
control with Tenant, or to any corporation resulting from the
merger of or consolidation with Tenant, provided such assignee
shall assume all of Tenant's obligations under this Lease, and such
assignee or sublessee shall then have a net worth at least equal to
that of Tenant on the date hereof.
(b) If Tenant desires to assign this Lease or sublet all
or any portion of the Property, Tenant shall submit to Landlord a
written request for Landlord's approval thereof, setting forth the
name, principal business address, and nature of business of the
proposed assignee or sublessee; the financial, banking and other
credit information relating to the proposed assignee or sublease;
and the details of the proposed assignment or subletting, including
a copy of the proposed assignment or sublease instrument and plans
for any Alterations required for the proposed assignee or
sublessee. Tenant shall also furnish any other information
reasonably requested by Landlord. Landlord shall have the option
(i) to withhold its consent; (ii) to grant consent; or (iii) in the
event of a proposed assignment of this Lease or sublease of a
substantial portion of the Property, to terminate this Lease as of
the effective date of such proposed assignment or sublease.
Landlord may enter into a direct lease with the proposed assignee
or sublessee, if Landlord so elects. Landlord's acceptance of rent
from a proposed assignee or sublessee shall not be construed to
constitute its consent to an attempted assignment or subletting.
(c) In the event of a permitted assignment or
subletting, Tenant shall remit to Landlord as additional rent each
month during the remainder of the Term fifty (50%) percent of any
rent or other sums received by Tenant from its assignee or
sublessee in excess of the Base Rent and other charges paid by
Tenant allocable to the Property or portion thereof sublet, as the
case may be.
(d) No assignment or subletting hereunder, whether or
not with Landlord's consent, shall release Tenant from any
obligations under this Lease, and Tenant shall continue to be
primarily liable hereunder. If Tenant's assignee or sublessee
defaults under this Lease, Landlord may proceed directly against
Tenant without pursuing its remedies against the assignee or
sublessee. Consent to one assignment or subletting shall not be
deemed a consent to any subsequent assignment or subletting.
Landlord may consent to subsequent assignments or modifications of
this Lease or sublettings without notice to Tenant and Tenant shall
not be relieved of liability under this Lease.
(e) Tenant shall pay to Landlord upon demand all costs,
including reasonable legal fees, which Landlord shall incur in
reviewing any proposed assignment or subletting.
(f) Notwithstanding anything herein to the contrary,
provided that Tenant shall not be in default of any of its
obligations under this Lease, Tenant may sublet up to an aggregate
of twenty (20%) percent of the Premises, without Landlord's
consent, but nevertheless subject to all of the other terms and
provisions of this Article 18. Tenant shall give Landlord prompt
notice of any such subletting.
19. Casualty. If the Building is damaged by fire or
other casualty, and (i) the insurance proceeds received by Landlord
on account of such damage are sufficient to pay for the necessary
repairs, (ii) Landlord's Mortgagee permits Landlord to utilize the
insurance proceeds to repair such damage, and (iii) the Building
can be fully repaired within one hundred eighty days (180) days
after such casualty occurred, this Lease shall remain in effect and
Landlord shall repair the damage as soon as reasonably possible.
If any of the foregoing conditions requiring Landlord to repair the
Building is not met, Landlord may elect either to (i) terminate
this Lease; or (ii) repair the damage as soon as reasonably
possible, in which event this Lease shall remain in full force and
effect (but Tenant shall then have the right to terminate this
Lease if the Building cannot be fully repaired within one hundred
eighty (180) days after such casualty occurred). Landlord shall
notify Tenant of its election within thirty (30) days after
Landlord receives notice of the occurrence of the casualty.
Tenant's notification, if any, shall be required within ten (10)
days thereafter. In the event this Lease shall remain in full
force and effect following a casualty, there shall be no abatement
of the Base Rent or additional rent payable hereunder, but the
proceeds of the rental income insurance described in Section 7
shall be applied against Tenant's rental obligations as received by
Landlord. Tenant waives the protection of any law which grants a
tenant the right to terminate a lease in the event of the
destruction of a leased property, and agrees that the provisions of
this paragraph shall govern in the event of any destruction of the
Building. Landlord shall not be required to repair improvements or
alterations to the Property made by Tenant. Landlord shall have
the option to terminate this Lease if more than twenty five (25%)
percent of the ground floor area of the Building is damaged or
destroyed by fire or other casualty or by the elements during the
last two (2) years of the Term.
20. Condemnation. If more than thirty-five (35%)
percent of the Land and/or Building shall be taken under the power
of eminent domain or sold under the threat thereof ("Condemnation")
and Tenant's use of the Property is materially adversely affected
in the reasonable opinion of Tenant exercised in good faith, this
Lease shall terminate on the date on which title to the Property or
portion thereof shall vest in the condemning authority. If this
Lease shall remain in effect as to the portion of the Property not
taken, Landlord shall restore the improvements not taken as nearly
as reasonably practicable to their condition prior to the
Condemnation, and the Base Rent shall be reduced proportionately in
accordance with the reduction in the square foot area of the
Building following the Condemnation. Landlord shall be entitled to
receive the entire award in any Condemnation proceeding relating to
the Property, except that Tenant may assert a separate claim to an
award for its moving expenses and for fixtures and personal
property installed by Tenant at its expense. It is understood that
Tenant shall have no claim against Landlord for the value of the
unexpired Term of this Lease or any options granted under this
Lease. Landlord shall not be required to restore improvements or
alterations to the Property made by Tenant.
21. Surrender of Property. Upon termination of the
Lease, Tenant shall surrender the Property to Landlord broom clean,
and in good order and condition, except for ordinary wear and tear,
and damage by casualty which Tenant was not obligated to remedy
under Section 19. Tenant shall remove its machinery and equipment
and repair any damage to the Property caused by such removal.
Tenant shall not remove any power wiring or power panels, lighting
or lighting fixtures, wall coverings, blinds or other window
coverings, carpets or other floor coverings, heaters or air
conditioners or fencing or gates, except if installed by Tenant and
required by Landlord to be removed from the Property. All personal
property of Tenant remaining on the Property after Tenant's removal
shall be deemed abandoned and at Landlord's election may either be
retained by Landlord or may be removed from the Property at
Tenant's expense.
22. Holdover. In the event Tenant remains in possession
of the Property after the expiration of the term of this Lease (the
"Holdover Period.), in addition to any damages to which Landlord
may be entitled or other remedies Landlord may have by law, Tenant
shall pay to Landlord a rental for the Holdover Period at the rate
of twice the sum of (i) the annual rent payable during the last
lease year of the term, plus (ii) all items of additional rent and
other charges with respect to the Property payable by Tenant during
the last lease year of the Term. Nothing herein contained shall be
deemed to give Tenant any right to remain in possession of the
Property after the expiration of the Term of this Lease. The sum
due to Landlord hereunder shall be payable by Tenant upon demand.
<PAGE>
23. Events of Default; Remedies. (a) Tenant shall be in
default upon the occurrence of one or more of the following events
(an "Event of Default"): (i) Tenant fails to pay rent or any other
sum of money required to be paid by Tenant hereunder within five
(5) days of the date when due; (ii) Tenant fails to perform any of
Tenant's non-monetary obligations under this Lease within thirty
(30) days after written notice thereof from Landlord (provided that
if more than thirty (30) days are required to complete such
performance, Tenant shall not be in default if Tenant promptly
commences such performance and thereafter diligently pursues its
completion); (iii) Tenant abandons the Property for thirty (30)
days or more; or (iv) Tenant makes an assignment for the benefit of
creditors, or if a petition for adjudication of bankruptcy or for
reorganization is filed by or against Tenant and is not dismissed
within thirty (30) days, or if a receiver or trustee is appointed
for a substantial part of Tenant's property and such appointment is
not vacated within thirty (30) days.
(b) On the occurrence of an Event of Default, without
limiting any other right or remedy Landlord may have, without
notice or demand, Landlord may:
(i) Terminate this Lease and Tenant's right to
possession of the Property by any lawful means, in which event
Tenant shall immediately surrender possession of the Property to
Landlord. At its option, Landlord may occupy the Property or cause
the Property to be redecorated, altered, divided, consolidated with
other adjoining property, or otherwise prepared for reletting, and
may relet the Property or any part thereof for a term or terms to
expire prior to, at the same time or subsequent to the original
Expiration Date, and receive the rent therefor, applying the sums
received first to the payment of such expenses as Landlord may have
incurred in connection with the recovery of possession, preparing
for reletting and the reletting itself, including brokerage and
attorneys' fees, and then to the payment of damages in amounts
equal to the rent hereunder and to the cost and expense of
performance of the other covenants of Tenant under this Lease.
Tenant agrees to pay to Landlord damages equal to the rent and
other sums payable by Tenant under this Lease, reduced by the net
proceeds of the reletting, if any, as ascertained from time to
time. In reletting the Property, Landlord may grant rent
concessions, and Tenant shall not be entitled to any credit
therefor. Tenant shall not be entitled to any surplus resulting
from any reletting. Tenant expressly agrees that Landlord shall
not be obligated to re-rent the Property or take any other action
to mitigate its damages in the event Tenant is in default under
this Lease.
(ii) Permit Tenant to remain in possession of
the Property, in which event this Lease shall continue in effect.
Landlord shall be entitled to enforce all of Landlord's rights and
remedies under this Lease, including the right to receive the rent
as it becomes due under this Lease.
(iii) Pursue any other remedy now or hereafter
available under the laws of the jurisdiction in which the Property
is located.
(c) The remedies available to Landlord herein specified
are not intended to be exclusive and prevent Landlord from
exercising any other remedy or means of redress to which Landlord
may be lawfully entitled. In addition to other remedies provided
in this Lease, Landlord shall be entitled to restraint by
injunction of any violation or threatened violation by Tenant of
any of the provisions of this Lease. Landlord's exercise of any
right or remedy shall not prevent Landlord from exercising any
other right or remedy.
(d) To the extent permitted by law, Tenant, for itself
and any person claiming through or under Tenant, waives any equity
or right of redemption provided by any law.
(e) Tenant agrees to pay as additional rent all
attorneys fees and other expenses incurred by Landlord in the
enforcement of any of the agreements or obligations of Tenant under
this Lease.
24. Service Fee: Interest. (a) Tenant's failure to pay
rent promptly or make other payments required under this Lease may
cause Landlord to incur unanticipated costs, which are impractical
to ascertain. Therefore, if Landlord does not receive any payment
of Base Rent, additional rent or other sums due from Tenant to
Landlord within five (5) days after it becomes due, without the
need for any notice thereof by Landlord (except Landlord agrees to
give written notice thereof not more than once in any twelve (12)
month period during the Term and the said five (5) day period shall
commence as of the date of such notice) Tenant shall pay Landlord
as additional rent a service fee equal to eight (8%) percent of the
overdue amount. This service fee shall be in addition to
reasonable legal fees and costs incurred by Landlord in enforcing
this Lease.
(b) Any amount owed by Tenant to Landlord which is not
paid within thirty (30) days after it becomes due shall bear
interest at the rate of eighteen (18%) percent per annum ("Default
Interest") from the expiration of such thirty (30) day period. The
payment of Default Interest on such amounts shall not extend the
due date of any amount owed. If the interest rate specified in
this Lease shall exceed the rate permitted by law, the Default
Interest shall be deemed to be the maximum legal interest rate
permitted by law.
25. Indemnification by Tenant. Tenant shall indemnify
and hold harmless Landlord, Sudler Construction Co., Inc. and
Landlord's managing agent from and against all liability, claims or
costs, including reasonable legal fees, arising from (i) Tenant's
use of the Property; (ii) any breach of this Lease by Tenant; (iii)
any other act or omission of Tenant; or (iv) any injury to person
or damage to property occurring on or about the Property. Tenant
shall defend Landlord, Sudler Construction Co., Inc. and
Landlord's managing agent against any such claim of a third party,
with counsel reasonably acceptable to Landlord or, at Landlord's
election, Tenant shall reimburse Landlord for reasonable legal fees
incurred by Landlord's employment of its own counsel.
26. Landlord's Right to Cure Tenant's Default. If
Tenant fails to make any payment or perform any act on its part to
be made or performed, then Landlord, without waiving or releasing
Tenant from such obligation, may, after any applicable cure period
granted to Tenant herein, make such payment or perform such act on
Tenant's part, and the costs incurred by Landlord in connection
with such payment or performance, together with Default Interest
thereon, shall be paid on demand by Tenant to Landlord as
additional rent.
27. Waiver of Liability. Landlord shall not be liable
for any injury or damage to the business, equipment, merchandise or
other property of Tenant or any of Tenant's employees or invitees
or any other person on or about the Property, resulting from any
cause, including, but not limited to: (i) fire, steam, electricity,
water, gas or rain; (ii) leakage, obstruction or other defects of
pipes, sprinklers, wires, plumbing, air conditioning, boilers or
lighting fixtures; or (iii) condition of the Property.
28. Force Majeure. If Landlord is unable to perform any
of its obligations due to events beyond Landlord's reasonable
control, the time provided to Landlord for performing such
obligations shall be extended by a period of time equal to the
duration of such events, and Tenant shall not be entitled to any
claim against Landlord by reason thereof. Events beyond Landlord's
reasonable control include, but are not limited to, acts of God,
war, civil commotion, labor disputes, strikes, casualty, weather
conditions, labor or material shortages, or government regulation
or restriction.
29. Notice of Landlord's Default. Tenant shall give
written notice of any failure by Landlord to perform any of its
obligations under this Lease to Landlord and any ground lessor or
Landlord's Mortgagee whose name and address have been furnished to
Tenant. Landlord shall not be in default under this Lease unless
Landlord (or such ground lessor or Landlord's Mortgagee) fails to
cure such non-performance within thirty (30) days after receipt of
Tenant's notice. If more than thirty (30) days are required to
cure such non-performance, Landlord shall not be in default if such
cure is commenced within such thirty (30) day period and thereafter
diligently pursued to completion.
<PAGE>
30. Landlord's Liability Limited. There shall be no
personal liability of the Landlord or any partner, stockholder,
officer, director or other principal of Landlord in connection with
this Lease. Tenant agrees to look solely to the interest of
Landlord in the Property for the collection of any judgment or
other judicial process requiring the payment of money by Landlord
in the event of any default or breach by Landlord with respect to
this Lease or in any way relating to the Property. No other assets
of Landlord or any principal of Landlord shall be subject to levy,
execution or other procedures for the satisfaction of Tenant's
remedies.
31. Estoppel Statement: Financial Statement. (a) Upon
Landlord's request, Tenant shall execute, acknowledge and deliver
to Landlord a written statement certifying: (i) the Commencement
Date; (ii) the Expiration Date; (iii) that this Lease is in full
force and effect and unmodified (or if modified, stating the n
modifications); (iv) the last date of payment of the Base Rent and
other charges and the time period covered by each payment; (v) that
Landlord is not in default under this Lease (or, if Landlord is
claimed to be in default, stating the nature of the default); and
(vi) such other matters as may be reasonably required by Landlord
or any Landlord's Mortgagee. Tenant shall deliver such statement
to Landlord within ten (10) days after Landlord's request. Any
such statement may be given to and relied upon by any prospective
purchaser or encumbrancer of the Property.
(b) Within ten (10) days after Landlord's request,
Tenant shall deliver to Landlord such financial statements as are
reasonably required to verify the net worth of Tenant. Any such
statement may be given by Landlord to any Landlord's Mortgagee or
prospective encumbrancer of the Property, but otherwise shall be
kept confidential by Landlord. Tenant represents to Landlord that
each such financial statement is a true and accurate statement as
of the date of such statement.
32. Quiet Enjoyment. (a) Landlord covenants that as
long as Tenant pays the Base Rent and additional rent and performs
its other obligations under this Lease, Tenant shall peaceably and
quietly have, hold and enjoy the Property for the term provided by
this Lease, subject to the provisions of this Lease.
(b) Landlord reserves to itself such access and utility
easements over, under and across the Property as may be required by
Landlord from time to time in connection with the ownership, use or
operation of any other property of Landlord or any affiliated party
of Landlord. No such easement shall materially interfere with
Tenant's use of the Property.
33. Subordination: Attornment. (a) This Lease is
subject and subordinate to any ground lease or mortgage which may
now or hereafter encumber the Property, and any renewals,
modifications, consolidations, replacements or extensions thereof.
(b) If Landlord's interest in the Property is acquired
by any ground lessor, Landlord's Mortgagee, or purchaser at a
foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such
transferee or successor as landlord under this Lease. Such
transferee or successor shall not be liable for any act or omission
of any prior landlord, or be subject to any offsets or defenses
which Tenant might have against any prior landlord, or be bound by
any Base Rent which Tenant might have paid for more than the
current month to any prior landlord, or be liable for any security
deposit under this Lease unless actually transferred to such
transferee or successor.
(c) Tenant agrees that this Lease shall be modified in
accordance with the reasonable request of any institutional
Landlord's Mortgagee, provided no such modification adversely
affects the business terms of this Lease.
(d) The foregoing provisions shall be self-operative and
no further instrument or act on the part of Tenant shall be
necessary to effect the same. Tenant shall nevertheless sign and
deliver any document necessary or appropriate to evidence the
subordination, attornment or agreement above provided.
34. Brokerage. Each party represents to the other
that it did not deal with any real estate broker in connection with
this Lease, other than the real estate broker whose identity is set
forth in Section 1(h). The commission of such broker shall be paid
by the party as set forth in Section 1(h). Each party shall
indemnify and hold the other harmless from any claim for a
commission or other fee made by any broker with whom the
indemnifying party has dealt, other than the broker identified in
Section 1(h).
35. Security Deposit. (a) Upon execution of this Lease,
Tenant shall deposit with Landlord the sum set forth in Section
1(g) as security for the performance by Tenant of its obligations
under this Lease (the "Security Deposit"). Landlord shall have the
right to use the Security Deposit to cure any default of Tenant
hereunder, including, but not limited to, payment of Base Rent,
additional rent, service fees or other debts of Tenant due
Landlord, or repair or restoration of the Property. If Landlord
uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after
Landlord's demand therefor. Provided Tenant has fully complied
with all of the terms of this Lease, Landlord shall return the
Security Deposit to Tenant without interest on the date thirty (30)
days after the surrender of the Property by Tenant. Landlord may
deliver the Security Deposit to the purchaser or other transferee
of Landlord's interest in the Property in the event the Property is
sold or otherwise transferred, and Landlord shall be discharged
from any further liability with respect to the Security Deposit.
(b) In lieu of a cash security deposit, Tenant shall
have the option to deliver to Landlord an irrevocable unconditional
letter of credit (the "L.O.C.") drawn on a bank which is a member
of the New York Clearing House Association with assets in excess of
$100,000,000.00. The L.O.C. shall be in the sum of $75,000.00 and
shall be payable in the event Tenant defaults in any of its
obligations under this Lease. If Tenant elects to deliver the
L.O.C. in lieu of a cash security deposit, Tenant shall be in
default under this Lease if Tenant fails to maintain the L.O.C. at
any time during the Term hereof.
36. Notices. All notices in connection with this Lease
or the Property shall be in writing and shall be personally
delivered, or sent by certified mail, return receipt requested,
postage prepaid, or sent by commercial overnight courier (e.g.,
Federal Express, Airborne). Notices to Landlord shall be delivered
to the address specified in Section 1(b). Notices to Tenant shall
be delivered to the address specified in Section 1(c) with a copy
of each such notice delivered to Richard S. Kalin, Esq., Kalin &
Banner, 757 Third Avenue, New York, New York 10017. All notices
shall be effective upon delivery or attempted delivery in
accordance with this provision. Either party may change its notice
address upon written notice to the other party given in accordance
with this provision.
37. Railroad License. Tenant is hereby granted a
non-exclusive license to use the lead track ("Lead Track") now
installed in Landlord's industrial park for the purpose of shipping
and receiving freight by rail via the facilities of common carriers
holding franchises to serve the area in which the Property is
located. The Tenant shall, subject to the terms and conditions
hereof, have the license to use the Lead Track in common with
Landlord, Landlord's designees and others, only as and for a
railroad right-of-way. Tenant shall not use the Lead Track for
loading and/or unloading purposes.
Tenant shall, at its sole cost and expense, maintain the
side track serving the Property, including any maintenance contract
therefor maintained. Provided that Tenant exercises its right to
use the Lead Track, Tenant covenants and agrees to pay to Landlord
as additional rent the cost of maintaining, repairing, replacing
and restoring the Lead Track and the appurtenances thereto
installed within Landlord's industrial park. Landlord shall make
an allocation of the cost of maintaining, repairing, replacing and
restoring the Lead Track and the appurtenances thereto by and among
the parties utilizing the Lead Track.
Anything contained herein to the contrary
notwithstanding, Landlord specifically reserves the right at its
sole cost and in its sole discretion from time to time and at any
time to relocate the presently existing Lead Track. In the event
that the Lead Track is so relocated by Landlord, the license
granted hereby shall then be deemed to have been relocated so as to
affect only the Lead Track as so relocated.
This License is made upon the express condition that
Tenant agrees to and shall at all times keep, save and hold
Landlord free and harmless from and indemnify it against all
liability, penalties, losses, damages, costs, expenses, causes of
action, claims and/or judgments (whether by reason of damage to
property or bodily injury to persons or otherwise) arising out of
or in connection with the use of the Lead Track and/or side track
by Tenant, its agents, successors or assigns.
38. Miscellaneous. (a) The failure of either party to
insist on strict performance of any provision of this Lease, or to
exercise any right contained herein, shall not be construed as a
waiver of such provision or right in any other instance. All
amendments to this Lease shall be in writing and signed by both
parties.
(b) The captions in this Lease are intended to assist
the parties in reading this Lease and are not a part of the
provisions of this Lease. Whenever required by the context of this
Lease, the singular shall include the pleural and the plural shall
include the singular. The masculine, feminine and neuter genders
shall each include the other.
(c) Landlord and Tenant hereby waive trial by jury in
any legal proceeding brought by either of them against the other
with respect to any matters arising out of or in any way connected
with this Lease or the Property.
(d) The laws of the state in which the Proper y is
located shall govern this Lease.
(e) If Tenant is a corporation or partnership, each
person signing this Lease on behalf of Tenant represents that he
has full authority to do so and that this Lease binds the
corporation or partnership, as the case may be.
(f) Landlord shall not be liable for consequential
damages arising from any negligence, tortious act, breach of any
term, covenant or obligation under this Lease, or any other act or
omission affecting this Lease.
(g) This Lease is binding upon any party who legally
acquires any rights or interest in this Lease from Landlord or
Tenant; provided, however, Landlord shall have no obligation to
Tenant's successor unless the interest of Tenant's successor in
this Lease is acquired in accordance with Section 18.
(h) The submission of this Lease to Tenant shall not be
deemed to be an offer and shall not bind either party until duly
executed by Landlord and Tenant.
(i) This Lease may be executed in counterparts, and,
when all counterpart documents are executed, the counterparts shall
constitute a single binding instrument.
(j) A determination by a court of competent jurisdiction
that any provision of this Lease or any part thereof is illegal or
unenforceable shall not invalidate the remainder of this Lease or
such provision, which shall continue to be in effect.
(k) Tenant shall not record this Lease.
The riders enumerated in Section 1(i) are attached hereto
and made a part of this lease as fully as if set forth herein at
length. The terms used in the rider have the same meanings as set
forth in the Lease. The provisions of a rider shall prevail over
any provisions of the lease which are inconsistent or conflict with
the provisions of the rider.
IN WITNESS HEREOF, the parties hereby have duly executed
this Lease as of the date set forth in Section 1(a).
LANDLORD:
WITNESS: PENSUD COMPANY
LIMITED PARTNERSHIP
By: Stanford Realty Group, L.P.
its general partner
Dolores A. Bocian David S. Steiner
Its: General Partner
TENANT:
ATTEST: PENTECH INTERNATIONAL, INC.
By:Richard S. Kalin By:David Melnick
Its:Secretary Its:President
<PAGE>
RENT RIDER
Date of Lease: August 28, 1995
Landlord: Pensud Company Limited Partnership
Tenant: Pentech International, Inc.
Property: 1101 Corporate Road
North Brunswick, New Jersey
1. The Base Rent payable by Tenant to Landlord during
the Term shall be at the annual Base Rent rate and be payable in
monthly installments as follows:
Monthly Annual
Period PSF Installment Amount
September 1, 1995 through
October 15, 1995 0 0 0
October 16, 1995 through
October 31, 1996 $3.15 $34,197.19 $410,366.25
November 1, 1996 through
October 31, 2000 $3.35 $36,368.44 $436,421.25
2. Escrow Payments. Tenant shall pay to Landlord real
property impositions, insurance premiums, and other expenses of the
Property in monthly installments on an estimated basis as
determined by Landlord sufficient to pay such real property
impositions, insurance premiums, and other expenses of the Property
before the same become due. Landlord may adjust such estimate at
any time and from time to time based upon Landlord's anticipation
of costs. After the end of each calendar year during the Term,
Landlord shall deliver to Tenant a statement setting forth the
actual real property impositions, insurance premiums, and other
expenses incurred by Landlord and paid from the deposits made by
Tenant for such calendar year. If Tenant has paid less than the
actual amount due, Tenant shall pay the difference to Landlord
within ten (10) days after Landlord's request therefor. Any amount
paid by Tenant which exceeds the amount due shall be credited
against the next succeeding estimated payments due hereunder,
unless the Lease has terminated, in which event the excess amount
shall be refunded to Tenant.
Initials:
DSS
Landlord
DM
Tenant
<PAGE>
EXTENSION OPTIONS RIDER
Date of Lease: August 28, 1995
Landlord: Pensud Company Limited Partnership
Tenant: Pentech International, Inc.
Property: 1101 Corporate Road
North Brunswick, New Jersey
1. Grant of Options. Subject to the provisions of
Section 3 of this Rider, Landlord hereby grants to Tenant two
options (each such option is referred to as the "Option") to extend
the Term following the expiration of the original term hereof (the
"Initial Term ") for additional teens of five (5) years each (each
such additional term is hereinafter referred to as the "Extension
Term").
2. Exercise of Options. Each Option shall be exercised
only by written notice (the "Extension Notice") delivered to
Landlord in accordance with Section 36 of the Lease at least six
(6) months before the expiration of the Initial Term or the
expiration of the current Extension Term, as the case may be. Time
shall be of the essence with respect to delivery of the Extension
Notice and if Tenant fails to deliver any Extension Notice within
the specified time period, the Option related thereto and any
succeeding Option shall lapse, and Tenant shall have no further
right to extend the Term.
3. Conditions Precedent to Options. Each Option shall
be exercisable by Tenant and the Lease shall continue for the
Extension Term on all of the following conditions: (a) At the time
Landlord receives the Extension Notice and at the commencement of
the Extension Term related thereto, Tenant shall not be in default
under any of the provisions of the Lease.
(b) At the time Landlord receives the Extension Notice
and at the commencement of the Extension Term related thereto, the
Tenant named in Section 1(c) of the Lease shall not have assigned
the Lease or sublet any portion of the Property, except as
permitted in Section 18(a) of the Lease.
(c) With respect to any Option for an Extension Term
following the first Extension Term, Tenant shall have theretofore
timely exercised all prior Options.
<PAGE>
4. Extension Term Provisions. Each Extension Term
shall be on all of the same terms and conditions set forth in the
Lease and applicable to the Initial Term, except the annual Base
Rent for each Extension Term shall be as follows:
Monthly Annual
Period PSF Installment Amount
November 1, 2000 through
October 31, 2005 $4.00 $43,425.00 $521,100.00
November 1, 2005 through
October 31, 2010 $4.75 $51,567.19 $618,806.25
Initials:
DSS
Landlord
DM
Tenant
<PAGE>
PLOT PLAN RIDER
Date of Lease: August, 28, 1995
Landlord: Pensud Company Limited Partnership
Tenant: Pentech International, Inc.
Property: 1101 Corporate Road
North Brunswick, New Jersey
The diagram shows an aerial view of the warehouse space being
rented.
Initials:
DSS
Landlord
DM
Tenant
<PAGE>
Landlord's Work Rider
Date of Lease: August, 28, 1995
Landlord: Pensud Company Limited Partnership
Tenant: Pentech International, Inc.
Property: 1101 Corporate Road
North Brunswick, New Jersey
Landlord shall, at its sole cost and expense, perform the following
work (Landlord's Work) to the Property:
a. Place plumbing, electrical, fire sprinkler and heating,
ventilating and air conditioning systems in good working
order.
b. Place overhead doors, and dock levellers in good working
order.
Initials:
DSS
Landlord
DM
Tenant
<PAGE>
EXHIBIT 21
Subsidiaries of Pentech International, Inc.
Jurisdiction of
Name Incorporation
Sawdust Pencil Co. Delaware
Pentech Cosmetics, Inc. Delaware
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in (i) the
Registration Statement (Form S-8 No. 33-27009) dated February 28,
1989 pertaining to the 1984 and 1989 Stock Option Plans of Pentech
International, Inc. and (ii) the Registration Statement (Form S-8
No. 33-67802) dated August 23, 1993 pertaining to the 1993 Stock
Option Plan of Pentech International, Inc. of our report dated
December 11, 1995, with respect to the consolidated financial
statements and schedule of Pentech International, Inc. included in
this Annual Report (Form 10-K) for the year ended September 30,
1995.
ERNST & YOUNG LLP
By: /s/ Ernst & Young LLP
MetroPark, New Jersey
December 27, 1995
ptk\10K.95
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-END> SEP-30-1995
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 12,450,960
<ALLOWANCES> 70,314
<INVENTORY> 22,844,482
<CURRENT-ASSETS> 39,336,457
<PP&E> 7,542,211
<DEPRECIATION> 2,737,036
<TOTAL-ASSETS> 44,518,055
<CURRENT-LIABILITIES> 22,407,772
<BONDS> 0
<COMMON> 104,968
0
0
<OTHER-SE> 21,240,183
<TOTAL-LIABILITY-AND-EQUITY> 44,518,055
<SALES> 54,891,592
<TOTAL-REVENUES> 54,891,592
<CGS> 39,087,504
<TOTAL-COSTS> 15,871,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (406,820)
<INTEREST-EXPENSE> 1,259,145
<INCOME-PRETAX> (1,698,298)
<INCOME-TAX> (639,352)
<INCOME-CONTINUING> (1,508,946)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,508,946)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
