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, 1996
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 no., 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 23, 1996 was
approximately $2,873,719 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 23, 1996.
On December 23, 1996 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, 1997 is incorporated herein by reference.
<PAGE>
PART I
Item 1. BUSINESS
(a) Pentech International, Inc. (the "Company") was formed
in April 1984 to design and market writing and drawing
instruments and other stationery products. In November 1989, the
Company formed a wholly-owned subsidiary, Sawdust Pencil Co., to
manufacture certain of the Company's writing instruments. In
October 1993, the Company formed another wholly-owned subsidiary,
Pentech Cosmetics, Inc., to manufacture and distribute a line of
cosmetic products. 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 or
licensed trademark brand. For financial information relating to
this business segment, please refer to the financial statements
contained elsewhere herein.
(c) The Company's product line consists of pens, markers,
pencils, other writing instruments, children's activity kits,
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 success factors.
The Company has also had an ongoing program to secure
select license agreements with licensors of established
trademarks to utilize with certain of the Company's product. The
Company views its licenses as an important ingredient in offering
a strong product line with powerful consumer appeal.
(d)(i) The Company markets a variety of pens, markers,
pencils, other writing instruments, children's activity kits,
related products and miscellaneous cosmetics products on a direct
basis as well as through approximately 100 independent,
nonexclusive, sales representatives throughout the United States.
Generally sales initiated by the sales representatives are made
directly to retail chains to include mass merchants, chain drug
stores, grocery stores, warehouse clubs, and office supply super
stores. The Company also has limited sales to the stationery,
military and college store markets and some sales go through
distributors and wholesalers. Additionally, the Company sells
its products in Canada, Europe, Mexico and other selected
countries through a variety of distribution arrangements.
<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 1994 17.9% 26.9% 35.3% 17.9% 2.0%
FY 1995 18.6% 23.0% 34.1% 20.3% 4.0%
FY 1996 21.1% 21.7% 36.4% 16.0% 4.8%
(ii) The Company conducts market research to stay abreast
of consumer trends and to gauge the demand for new writing
instruments and related products. Once the Company identifies a
product for marketplace introduction it either selects a suitable
overseas manufacturer to manufacture the product or elects to
manufacture the product itself.
The Company's domestic pencil and marker manufacturing
facility, Sawdust Pencil Company ("Sawdust") is presently being
utilized by the Company to manufacture a significant portion of
the Company's writing instruments. Sawdust's capacity (on a two
shift basis) is approximately $34,500,000 (wholesale value) of
pencils, markers and other writing instruments. During its
fiscal year ended September 30, 1996 ("Fiscal 1996"), the Company
manufactured approximately $24,884,000 wholesale value of
products at Sawdust, which represents 72% of its current capacity
and approximately 38% of the Company's current requirements.
During its fiscal year ended September 30, 1995 ("Fiscal 1995"),
the Company manufactured 36% of the wholesale value of the
products it sold.
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.
An important part of the product development process is
packaging. The Company leverages its unique packaging style to
reinforce its image as a marketer of modern, well designed, high
quality, and reasonably priced writing instruments and children's
activity products.
(iii) The Company utilizes foreign manufacturers to supply
a large percentage of pens, markers, other writing instruments
and related products and miscellaneous cosmetic products that it
sells throughout the United States. It acquires a majority of
its products from contract manufacturers located in Taiwan,
China, Korea, Italy, India and other foreign countries. Such
products are manufactured to the Company's order. The Company
generally acquires its imported products pursuant to purchase
orders, which typically provide for delivery within 60 days to 90
days after the order. Historically, the Company has financed a
large percentage of its purchases pursuant to letters of credit.
The present policy is to establish with a majority of its
accounts payment terms ranging from 30 to 60 days and finance
the remainder pursuant to letters of credit.
To date, the Company has experienced limited supply
shortages with respect to these imported products. The Company
has occasionally incurred additional costs by shipping goods into
its warehouse via airfreight, as opposed to by ship when the
manufacturers did not timely deliver products or the Company
required faster delivery. The Company is unable to predict
whether it will experience similar or more severe product
shortages in the future. The Company has successfully developed
alternative sources of supply for virtually all of its important
items to ensure timely deliveries in the event of a disruption in
deliveries due to a dispute with any overseas manufacturer or any
other reason. The Company has achieved this through building
Sawdust and developing multiple sources in Taiwan, China, Korea,
Italy, India and other foreign countries. As a result, the loss
of any one overseas manufacturer would probably not create any
long-term disruptions in the Company's ability to ship its goods
to its customers on a timely basis. Management believes that it
is not now dependent, nor is it likely to become dependent, upon
any one manufacturer for its product lines. It believes that
products of quality comparable to its present products could, if
necessary, be acquired from a variety of overseas manufacturers
at comparable rates.
The Company obtains raw materials for Sawdust from domestic
and foreign suppliers. It has not faced material supply
shortages,and it generally has multiple sources for most of its
product requirements. Due to a determination by the United
States International Trade Commission that certain manufacturers
of Chinese pencils were dumping 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
increased costs to the Company for the 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.
The Company has entered into license agreements with The
Walt Disney Company, the NBA (National Basketball Association),
NHL (National Hockey League), and the Coca-Cola Company, using
these trademark names on the Company's products. In most
situations, the licensor requires an advance royalty, a royalty
against net sales for the licensed product and a minimum royalty.
Generally, the Company satisfies the minimum royalty;
occasionally it does not. In such a case, the Company must pay
the minimum royalty and possibly incur losses as a result
thereof. The Company evaluates its licenses carefully and
attempts to minimize such losses. These licenses have terms
ranging normally from one to three years and are renewed by
mutual consent from both parties.
Except when the Company uses trademarks owned by others, the
Company follows a policy of registering with the U.S. Patent and
Trademark Office trademarks covering the names of items in its
product line and proposed names for new items. The Company has
been awarded trademarks in the past. There is no assurance that
any pending trademarks will be registered.
(v) The business of the Company has certain seasonal
aspects. Sales tend to increase during the months of May through
August, because retailers buy in anticipation of fall school
opening, and to decrease during the months of September through
December. The Company has been developing marketing programs to
reduce this seasonality.
(vi) In Fiscal 1995, the Company reduced its use of an
unaffiliated warehouse to store and ship its products on a
contract basis, and began leasing and maintaining a warehouse in
North Brunswick, New Jersey to ship its products to its
customers.
Generally, the Company does not require any of its customers
to post letters of credit or to advance any deposits on orders,
except in certain instances, depending upon the creditworthiness
of the customer, for special orders. The Company analyzes each
special order customer independently to determine whether any
deposits should be paid. The Company considers credit rating,
location, and amount of order, among other factors, to determine
whether a deposit is required. Normal credit terms are "net 30
days." The Company, in certain instances, follows the industry
practice of "School Dating," which is the shipment of products
from May through August, for which payment is not due until
September or October. The Company reviews its credit practices
regularly and currently attempts to insure 80% of its receivables
through credit insurance. In the past, except for the Phar-Mor
bankruptcy in Fiscal 1992 and the Happiness Express bankruptcy in
Fiscal 1996, the Company has experienced a limited amount of bad
debts from its customers, usually as a result of a bankruptcy.
In such a case the Company's policy has been to liquidate its
claims as promptly as reasonable under the circumstances. This
has been further ameliorated since the Company obtained credit
insurance. The Company believes it has sufficient resources to
manage its credit functions.
(vii) The Company's primary customers include major mass
market retailers in the United States. In Fiscal 1996, one
customer accounted for 11% 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, however it is investigating
additional advertising avenues.
The Company warrants its merchandise against manufacturing
defects. In the event of any such returns the Company evaluates
the problem and attempts to rectify the problem for the customer,
if possible. The Company believes it maintains adequate product
liability insurance.
(viii) As of December 31, 1996 and December 31, 1995, the
Company's backlog of firm written orders was approximately
$1,900,000 and $3,100,000, respectively. This backlog is
comprised of the normal delay between receipt and processing of
orders and orders for delayed delivery. All orders were
delivered or are expected to be filled within the applicable
fiscal year.
(x) The industry in which the Company is engaged is highly
competitive. The Company competes with a large number of
companies, including such well known companies as Bic Pen
Company, Papermate and Newell some of which may have far greater
financial resources and sales. The Company generally competes on
the basis of the special features of its products, quality,
packaging design (which includes the individual product's name
and the Company's name and logo) and price.
(xiii) As of November 30, 1996, the Company had
approximately 169 employees, including Messrs. Norman Melnick,
David Melnick, John Linster and John F. Kuypers. The Company's
sales are made primarily by independent sales organizations which
are compensated exclusively on a commission basis with
commissions ranging from two and one half to seven percent. The
Company does not anticipate a substantial increase in the number
of its employees in the near future. The Company considers its
relations with its employees to be good. In December 1992, the
production and maintenance employees of the Company's
wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), voted to
join Local 478 of the International Brotherhood of Teamsters (the
"Union"). In Fiscal 1996, Sawdust agreed to enter into a labor
agreement with the Union for the benefit of these employees which
expires August 31, 1999.
(e) The Company exports approximately 4.6% 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, with an unaffiliated party,
expiring March 1, 1998.
The Company extended its lease for five years commencing
June 1, 1995 (the "Sawdust Lease") with an unaffiliated company
for approximately 50,000 square feet for Sawdust's premises
located at 44 National Road, Edison, New Jersey 08817. The
Sawdust Lease, which is triple net, currently requires annual
rental payment of $173,376 with yearly moderate increment
additions in each subsequent year of the Sawdust Lease's term.
The Sawdust Lease contains an option to renew on terms providing
for moderate increases in rent for up to an additional five
years.
The Company entered into a five year lease for a warehouse
at 1101 Corporate Road, North Brunswick, New Jersey (the
"Warehouse Lease") with an unaffiliated Company for approximately
130,000 square feet which commenced on September 1, 1995. The
Warehouse Lease provides for annual base rent of approximately
$436,000 per year.
The Company entered into a year-to-year lease for a sales
office in Madison, Wisconsin (the "Madison Lease"). The Madison
Lease, which is with an unaffiliated party, is for approximately
1,140 square feet and commenced December 1, 1992. The Madison
Lease calls for annual rental of $22,701, which increases by 3.5
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
$2,700 per month. 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.
Item 3. LEGAL PROCEEDINGS
In October 1987, the Company commenced an action against
Leon Hayduchok, All-Mark Corporation and Paradise Creations,
Inc., (collectively, "Paradise") in the United States District
Court for the Southern District of New York which resulted in an
adverse multi-million judgment against Pentech. In December 1996,
the parties to such litigation entered into a settlement
agreement providing, among other things, for Pentech to pay
$500,000; deliver its promissory note for $3,000,000 plus
interest at the rate of 7% per annum and enter into a five year
non-exclusive license to sell such products for a 10% royalty,
with a minimum royalty of $500,000 (the "Paradise Settlement").
Pentech paid Paradise $500,000 in December 1996 and $100,000 of
the minimum royalty in January 1997.
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
---- ---
1996
- ----
1st Quarter 3 3/8 2
2nd Quarter 2 1/4 1 3/4
3rd Quarter 2 1/4 1 3/4
4th Quarter 2 3/16 5/8
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 January 6, 1997, the closing "bid" and "ask" prices for
the Common Stock were $1 1/8 and $1 1/4 respectively, as reported
by NASDAQ.
(b) On January 6, 1997, the number of shareholders of
record of the Common Stock was 459.
(c) The Company has not declared a cash dividend in the
past and is not permitted to do so without the consent of its
lenders. See Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<PAGE>
Item 6. SELECTED FINANCIAL DATA
The following summary of financial information should be
read in conjunction with the Financial Statements and notes
thereto included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS DATA
Fiscal Years Ended September 30,
-------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ 000s omitted except per share amounts)
<S> <C> <C> <C> <C> <C>
Net
sales $61,679 $54,892 $62,136 $51,321 $39,130
Net income
(loss) (5,317) (1,059) 4,701 3,986 2,789
Net income
(loss)
per share ($.51) ($.10) $.40 $.34 $.23
Weighted
average
number
of shares
outstanding
including
common
stock
equi-
valents 10,497 10,661 11,855 11,876 12,201
Dividends - - - - -
<CAPTION>
<PAGE>
BALANCE SHEET DATA
September 30,
-------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
($ 000s omitted except per share amounts)
<S> <C> <C> <C> <C> <C>
Working
capital $13,676 $16,928 $21,451 $18,490 $15,756
Total
assets 48,189 44,518 42,558 42,130 32,267
Notes
payable
(included
in current
liabil-
ities) 21,352 15,169 9,163 10,882 6,577
Long-
term
debt - - - - -
Share-
holders'
equity 16,028 21,345 26,479 23,502 20,121
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fiscal 1996 Compared to Fiscal 1995
Net sales for Fiscal 1996 were $61,679,499 as compared to
$54,891,592 for Fiscal 1995, reflecting an increase of $6,787,907
or approximately 12.4%. The increase in sales was primarily due
to the growth in the Company's licensed products, which helped
the Company achieve sales growth with the majority of its top
accounts.
In Fiscal 1996, the Company incurred a loss from operations
of $872,603 as compared to a loss from operations of $474,368 in
Fiscal 1995. The Company's gross profit of 30.2% in Fiscal 1996
was up from 28.8% in Fiscal 1995. The Company's gross profit
increased primarily due to absence of the $1.3 million reserve
established last year for slow-moving inventory, an increase in
gross profit associated with its new licensed products and an
improvement in the sell through of its product line which reduced
the overall return rates. Offsetting these improvements were
higher costs incurred at its manufacturing facility, higher costs
associated with its cosmetics business and aggressive efforts to
close-out slow-moving inventory.
The Company's selling, general & administrative ("SG&A")
expenses increased during Fiscal 1996 to $19,521,690 from
$15,871,636 in Fiscal 1995, reflecting an increase of $3,650,054.
SG&A expenses as a percentage of sales increased to 31.7% from
28.9%. The increase was primarily related to higher royalty
costs associated with many of the Company's new licensed
products. In addition, the Company incurred higher variable
costs such as freight, distribution and commission costs
associated with higher sales. The Company also incurred higher
legal and expert fees during the trial leading up to the Paradise
Settlement. The Company incurred higher bad debt expense due to
the bankruptcy of Happiness Express and incurred additional
royalty costs relating to its termination of several license
agreements. The Company also incurred higher costs relating to
its establishment of a warehouse/distribution center and the
establishment of an expanded marketing department. The Company
also hired a new President, human resource manager, purchasing
manager and an assistant controller.
The Company incurred a significant loss of $4,433,920
associated with the Paradise Settlement. This loss included the
cost of the Paradise Settlement, the legal and consulting fees
associated with the Paradise Settlement and the bank debt
refinancing which occurred as a result of the material adverse
effect on the Company from the Paradise Settlement.
During Fiscal 1996, the Company increased its short-term
borrowings to an average level of $18,507,000 from $15,618,000 in
Fiscal 1995. The increase was primarily due to the
stock-buy-back program completed in January 1995 and the higher
cash position maintained by the Company in August 1996 and
September 1996 as a result of the bank refinancing activities.
The Company's effective interest rate decreased slightly from
8.1% to 7.8% due to a slight decline in short-term interest
rates. As a result, the Company's interest expense increased
during Fiscal 1996 to $1,447,499 from $1,259,145.
During Fiscal 1996, the Company established a valuation
allowance against its deferred tax assets in the amount of
$1,243,191 which reduced its income tax benefit for the year.
Based on the above factors, the Company incurred a loss of
$5,317,408 in Fiscal 1996 as compared to a net loss of $1,058,946
in Fiscal 1995.
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.
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 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.
The Company's 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 expenses 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 warehouse 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. 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.
(b) Liquidity and Capital Resources
Cash and cash equivalents increased to $7,063,808 at
September 30, 1996 from $0 at September 30, 1995. Generally, the
Company uses its cash to reduce its outstanding borrowings in
order to reduce interest costs. At September 30, 1996, due to
the status of the refinancing of the Company's borrowing
facilities, the Company maintained a high level of cash.
Accounts receivable increased to $14,537,500 at September 30,
1996 from $12,450,960 at September 30, 1995, primarily due to
increased sales in the fourth quarter. The Company believes that
its allowance for doubtful accounts and its accrual for returns
and advertising allowances are adequate given the Company's
detailed review of its accounts receivable aging, its review of
subsequent cash receipts, its use of credit limits and
its on-going credit evaluation and account monitoring. In
addition, the Company has credit insurance on most of its major
accounts receivable. Inventory decreased to $18,728,008 at
September 30, 1996 from $22,844,482. This decrease was due to
the Company's decision to eliminate items from its product line
and to move aggressively to close out excess and slow-moving
inventory. The decrease to $4,368,477 for equipment at September
30, 1996 from $4,805,175 at September 30, 1995 primarily reflects
a reduction in the rate of equipment purchases. Notes payable at
September 30, 1996 were $21,352,498 as compared to $15,169,103 at
September 30, 1995. This increase was primarily due to the
Company's decision to maintain a high cash position at September
30, 1996.
Net cash provided by operating activities for the year ended
September 30, 1996 was $1,489,465 as compared to cash used in
operating activities for Fiscal 1995 of $1,906,872. This change
was primarily due to the decrease in inventory during Fiscal 1996
as compared to an increase in Fiscal 1995. This was partially
offset by the increase in accounts receivable at September 30,
1996 due to higher fourth quarter sales as compared to a decrease
in receivables at September 30, 1995.
Cash used in investing activities during Fiscal 1996 of
$609,052 was less than the prior year due to the decrease in
fixed asset additions. This was primarily due to the slow-down
in fixed asset additions for Sawdust and the Company's cosmetic
facilities.
The cash provided by financing activities during Fiscal 1996
was $6,183,315 as compared to cash provided by financing
activities of $1,931,089 in Fiscal 1995. The increase in cash
provided by financing activities was primarily due to the
Company's decision to maintain a high cash balance at September
30, 1996 and the absence of a stock buy-back program. As a
result of these activities, cash and cash equivalents increased
$7,063,808 during Fiscal 1996 as compared to a decrease of
$697,545 during Fiscal 1995.
The Company's working capital decreased to $13,675,828 at
September 30, 1996 from $16,928,685 at September 30, 1995. This
decrease was primarily due to the loss sustained for the year.
During Fiscal 1996, the Company maintained a line of credit
with European American Bank ("EAB") and Chemical Bank New Jersey
N.A. (the "Banks"), which permitted maximum availability of
$34,000,000, subject to the Banks' discretion. As a result of
the events leading to the Paradise Settlement, this line of
credit was restructured by the Banks' to provide a maximum amount
of $22,000,000 for a period ending January 31, 1997.
In January 1997, the Company entered into a three year
$30,000,000 revolving credit facility with BankAmerica Business
Credit, Inc. (the "New Banking Agreement"). The amount of
drawings under the facility is subject to limitations based upon
eligible inventory and accounts receivable as described in the
New Banking Agreement. The New Banking Agreement is
collateralized by a security interest in substantially all of the
assets of the Company. In addition, in accordance with the New
Banking Agreement, the Company has agreed, among other things, to
the maintenance of certain minimum amounts of tangible net worth
and interest coverage ratios.
The $3,000,000 note (the "Note") issued in connection with
the Paradise Settlement requires $100,000 quarterly principal
payments commencing January 1, 1998. The Note also requires
prepayment under certain conditions related to when the Company
obtains tax benefits. The Company does not anticipate any
difficulty meeting this payment schedule.
The Company initiated several actions to increase its
liquidity during Fiscal 1996. It established a policy of
obtaining 30 to 60 days vendor credit to finance a majority of
its purchases that historically have been financed pursuant to
letters of credit.
The Company also conducted a private offering of securities.
In December 1996 and January 1997, the Company completed a
private offering of 20 Units, each Unit consisting of 100,000
shares of Common Stock of the Company for $50,000 per Unit (the
"Private Offering"). The Company had net proceeds of $975,000
from the Private Offering. Officers and directors of the Company
acquired 52.5% of the Units sold in the Private Offering. They
participated on the same terms as the other investors in the
Private Offering. The terms of the Private Offering were
established by a Special Committee of the Board of Directors who
did not participate in the Private Offering. The Company was
required by its banks (at that time) to raise funds in the
Private Offering in order to fund the $500,000 payment referred
to in Item 3, "Legal Proceedings" and to enable the Company to
fund its requirements for capital expenditures.
As a result of the seasonal nature of the Company's
business, the Company's use of credit increases significantly in
the months of May, June and July as the Company finances its
inventory and receivables, and declines in September and October
after collection of the invoices from its Back-to-School sales.
The Company anticipates that its revolving credit line with
BankAmerica Business Credit, Inc. together with anticipated
revenues from operations, will be sufficient to provide liquidity
on both a short-term and long-term basis to finance current and
future operations. The Company believes these resources are
sufficient to support its operating expenses.
(c) Safe Harbor Statement
Statements which are not historical facts, including
statements about the Company's confidence and strategies and its
expectations about new and existing products, technologies and
opportunities, market and industry segment growth, demand and
acceptance of new and existing products are forward looking
statements that involve risks and uncertainties. These include,
but are not limited to, product demand and market acceptance
risks; the impact of competitive products and pricing; the
results of financing efforts; the loss of any significant
customers of any business; the effect of the Company's accounting
policies; the effects of economic conditions and trade, legal,
social, and economic risks, such as import, licensing, and trade
restrictions; the results of the Company's business plan and the
impact on the Company of its relationship with its lenders.
Item 8. FINANCIAL STATEMENTS
This information is contained on pages F-1 through F-24
hereof.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<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, 1997.
<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, 1996 and
1995....................................................... F-2-3
Consolidated Statements of Operations for the
years ended September 30, 1996, 1995 and 1994 ............. F-4
Consolidated Statements of Shareholders' Equity for
the years ended September 30, 1996, 1995 and 1994.......... F-5-6
Consolidated Statements of Cash Flows for the
years ended September 30, 1996, 1995, and 1994............. F-7-9
Notes to Consolidated Financial Statements............. F-10-24
(a) (2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves.................................................. F-25
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 Employment Agreement dated November 3, 1995, between
the Company and John W. Linster incorporated by
reference to the 1995 10-K.
10.5 1995 Stock Option Plan is incorporated by reference to
the 1995 Proxy Statement.
10.6 Settlement Agreement dated December 9, 1996, among the
Company, Leon Hayduchok, All-Mark Corporation, Inc.,
Paradise Creations, Inc. and Norman Melnick.
10.7 Loan and Security Agreement dated as of January 13,
1997, among the Company, Pentech Cosmetics, Inc.,
Sawdust Pencil Co. and Bank America Business Credit,
Inc.
10.8 Settlement Letter dated November 15, 1996 from Fisher-
Price to the Company.
10.9 Settlement Agreement dated December 27, 1996, between
the Company and Pentel Co., Ltd.
10.10 Form of Subscription Agreement connected with the
Company's Private Offering Memorandum dated December
10, 1996.
10.11 Form of Registration Rights Agreement connected with
the Company's Private Offering Memorandum dated
December 10, 1996.
21 Subsidiaries of the Company.
23.1 Consent of Ernst & Young LLP.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PENTECH INTERNATIONAL, INC.
January 13, 1997 By: s/John W. Linster
John W. Linster,
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, as amended, this Report has been signed below by the
following persons in the capacities and on the dates indicated.
s/Norman Melnick Chairman of the Board January 13, 1997
Norman Melnick of Directors
s/John W. Linster President and Chief Execu- January 13, 1997
John W. Linster tive Officer (principal
executive officer)
s/David Melnick Chief Operating Officer January 13, 1997
David Melnick and Director (principal
operating officer)
John F. Kuypers Executive Vice Preident- January , 1997
Sales and Director
s/Richard S. Kalin Secretary and January 13, 1997
Richard S. Kalin Director
Director January , 1997
Jerry Della Femina
s/Roy L. Boe Director January 13, 1997
Roy L. Boe
s/William Visone Treasurer (principal January 13, 1997
William Visone accounting officer)
ptk\10K.96 <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,
1996 and 1995 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 1996. Our audits
also included the financial statement schedule listed in the
Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Pentech International, Inc. and
subsidiaries as of September 30, 1996 and 1995, and the
consolidated results of its operations and its cash flows for
each of the three years in the period ended September 30, 1996,
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
January 13, 1997
F-1
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Consolidated Balance Sheets
Assets (Note 3)
September 30,
1996 1995
---- ----
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 7,063,808
Accounts receivable, net
of allowance for doubtful
accounts ($402,513 and $70,314
in 1996 and 1995, respect-
ively) 14,537,500 $12,450,960
Inventory (Note 2) 18,728,008 22,844,482
Income taxes receivable 1,146,414 1,823,041
Deferred tax assets (Note 5) 618,929 849,945
Prepaid expenses and other 1,042,807 1,227,429
---------- ----------
Total current assets 43,137,466 39,195,857
Equipment:
Equipment and furniture 8,030,387 7,542,211
Less accumulated depreciation (3,661,910) (2,737,036)
---------- ---------
4,368,477 4,805,175
Other assets:
Deferred tax assets, long term
(Note 5) 306,185
Trademarks, net of
amortization 267,742 266,912
Due from officer 109,511 109,511
---------- --------
683,438 376,423
----------- ---------
$ 48,189,381 $44,377,455
=========== ==========
See accompanying notes.
F-2
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
September 30,
1996 1995
----- ----
<S> <C> <C>
Current liabilities:
Notes payable (Note 3) $21,352,498 $15,169,103
Bankers' acceptances
payable (Note 3) 1,488,757 1,841,985
Accounts payable 1,593,253 2,382,959
Accrued expenses (Note 10) 3,827,130 3,013,725
Settlement payable (Note 7) 500,000
Settlement note payable (Note 7) 700,000
---------- ---------
Total current liabilities 29,461,638 22,407,772
---------- ----------
Other liabilities:
Royalty payable, long-term (Note 7) 400,000
Settlement note payable,
long-term (Note 7) 2,300,000
Deferred income taxes payable
(Note 5) 624,532
---------- ----------
2,700,000 624,532
---------- ----------
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 in 1996 and
1995, respectively 104,968 104,968
Capital in excess of par 5,845,781 5,845,781
Retained earnings 10,076,994 15,394,402
---------- ----------
16,027,743 21,345,151
---------- ----------
$48,189,381 $44,377,455
========== ==========
See accompanying notes.
F-3
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
<CAPTION>
Consolidated Statements of Operations
Year ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales (Note 8) $61,679,499 $54,891,592 $62,136,134
Cost of sales 43,030,412 39,087,504 40,315,104
---------- ---------- ----------
Gross profit 18,649,087 15,804,088 21,821,030
Selling, general and
administrative expenses 19,521,690 15,871,636 13,459,402
Loss on Mexican
affiliate (Note 13) 406,820
---------- ---------- ----------
(Loss) income from
operations (872,603) (474,368) 8,361,628
Other (income) expense:
Loss from litigation 4,433,920
Interest expense 1,447,499 1,259,145 740,953
Interest income (39,661) (35,215) (16,582)
---------- ---------- ----------
5,841,758 1,223,930 724,371
--------- --------- ----------
(Loss) income before
taxes (6,714,361) (1,698,298) 7,637,257
Income tax (benefit)
expense (Note 5) (1,396,953) (639,352) 2,936,659
---------- --------- ---------
Net (loss) income $ (5,317,408) $(1,058,946) $4,700,598
========== ========= =========
(Loss) earnings per common
and common equivalent
share (Note 1) ($.51) ($.10) $.40
========== ========== =========
See accompanying notes.
F-4
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND
SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended September 30, 1996, 1995 and 1994
Capital
Common Stock in Treasury Stock
Number of Shares Excess Retained --------------
Authorized Issued Amount of Par Earnings Shares Amount
---------- ------ ------ ------- -------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, October
1, 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 treas-
ury stock 418,606 2,339,932
Retirement of treas-
ury 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 Treas-
ury Stock 999,400 4,067,790
Retirement of
Treasury Stock (1,196,200) (11,962) (666,263)(4,432,833)(1,196,200)(5,111,058)
Net loss (1,058,946)
--------- --------- ------ --------- --------- --------- ---------
Balance, September
30, 1995 20,000,000 10,496,758 104,968 5,845,781 15,394,402 - -
F-5
<PAGE>
<CAPTION> PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended September 30, 1996, 1995 and 1994
(continued)
Capital
Common Stock in Treasury Stock
Number of Shares Excess Retained --------------
Authorized Issued Amount of Par Earnings Shares Amount
---------- ------ ------ ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1995 20,000,000 10,496,758 104,968 5,845,781 15,394,402 - -
Net loss (5,317,408)
---------- ---------- ------- --------- ---------- --------- ---------
Balance, September
30, 1996 20,000,000 10,496,758 $104,968 $5,845,781$10,076,994 - -
========== ========== ======= ========= ========== ========= =========
See accompanying notes.
F-6<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating
activities
Net (loss) income $(5,317,408) $(1,058,946) $4,700,598
Adjustments to reconcile
net (loss) income to net cash
provided by (used in)
operating activities:
Depreciation and amortiza-
tion 1,044,920 939,505 823,933
Provision for losses on 401,620 62,467 97,880
accounts receivable
Paradise Settlement 4,000,000
Provision for slow-moving
inventory 1,286,000
Provision for deferred
income taxes (699,701) (565,515) 57,810
Change in assets and
liabilities:
(Increase) decrease in
accounts receivable (2,488,160) 616,415 2,713,493
Decrease (increase) in
inventory 4,116,474 (2,803,788)(2,738,432)
Decrease in prepaid
expenses and other 184,622 80,587 154,743
(Increase) in due from
officer (30,999) (8,303)
(Decrease) in bankers'
acceptances payable (353,228) (18,211) (796,101)
(Decrease) increase in
accounts payable (789,706) 957,793 (822,444)
Increase in
accrued expenses 713,405 81,742 538,002
Change in income
taxes payable/
receivable 676,627 (1,453,922) (534,119)
--------- --------- ---------
Net cash provided
by (used in) operating
activities 1,489,465 (1,906,872)4,187,060
See accompanying notes.
F-7
<PAGE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (cont'd)
Year ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from investing
activities
Purchase of equipment and
furniture (488,176) (652,037) (1,145,984)
Increase in trademarks (120,876) (69,725) (68,852)
Decrease in deposits 324,919
--------- -------- --------
Net cash used in investing (609,052) (721,762) (889,917)
activities
Cash flows from financing
activities
Net increase (decrease) in
notes payable 6,183,395 6,006,379 (1,719,515)
Proceeds from the issuance
of common stock 10,250
Payments to acquire
treasury stock (4,067,790) (1,733,682)
Payments to acquire
common stock options (7,500)
Net cash provided by
(used in) financing --------- --------- ---------
activities 6,183,395 1,931,089 (3,442,947)
Net increase (decrease) --------- --------- ---------
in cash and cash equi-
valents 7,063,808 (697,545) (145,804)
Cash and cash equivalents,
beginning of year -0- 697,545 843,349
Cash and cash equivalents, --------- ------- -------
end of year $7,063,808 $ -0- $697,545
========= ======= =======
See accompanying notes.
F-8
<PAGE>
<CAPTION> PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (cont'd)
Year ended September 30,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Supplemental disclosures
of cash flow information
Non-cash investing activities:
Acquisition of treasury
stock $606,250
Issuance of common stock
pursuant to exercise
of options 606,250
Retirement of treasury
stock $ 5,111,058 1,296,664
Cash paid during the year for:
Interest $1,319,958 1,259,145 740,953
Income taxes 140,000 1,380,085 3,385,550
See accompanying notes.
</TABLE>
F-9
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
1. Summary of Significant Accounting Policies
Organization
Pentech International, Inc. (the "Company") was formed in
April 1984. A wholly-owned subsidiary, Sawdust Pencil Co.
("Sawdust"), was formed in November 1989. The Company and its
subsidiary are engaged in the production, design, and marketing
of writing and drawing instruments. In October 1993, the Company
formed another wholly-owned subsidiary, Pentech Cosmetics, Inc.,
to manufacture and distribute cosmetic pencils. 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 or licensed trademark brand.
Principles of Consolidation
The consolidated financial statements include the accounts
of the Company and its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Cash Equivalents
The Company considers all time deposits with a maturity of
three months or less to be cash equivalents.
Inventory and Cost of Sales
Inventory is stated at the lower of cost (first-in, first-
out) or market. Cost of sales for imported products includes the
invoice cost, duty, freight in, display and packaging costs. Cost
of domestically manufactured products includes raw materials,
labor, overhead and packaging costs.
Equipment and Depreciation
Equipment is stated at cost. Depreciation is provided by
the straight-line method over the estimated useful lives of the
assets, which range between five to ten years. Major
improvements to existing equipment are capitalized. Expenditures
for maintenance and repairs which do not extend the life of the
assets are charged to expense as incurred.
F-10
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
1. Summary of Significant Accounting Policies (cont'd)
Trademarks
Costs related to trademarks are being amortized over a five
year period on a straight-line basis.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Reclassification
Certain 1995 amounts have been reclassified to conform to
the 1996 presentation.
(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, 1996 10,496,758 10,496,758*
Year ended September 30, 1995 10,660,988 10,660,988*
Year ended September 30, 1994 11,855,700 11,855,700*
- -------
* In 1996, 1995 and 1994 fully diluted was anti-dilutive.
F-11
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
2. Inventory
1996 1995
---- ----
Raw materials $ 6,732,751 $ 8,644,695
Work-in-process 1,265,795 1,746,149
Finished goods 12,115,462 13,839,638
Allowance for slow-
moving items (1,386,000) (1,386,000)
---------- ----------
$18,728,008 $ 22,844,482
========== ==========
3. Notes and Bankers' Acceptances Payable
September 30, September 30,
Interest 1996 Interest 1995
-------- ------------- -------- -------------
Notes payable 8.25% $11,725,000 7.875% $ 9,000,000
Notes payable 8.25% 9,627,498 8.75% $ 6,169,103
---------- ----------
Total $21,352,498 $15,169,103
========== ==========
Bankers'
acceptances
payable None $ 1,488,757 None $ 1,841,985
========== ==========
Notes and bankers' acceptances payable as of September 30,
1996 were initially advanced under a $34,000,000 line of credit
which was available at the banks' discretion and subject to
limitations based upon eligible inventory and accounts receivable
as defined by that agreement.
As a result of the events leading to the Paradise
settlement, the Company's original line of credit was
restructured by the Banks for a period ending January 31, 1997.
In January 1997, the Company entered into a new three year
$30,000,000 Revolving Credit Agreement with BankAmerica
Business Credit, Inc. (the "New Credit Agreement"). Borrowings
under the New Credit Agreement are subject to limitations based
upon eligible inventory and accounts receivable as defined in the
New Credit Agreement.
F-12
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
3. Notes and Bankers' Acceptances Payable (cont'd)
The New Credit Agreement is collateralized by a security
interest in substantially all of the assets of the Company. In
connection with the New Credit Agreement, the Company has agreed,
among other things, to the maintenance of certain minimum amounts
of tangible net worth and interest coverage ratios.
The weighted average interest rate during the periods on the
outstanding short-term borrowings was 7.8% and 8.1% for fiscal
year ended September 30, 1996 and 1995, respectively.
4. Shareholders' Equity
Stock Options
During Fiscal 1996, the Company granted options (outside of
the plans discussed herein) covering in the aggregate 175,000
shares of common stock at an exercise price of $3.125 per share
(representing fair market value at date of grant). During Fiscal
1994 and 1995, there were no options granted. During this
period, no options were exercised. At September 30, 1996,
350,000 options remain outstanding at prices ranging from $3.125
to $7.375 per share, of which 135,000 are presently exercisable.
Stock Option Plans
On January 5, 1989, the Company adopted a stock option plan
("1989 Plan"). The 1989 Plan provides for options and limited
stock appreciation rights ("Limited SARs") to be granted in
tandem to issue up to 600,000 shares of common stock. Limited
SARs may only be granted in conjunction with related options.
The exercise price of options granted may not be less than the
fair market value of the shares on the date of the grant (110% of
such fair market value for a holder of more than 10% of the
Company's voting securities), nor may options be exercised more
than ten years from date of grant (5 years for a holder of more
than 10% of the Company's voting securities). No SARs have been
granted. The 1989 Plan will terminate on January 5, 1999.
On April 14, 1993, the Company adopted a Stock Option Plan
("1993 Plan"). The 1993 Plan provides for the issuance of
incentive and nonstatutory stock options to employees,
consultants, advisors and/or directors for a total up to 700,000
shares of common stock. The exercise price of options granted
may not be less than the fair market value of the shares on the
F-13
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
4. Shareholders' Equity (cont'd)
date of grant (110% of such fair market value for a holder of
more than 10% of the Company's common stock), nor may options be
exercised more than five years from date of grant. The 1993 Plan
will terminate on January 4, 2003.
On May 9, 1995, the Company adopted a Stock Option Plan
("1995 Plan"). The 1995 Plan provides for the issuance of
incentive and nonstatutory stock options to employees,
consultants, advisors and/or directors for a total of up to
700,000 shares of Common Stock. The determination of the
exercise price of the options granted under the 1995 Plan are the
same as those of the 1993 Plan. The 1995 Plan will terminate on
January 4, 2005.
F-14<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
<TABLE>
<CAPTION>
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1989
Plan:
Year ended Year ended Year ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1994
Price range Shares Price range Shares Price Range Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $4.00-$7.875 392,000 $4.00-$7.875 397,000 $3.19-$7.875 575,000
Options
granted 3.125 180,000 4.875-5.25 30,000
Cancelled 4.00-6.50 (221,000) 6.50 (5,000) 4.25-7.875 (31,000)
Exercised 3.19-5.13 (177,000)
---------- -------- ---------- ------- ---------- -------
Outstanding,
end of
year $3.125-7.875 351,000 $4.00-7.875 392,000 $4.00-7.875 397,000
----------- ------- ---------- ------- ---------- -------
Eligible for
exercise
currently $4.50-7.875 18,600 $4.00-7.875 267,000 $4.00-7.875 214,600
=========== ====== ========== ======= ========== =======
F-15
<PAGE>
<CAPTION> PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
4. Shareholders' Equity (cont'd)
The table below presents option information for the
1993 Plan:
Year ended Year ended Year ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1994
Price range Shares Price range Shares Price Range Shares
----------- ------ ----------- ------ ----------- ------
Outstanding,
beginning of
year $4.50-6.125 668,750 $4.50-6.125 678,750 $4.50-4.95 272,500
Options
granted 3.125 20,000 4.875-6.125 421,250
Cancelled 4.50-6.125 (41,250) 5.25 (10,000) 4.50 (15,000)
Exercised
---------- ------ --------- ------- ---------- -------
Outstanding,
end of year $3.125-6.125 647,500 $4.50-6.125 668,750 $4.50-6.125 678,750
=========== ======= ========== ======= ========== =======
Eligible for
exercise
currently $4.50-6.125 301,500 $4.50-6.125 273,000 $4.50-4.95 53,000
========== ======= ========== ======= ========== =======
</TABLE>
F-16
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1995
Plan:
Year Ended
Sept. 30, 1996
Price range Shares
----------- ------
Outstanding,
beginning of
year -
Options granted $3.00 10,000
Cancelled
Exercised
----- ------
Outstanding,
end of year $3.00 10,000
===== ======
Eligible for
exercise
currently -
===== ======
F-17
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
<TABLE>
<CAPTION>
5. Income Taxes
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(Benefit)/Expense
Federal:
Current $(697,252) $ (73,837) $2,395,908
Deferred (421,047) (503,308) 45,400
State:
Current - -- 482,941
Deferred (278,654) (62,207) 12,410
------- ------- ---------
$(1,396,953) $ (639,352) $2,936,659
========= ======= =========
Reconciliations of the statutory federal income tax rate of
34% to the effective tax rates are as follows:
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate (34.00%) (34.00%) 34.00%
State income taxes, net
of federal tax (benefit)
expense (6.00) (3.63) 4.45
Increase in valuation
allowance 18.5%
Other .7%
----- ----- -----
Effective tax rate (20.80%) (37.63%) 38.45%
===== ====== =====
F-18
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
<CAPTION>
5. Income Taxes (cont'd)
Significant components of the Company's deferred tax assets
and liabilities as of September 30, 1996 and 1995 are as follows:
September 30,
1996 1995
---- ----
<S> <C> <C>
Current deferred tax liability:
State taxes on deferred
federal items $(224,935) -
-------- ------
Current deferred tax assets:
Bad debts 231,392 26,719
Inventory reserve 595,980 520,453
Reserve for returns and 369,017 259,886
allowances
Unicap 33,110 34,200
Reserve for restructuring 129,000
Other 8,687
Total current deferred --------- -------
tax assets 1,358,499 849,945
Valuation allowance on current
deferred tax assets (514,635)
------- -------
843,864 849,945
------- -------
Net current deferred tax assets 618,929 849,945
======== =======
Long-term deferred tax liabilities:
Depreciation (888,450) (765,132)
------- --------
Long-term deferred tax assets:
Reserve for litigation 1,720,000 140,600
State net operating loss
carryforwards 203,191
-------- -------
Total long-term deferred
tax assets 1,923,191 140,600
Valuation allowance on
long-term deferred
tax assets (728,556)
-------- -------
1,194,635 140,600
--------- -------
Net long-term deferred tax
assets (liabilities) $306,185 $(624,532)
========= =========
</TABLE>
F-19
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
5. Income Taxes (cont'd)
The Company has generated state net operating loss
carryforwards of $2,588,246, which expire in varying amounts
beginning on September 30, 2001.
The Company has recorded a valuation allowance of $1,243,191
against deferred tax assets due to the uncertainty of its ability
to recognize a full tax benefit for future payments against the
litigation reserve and its ability to fully utilize the state net
operating loss carryforwards.
6. Commitments and Contingencies
Letters of Credit
The Company was contingently liable for outstanding letters of
credit of $2,385,466 at September 30, 1996.
Leases
Rent expense for the years ended September 30, 1996, 1995 and
1994 amounted to $480,563, $487,959 and $435,742, respectively.
In May 1990, the Company entered into a 60 month lease for
manufacturing space. The lease provides for all real estate
taxes and operating expenses to be paid by the Company and it
contains options to renew for two 60 month periods. In March
1993, the Company exercised its first option and extended the
lease for an additional 60 months.
In March 1993, the Company entered into a 60 month lease for
office, warehouse and manufacturing space. The lease provides
for all real estate taxes and operating expenses to be paid by
the Company and it contains an option to renew for an additional
60 month period.
In 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-20
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
6. Commitments and Contingencies (cont'd)
Future minimum rental payments under operating leases are as
follows:
1997 $ 739,151
1998 658,302
1999 614,416
2000 556,624
Thereafter 36,000
---------
$2,604,493
==========
7. Paradise Settlement
In October 1987, the Company commenced an action against Leon
Hayduchok, All-Mark Corporation and Paradise Creations, Inc.,
(collectively, "Paradise") in the United States District Court
for the Southern District of New York which resulted in an
adverse multi-million dollar judgment against Pentech. In
December 1996, the parties to such litigation entered into a
settlement agreement providing, among other things, for Pentech
to pay $500,000, deliver a $3,000,000 promissory note plus
interest at the rate of 7% per annum and enter into a five year
non-exclusive license to sell such products for a 10% royalty,
with a minimum royalty of $500,000 (the "Paradise Settlement").
The Company paid Paradise $500,000 in December 1996 and $100,000
of the minimum royalty in January 1997.
8. Major Customer and Concentration of Credit Risk
For the years ended September 30, 1996, 1995 and 1994, the
Company had one customer who accounted for 11%, 9% 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.
F-21
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
9. 401(k) Plan
The Company adopted a defined contribution 401(k) plan
effective April 1, 1993, covering substantially all employees not
covered under a collective bargaining agreement. The plan
provides employees an opportunity to make pre-tax payroll
contributions to the plan. During 1995 and 1994 the Company did
not make contributions to the plan. The plan was amended on April
1, 1996 to incorporate an employer discretionary match of 1/3 of
the first 6% of employee contributions. In 1996, the Company
contributed $16,941.
10. Accrued Expenses
September 30,
1996 1995
---- ----
Accrued returns and advertising
rebates $ 1,552,204 2,062,948
Accrued legal/consulting fees 579,550
Accrued royalties 776,132 203,038
Other accrued expenses 919,244 747,739
--------- ---------
$3,827,130 $3,013,725
========= =========
11. New authoritative accounting pronouncements:
The Financial Accounting Standards Board has issued
Financial Accounting Standard No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 will take effect for
transactions entered into during the fiscal year beginning
October 1, 1996; with respect to disclosures required for
entities that elect to continue to measure compensation cost
using prior permitted accounting method, such disclosures must
included the effects of all awards granted in the fiscal year
beginning October 1, 1995. The Company's election under FAS
123 has not been determined and the effect of adoption of FAS 123
on the Company's financial statements has not been determined.
F-22
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
12. Unaudited Summarized Quarterly Information
<TABLE>
<CAPTION>
Unaudited summarized quarterly financial information for the
years ended September 30, 1996 and 1995 are as follows:
(000's except for per share information)
Three Months Ended
December March June September
31, 1995 31, 1996 30, 1996 30, 1996(a)
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $11,892 $10,410 $21,976 $17,401
Gross profit 4,236 3,458 6,994 3,961
Net income/(loss) 130 (703) 617 (5,361)
Earnings (loss)
per common share .01 (.07) .06 (.51)
December March June September
31, 1994 31, 1995 30, 1995 30, 1995(a)
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
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 (loss)
per common share .03 .04 .09 (.25)
(a) Fourth quarter of Fiscal 1995 results reflect various
advertising and volume rebate activity which is not earned
by customers until the end of the fiscal year. In addition,
the Company reviewed its product line and decided to increase
its reserve for slow-moving inventory by $1.3 million, its
Cosmetics Division incurred a loss and certain unfavorable domestic
manufacturing variances were incurred. In the fourth quarter of
Fiscal 1996, the Company settled the Paradise litigation (Note 7).
</TABLE>
F-23
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1996
13. 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.
14. Subsequent Event
In December 1996 and January 1997, the Company completed a
private offering of 20 Units, each Unit consisting of 100,000
shares of Common Stock of the Company for $50,000 per Unit (the
"Private Offering"). The Company received net proceeds of
$975,000 from the Private Offering. Officers and directors of
the Company acquired 52.5% of the Units sold in the Private
Offering and participated on the same terms as the other
investors in the Private Offering. The terms of the Private
Offering were established by a Special Committee of the Board of
Directors who did not participate in the Private Offering. The
Company was required by its banks (at that time) to raise funds
in the Private Offering in order to fund the $500,000 payment
referred to in Note 7 and to enable the Company to fund its
requirements for capital expenditures.
F-24
<PAGE>
<TABLE>
<CAPTION>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended September 30, 1996, 1995 and 1994
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Charged
Balance at to Costs Balance
Beginning and End of
Description of Period Expenses Deductions(1)Period
- ----------- --------- -------- ------------ ------
Year ended September
30, 1996
Allowance for doubtful
accounts $ 70,314 $ 401,620 $ 69,421 $402,513
======== ========== ======= ========
Allowance for slow
moving items $1,386,000 - - $1,386,000
========= ========== ======= =========
Valuation allowance
for deferred taxes $ - $1,243,191 $ - $1,243,191
========= ========== ================
Year ended September
30, 1995
Allowance for doubtful
accounts $ 54,565 $ 62,467 $ 46,718 $ 70,314
========= ======== ======= =========
Allowance for slow
moving items $ 100,000 $1,286,000 $1,386,000
========= ========= ======= =========
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
========= ========= ======= =========
(1) Amount represents various accounts written off during the
year, net of recoveries.
</TABLE>
F-25
<PAGE>
EXHIBIT INDEX
Exhibit 10.6 Settlement Agreement dated December 9, 1996, among
the Company, Leon Hayduchok, All-Mark Corporation,
Inc., Paradise Creations, Inc. and Norman Melnick.
Exhibit 10.7 Loan and Security Agreement dated as of January
13, 1997, among the Company, Pentech Cosmetics,
Inc., Sawdust Pencil Co. and Bank America Business
Credit, Inc.
Exhibit 10.8 Settlement Letter dated November 15, 1996 from
Fisher-Price to the Company.
Exhibit 10.9 Settlement Agreement dated December 27, 1996,
between the Company and Pentel Co., Ltd.
Exhibit 10.10 Form of Subscription Agreement connected with the
Company's Private Offering Memorandum dated
December 10, 1996.
Exhibit 10.11 Form of Registration Rights Agreement connected
with the Company's Private Offering Memorandum
dated December 10, 1996.
Exhibit 21 Subsidiaries of the Company.
Exhibit 23.1 Consent of Ernst & Young LLP.
<PAGE>
EXHIBIT 10.6
SETTLEMENT AGREEMENT
This agreement of settlement ("Agreement") is entered into
by the undersigned parties on this 9th day of December, 1996.
R E C I T A L S :
A. Pentech International, Inc. ("Pentech") commenced
an action in the United States District Court for the Southern
District of New York captioned Pentech International, Inc. v.
Leon Hayduchok, All-Mark Corporation, Inc. and Paradise
Creations, Inc. These defendants are hereafter collectively
referred to as the "Paradise Defendants". The action was
assigned Civil Action No. 87 Civ. 7223 (the "Action").
B. In the Action, Pentech sued to invalidate a
patent, U.S. Patent No. 4,681,471 (the "Patent") which is owned
by the Paradise Defendants.
C. The Paradise Defendants counterclaimed against
Pentech and added Norman Melnick ("Melnick") as an additional
defendant with respect to its counterclaims. In their
counterclaims, the Paradise Defendants asserted that Pentech and
Melnick infringed the Patent and that the Paradise Defendants
were entitled to damages, ("the Royalty Fees") and attorney's
fees.
D. By an opinion and order, containing findings of
fact and conclusions of law, dated November 12, 1990, the United
States District Court (Judge Pierre N. Leval) rejected Pentech's
claim that the Patent was invalid and found that liability
existed for Pentech on the Paradise Defendants' counterclaims for
patent infringement and that Royalty Fees were owed.
E. On or about May 20, 1991, judgment was entered in
favor of the Paradise Defendants declaring that the Patent was
good and valid in law and that it had been infringed by Pentech.
The judgment reserved, for later disposition, all matters
relating to Royalty Fees which were owed to the Paradise
Defendants.
F. On or about September 18, 1996, following a trial
before the United States District Court Judge Kevin T. Duffy on
the issues reserved in the judgment of May 20, 1991, a judgment
was entered against Pentech and in favor of the Paradise
Defendants in the amount of $4,005,998. Judge Duffy also awarded
the Paradise Defendants attorney's fees in an amount yet to be
determined by the Court. (The May 20, 1991 and the September 18,
1996 judgments are hereafter collectively referred to as the
"Judgments").
G. The parties hereto have agreed to settle all
remaining issues between them arising out of or in connection
with the Patent and to satisfy and compromise the Judgments and
to terminate the Action under the terms and conditions set forth
below. Since entry of the September 18, 1996 Judgment, the
parties have explored a resolution of all of the claims which
were, or could have been, asserted in the Action. The parties
have agreed to resolve all disputes between them and to provide
compensation to the Paradise Defendants in respect of the
Judgments on the conditions set forth below. By entering into
this Agreement, the parties have agreed to forego their right to
appeal the Judgments and Pentech acknowledges that it will no
longer be able to seek a reduction of the amount of the Judgments
and The Paradise Defendants acknowledge that they will no longer
be able to seek an increase in the amount of the Royalty Fees
awarded or a hearing on attorney's fees.
NOW, THEREFORE the parties agree as follows:
(1) Initial Payment. Provided that this Agreement is
executed by the parties on or before December 9, 1996, Pentech
shall, on or before December 31, 1996, pay the Paradise
Defendants the sum of $500,000.00 (the "Initial Payment"). The
Initial Payment shall be made by Pentech from funds obtained
through the sale of Pentech's equity securities. The Initial
Payment shall not, unless expressly consented to in writing by
the Lenders (as hereafter defined) and by the Paradise
Defendants, be made from funds internally generated by Pentech
from its business operations or from the sale of its assets or
from the business operations and/or assets of any of Pentech's
wholly owned subsidiaries whether now existing or hereafter
created.
(2) Promissory Note. Simultaneously with the
execution of this Agreement, Pentech shall deliver a promissory
note (the "Note") substantially in the form annexed hereto as
Exhibit "A".
(3) Promissory Note: Mandatory Prepayments.
(i) Pentech hereby represents that it has or will
prior to January 15, 1997 file a corporate tax return or other
filing which includes a request for refunds with the Internal
Revenue Service for income tax refunds due with respect to the
fiscal year ended September 30, 1996. Pentech anticipates that
the amount of said refunds will exceed $400,000 (the "Tax
Refunds"). Copies of the documents requesting a refund shall be
provided to the Paradise Defendants promptly after submission to
the Internal Revenue Service.
(ii) Within 15 business days of the receipt of any
Tax Refund, Pentech shall pay the Paradise Defendants an amount
equal to the Tax Refund received up to an aggregate maximum of
$400,000.00, which shall be in reduction of the principal amount
due under the Note.
(iii) As a result of the Judgments and/or this
Agreement and the payments to be made and obligations incurred
hereunder, Pentech will incur losses which it, to the best of its
knowledge, believes will reduce or eliminate on a quarterly basis
its obligation to pay income taxes otherwise due on a quarterly
basis in fiscal year commencing October 1, 1996. Pentech shall
pay the Paradise Defendants at the completion of each fiscal
quarter an amount equal to the amount of the income taxes it
otherwise would have paid had not the Judgments been entered
and/or this Agreement executed (said amount hereafter referred to
as the "Tax Benefit") within 15 business days of Pentech's final
determination of the Tax Benefit. Such determination shall be
made within 45 days of the end of each fiscal quarter. In the
event that a dispute arises with respect to the amount of the Tax
Benefit, a determination of said amount shall be made by the
independent auditors and accountants retained by Pentech, whose
determination shall be conclusive and binding on the parties.
(4) License Agreement. Simultaneous with the
execution of the Agreement, Pentech and Paradise Creations, Inc.
("Paradise") shall execute a license agreement, substantially in
the form of Exhibit "B" hereto, for the Patent.
(5) Consent Judgment. Simultaneous with the
execution of the Agreement, Pentech shall deliver a Consent Order
permitting the Paradise Defendants to enter a Judgment on Consent
(the "Consent Judgment") to the Paradise Defendants,
substantially in the form annexed hereto as Exhibit "C". The
Consent Judgment shall be held in escrow by Stroock & Stroock &
Lavan ("S&S&L"), counsel to the Paradise Defendants, and judgment
shall not be entered thereon except upon the failure to make the
Initial Payment, a default under this Agreement, or the Note or a
failure by Pentech to pay the Annual License Fee Payment, as
defined in the License, which default remains uncured for a
period of 7 business days after delivery of a notice to Pentech
that an event of default has occurred. Any notice of a default
shall describe the event of default in sufficient detail so as to
permit Pentech to take appropriate action to cure the default.
(6) Security Agreement. Simultaneously with the
execution of the Agreement, as security for Pentech's obligations
under the Agreement, the Note and the License and to secure any
judgment, should one be entered pursuant to the Consent Judgment,
Pentech shall execute and deliver a Security Agreement (the
"Security Agreement") substantially in the form annexed as
Exhibit D.
(7) Subordination Agreement. Simultaneous with the
execution of the Agreement, the Paradise Defendants and the
Lenders shall enter into an agreement (the "Subordination
Agreement;" Exhibit E hereto) pursuant to which, inter alia, the
liens granted to the Paradise Defendants pursuant to the Security
Agreement shall be subordinate to the liens of the Lenders and
any lenders who may replace the Lenders as Pentech's working
capital lenders. In connection therewith, the Paradise
Defendants agree to execute all documents and to take such
actions, consistent with the provisions of the Subordination
Agreement required by any replacement working capital lender as a
condition to its replacing the Lenders.
(8) Releases. Simultaneous with the execution of the
Agreement, Pentech, Melnick and the Paradise Defendants shall
deliver releases, in the forms annexed hereto as Exhibit "F", to
be held in escrow. The releases signed by Pentech and Melnick
shall be delivered by Pentech and Melnick to be held in escrow by
S&S&L who shall deliver the releases to the Paradise Defendants
from escrow only upon, and when, S&S&L receives the Initial
Payment. The releases signed by Paradise shall be delivered by
the Paradise Defendants to be held in escrow by Angel & Frankel,
P.C. ("A&F") who shall deliver the releases to Pentech only upon
and when it receives notice from S&S&L that the Initial Payment
has been made.
(9) Satisfaction of Judgments. Simultaneous with the
execution of the Agreement, the Paradise Defendants shall also
deliver a Satisfaction of Judgment, substantially in the form of
Exhibit "G" hereto, which shall be held in escrow by A&F, to be
filed only when it receives notice from S&S&L that the Initial
Payment has been made.
(10) Stipulation of Discontinuance. Simultaneous with
the execution of the Agreement, the parties shall execute a
stipulation of discontinuance, substantially in the form of
Exhibit "H" hereto, which shall be held in escrow by A&F to be
filed only when it receives notice from S&S&L that S&S&L has
received the Initial Payment.
(11) Miscellaneous.
(i) Bank Approval. Pentech warrants and represents
that it has obtained the written consent of The Chase Manhattan
Bank and The European American Bank, its current working capital
lenders (the "Lenders"), to Pentech's entering into the
Agreement, the exhibits annexed hereto and to the terms and
conditions contained herein and therein.
(ii) Notices. All notices required and permitted
hereunder and under the exhibits annexed hereto shall be in
writing and shall be deemed to have been given and received when
delivered in person or transmitted by facsimile transmission
addressed as follows (or to such other address as may
subsequently be specified by the Notice):
If to Pentech:
Pentech International, Inc.
195 Carter Drive
Edison, NJ 08817
Telephone: (908) 287-6640
Facsimile: (908) 287-6610
Attn: Mr. John Linster
With a copy to:
Kalin & Banner
757 Third Avenue
New York, New York 10017
Telephone: (212) 888-9010
Facsimile: (212) 759-3234
Attn: Richard Kalin, Esq.
-and-
Angel & Frankel
460 Park Avenue
New York, New York
Telephone: (212) 752-8000
Facsimile: (212) 752-8393
Attn: Laurence May, Esq.
If to the Paradise Defendants:
Stroock & Stroock & Lavan
7 Hanover Square
New York, New York 10004
Telephone: (212) 806-6663
Facsimile: (212) 806-6006
Attn: Steven B. Pokotilow, Esq.
With a copy to:
Paradise Creations, Inc.
23123 State Road 7
Boca Raton, Florida 33428
Telephone: (561) 483-9091
Facsimile: (561) 479-0868
(iii) Amendments and Modification. This Agreement
may not be amended, modified or supplemented except by written
agreement signed by Pentech and the Paradise Defendants.
(iv) Parties In Interest. This Agreement shall be
binding upon and inure solely to the benefit of each party hereto
and nothing in this Agreement express or implied, is intended to
confer upon any other person any right or remedies of any nature
whatsoever under or by reason of this Agreement.
(v) Entire Agreement. This Agreement, including the
exhibits annexed hereto, embodies the entire agreement and
understanding between the parties hereto with respect to the
subject matter hereof. This Agreement and the exhibits hereto are
intended to be one and to the extent there are any discrepancies
or inconsistencies between the Agreement and an exhibit, the
provisions of the exhibit shall control.
(vi) Waivers. No provisions of this Agreement shall
be waived, altered or amended except in writing signed by the
party against whom such waiver, alteration or amendment is
asserted. Any such waiver shall be limited to the particular
instance in the particular time when and for which it is given.
(vii) Failure To Make Initial Payment. In the event
Pentech fails to make the Initial Payment when due then the
Paradise Defendants may, at their option, declare this Agreement
to be null and void and of no force and effect. In such event
all documents delivered into escrow and intended to be released
upon delivery of the Initial Payment shall, upon delivery of a
notice from the Paradise Defendants to Pentech and its attorneys,
be destroyed.
(viii) Choice of Law. The parties hereto
acknowledge, consent and agree that this Agreement and the
exhibits thereto shall be governed by the laws of the State of
New York and interpreted and construed in accordance with such
laws except to the extent superseded by applicable federal law
and the United States District Court for the Southern District of
New York and any court of competent jurisdiction in the State of
New York shall have jurisdiction in any proceeding instituted to
enforce this Settlement Agreement and any objections to venue are
hereby waived.
(ix) Subordination. In the event of any conflict
between (x) the terms of this Agreement or any other agreement or
document between and among Pentech and the Paradise Defendants
executed or delivered pursuant to, or in conjunction with, this
Agreement (including the license agreement referred to in
paragraph 4 hereof) and (y) the terms of the Subordination
Agreement, the terms of the Subordination Agreement shall
prevail.
IN WITNESS WHEREOF each of the parties to this
Agreement has caused this Agreement to be duly executed as of the
date above written.
PENTECH INTERNATIONAL, INC.
By:s/John W. Linster
Name: s/John W. Linster
Title: President, CEO
LEON HAYDUCHOK
s/Leon Hayduchok
Steven B. Pokatilow, Attorney-in-fact
ALL-MARK CORPORATION, INC.
Leon Hayduchok, by
By: Steven B. Pokatilow, Attorney-in-fact
____________________________
Name: Leon Hayduchok
Title: President
PARADISE CREATIONS, INC.
By: s/Ira Hochroth
Name: s/Ira Hochroth
Title: Vice President
NORMAN MELNICK: [with respect to paragraph 7
only]
s/Norman Melnick
<PAGE>
EXHIBIT 10.7
LOAN AND SECURITY AGREEMENT
Dated as of January 13, 1997
Among
BANKAMERICA BUSINESS CREDIT, INC.
as the Lender
and
PENTECH INTERNATIONAL, INC.,
PENTECH COSMETICS, INC., and
SAWDUST PENCIL CO.
as Borrowers
<PAGE>
TABLE OF CONTENTS
INTERPRETATION OF THIS AGREEMENT . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms . . . . . . . . . . . . . . . . . 24
1.3 Other Terms. . . . . . . . . . . . . . . . . . . . 24
LOANS AND LETTERS OF CREDIT. . . . . . . . . . . . . . . . . 25
2.1 Total Facility. . . . . . . . . . . . . . . . . . . 25
2.2 Revolving Loans . . . . . . . . . . . . . . . . . . 26
2.3 Letters of Credit . . . . . . . . . . . . . . . . . 28
2.4 Automated Clearing House Transfers and Overdrafts . 34
INTEREST AND OTHER CHARGES . . . . . . . . . . . . . . . . . 34
3.1 Interest. . . . . . . . . . . . . . . . . . . . . . 34
3.2 Conversion and Continuation Elections . . . . . . . 36
3.3 Maximum Interest Rate . . . . . . . . . . . . . . . 37
3.4 Facility Fee. . . . . . . . . . . . . . . . . . . . 37
3.5 Letter of Credit Fee. . . . . . . . . . . . . . . . 38
PAYMENTS AND PREPAYMENTS . . . . . . . . . . . . . . . . . . 38
4.1 Revolving Loans . . . . . . . . . . . . . . . . . . 38
4.2 Place and Form of Payments; Extension of Time . . . 38
4.3 Application and Reversal of Payments. . . . . . . . 38
4.4 INDEMNITY FOR RETURNED PAYMENTS . . . . . . . . . . 39
LENDER'S BOOKS AND RECORDS; MONTHLY STATEMENTS . . . . . . . 39
TAXES, YIELD PROTECTION AND ILLEGALITY . . . . . . . . . . . 40
6.1 Taxes. . . . . . . . . . . . . . . . . . . . . . . 40
6.2 Illegality . . . . . . . . . . . . . . . . . . . . 41
6.3 Increased Costs and Reduction of Return. . . . . . 41
6.4 Funding Losses . . . . . . . . . . . . . . . . . . 42
6.5 Inability to Determine Rates . . . . . . . . . . . 42
6.6 Survival . . . . . . . . . . . . . . . . . . . . . 42
COLLATERAL . . . . . . . . . . . . . . . . . . . . . . . . . 43
7.1 Grant of Security Interest. . . . . . . . . . . . . 43
7.2 Perfection and Protection of Security Interest. . . 43
7.3 Location of Collateral. . . . . . . . . . . . . . . 44
7.4 Title to, Liens on, and Sale and Use of Collateral. 45
7.5 Appraisals. . . . . . . . . . . . . . . . . . . . . 45
7.6 Access and Examination. . . . . . . . . . . . . . . 45
7.7 Insurance . . . . . . . . . . . . . . . . . . . . . 46
7.8 Collateral Reporting. . . . . . . . . . . . . . . . 47
7.9 Accounts. . . . . . . . . . . . . . . . . . . . . . 47
7.10 Collection of Accounts; Payments . . . . . . . . . 49
7.11 Inventory. . . . . . . . . . . . . . . . . . . . . 50
7.12 Equipment. . . . . . . . . . . . . . . . . . . . . 50
7.13 Licenses; Settlement Documents; Assigned Contracts 51
7.14 Documents, Instruments, and Chattel Paper. . . . . 52
7.15 Right to Cure. . . . . . . . . . . . . . . . . . . 53
7.16 Power of Attorney. . . . . . . . . . . . . . . . . 53
7.17 Lender's Rights, Duties, and Liabilities . . . . . 53
BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES. . . . . . 54
8.1 Books and Records . . . . . . . . . . . . . . . . . 54
8.2 Financial Information . . . . . . . . . . . . . . . 54
8.3 Notices to Lender . . . . . . . . . . . . . . . . . 57
GENERAL WARRANTIES AND REPRESENTATIONS . . . . . . . . . . . 58
9.1 Authorization, Validity, and Enforceability of this
Agreement and the Loan Documents . . . . . . . . . 59
9.2 Validity and Priority of Security Interest. . . . . 59
9.3 Organization and Qualification . . . . . . . . . . 59
9.4 Corporate Name; Prior Transactions. . . . . . . . . 60
9.5 Subsidiaries and Affiliates . . . . . . . . . . . . 60
9.6 Financial Statements and Projections. . . . . . . . 60
9.7 Capitalization. . . . . . . . . . . . . . . . . . . 60
9.8 Solvency. . . . . . . . . . . . . . . . . . . . . . 61
9.9 Debt. . . . . . . . . . . . . . . . . . . . . . . . 61
9.10 Distributions. . . . . . . . . . . . . . . . . . . 61
9.11 Title to Property. . . . . . . . . . . . . . . . . 61
9.12 Adequate Assets. . . . . . . . . . . . . . . . . . 61
9.13 Real Property; Leases. . . . . . . . . . . . . . . 61
9.14 Proprietary Rights . . . . . . . . . . . . . . . . 61
9.15 Trade Names and Terms of Sale. . . . . . . . . . . 62
9.16 Litigation; Certain Settlement Agreement Matters . 62
9.17 Restrictive Agreements . . . . . . . . . . . . . . 62
9.18 Labor Disputes . . . . . . . . . . . . . . . . . . 62
9.19 Environmental Laws . . . . . . . . . . . . . . . . 63
9.20 No Violation of Law. . . . . . . . . . . . . . . . 64
9.21 Settlement Documents and Other Material Contracts. 64
9.22 ERISA Compliance . . . . . . . . . . . . . . . . . 65
9.23 Taxes. . . . . . . . . . . . . . . . . . . . . . . 65
9.24 Use of Proceeds. . . . . . . . . . . . . . . . . . 66
9.25 Private Offerings. . . . . . . . . . . . . . . . . 66
9.26 Broker's Fees. . . . . . . . . . . . . . . . . . . 66
9.27 No Material Adverse Change . . . . . . . . . . . . 66
9.28 Disclosure . . . . . . . . . . . . . . . . . . . . 66
AFFIRMATIVE AND NEGATIVE COVENANTS . . . . . . . . . . . . . 66
10.1 Taxes and Other Obligations. . . . . . . . . . . . 67
10.2 Corporate Existence and Good Standing. . . . . . . 67
10.3 Compliance with Law and Agreements . . . . . . . . 67
10.4 Maintenance of Property and Insurance. . . . . . . 67
10.5 Environmental Laws . . . . . . . . . . . . . . . . 68
10.6 ERISA. . . . . . . . . . . . . . . . . . . . . . . 68
10.7 Mergers, Consolidations, Acquisitions, or Sales. . 68
10.8 Distributions; Capital Changes . . . . . . . . . . 68
10.9 Transactions Affecting Collateral or Obligations . 68
10.10 Guaranties. . . . . . . . . . . . . . . . . . . . 68
10.11 Debt. . . . . . . . . . . . . . . . . . . . . . . 69
10.12 Prepayment. . . . . . . . . . . . . . . . . . . . 69
10.13 Transactions with Affiliates. . . . . . . . . . . 69
10.14 Business Conducted. . . . . . . . . . . . . . . . 69
10.15 Liens . . . . . . . . . . . . . . . . . . . . . . 69
10.16 Sale and Leaseback Transactions . . . . . . . . . 70
10.17 New Subsidiaries. . . . . . . . . . . . . . . . . 70
10.18 Restricted Investments. . . . . . . . . . . . . . 70
10.19 Capital Expenditures. . . . . . . . . . . . . . . 70
10.20 Operating Lease Obligations . . . . . . . . . . . 70
10.21 Minimum Interest Coverage . . . . . . . . . . . . 70
10.22 Adjusted Tangible Net Worth . . . . . . . . . . . 71
10.23 Landlord Waivers; Credit Insurance; etc . . . . . 71
10.24 Further Assurances. . . . . . . . . . . . . . . . 71
CLOSING; CONDITIONS TO CLOSING . . . . . . . . . . . . . . . 72
11.1 Conditions Precedent to Making of Loans and Issuance of
Letters of Credit on the Closing Date. . . . . . . 72
11.2 Conditions Precedent to Each Loan. . . . . . . . . 74
DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . 74
12.1 Events of Default. . . . . . . . . . . . . . . . . 74
REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . 77
TERM AND TERMINATION . . . . . . . . . . . . . . . . . . . . 78
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . 79
15.1 Cumulative Remedies; No Prior Recourse to Collateral79
15.2 No Implied Waivers . . . . . . . . . . . . . . . . 79
15.3 Severability . . . . . . . . . . . . . . . . . . . 79
15.4 Governing Law; Choice of Forum; Service of Process;
Jury
Trial Waiver; Waivers. . . . . . . . . . . . . . . 79
15.5 Survival of Representations and Warranties . . . . 81
15.6 Other Security and Guaranties. . . . . . . . . . . 81
15.7 Fees and Expenses. . . . . . . . . . . . . . . . . 81
15.8 Notices. . . . . . . . . . . . . . . . . . . . . . 82
15.9 Indemnification. . . . . . . . . . . . . . . . . . 83
15.10 Waiver of Notices . . . . . . . . . . . . . . . . 84
15.11 Binding Effect; Assignment. . . . . . . . . . . . 84
15.12 Modification. . . . . . . . . . . . . . . . . . 84
15.13 Counterparts. . . . . . . . . . . . . . . . . . . 84
15.14 Captions. . . . . . . . . . . . . . . . . . . . . 84
15.15 Right of Set-Off. . . . . . . . . . . . . . . . . 85
15.16 Participating Lender's Security Interests . . . . 85
15.17 Joint and Several Liability . . . . . . . . . . . 85
<PAGE>
LOAN AND SECURITY AGREEMENT (this "Agreement"), dated
as of January 13, 1997, by and among BANKAMERICA BUSINESS CREDIT,
INC., a Delaware corporation, with offices at 40 East 52nd
Street, New York, New York 10022 (the "Lender"); PENTECH
INTERNATIONAL, INC., a Delaware corporation with chief executive
offices at 195 Carter Drive, Edison, New Jersey 08817
("Pentech"); PENTECH COSMETICS, INC., a Delaware corporation with
chief executive offices at 195 Carter Drive, Edison, New Jersey
08817 ("Cosmetics"); and SAWDUST PENCIL CO., a Delaware
corporation with chief executive offices at 195 Carter Drive,
Edison, New Jersey 08817 ("Sawdust") (Pentech, Cosmetics and
Sawdust, individually, a "Borrower", and collectively, the
"Borrowers").
W I T N E S S E T H
WHEREAS, the Borrowers have requested that the Lender
make available to them a revolving line of credit for loans and
letters of credit in an amount not to exceed $30,000,000, which
extensions of credit the Borrowers will use to refinance certain
existing debt and for their ongoing working capital needs;
NOW, THEREFORE, in consideration of the mutual
conditions and agreements set forth in this Agreement, and for
good and valuable consideration, the receipt of which is hereby
acknowledged, the Borrowers and the Lender hereby agree as
follows:
1. INTERPRETATION OF THIS AGREEMENT.
1.1 Definitions. As used herein:
"Account" means each Borrower's right to payment for a
sale or lease and delivery of goods or rendition of services.
"Account Debtor" means each Person obligated in any way
on or in connection with an Account.
"ACH Settlement Risk Reserve" means any and all
reserves which the Lender from time to time establishes, in its
sole discretion, with respect to ACH Transactions.
"ACH Transactions" means all debts, liabilities, and
obligations now or hereafter owing from any Borrower to the Bank
arising from or related to the automatic clearing house transfer
of funds by the Bank for the account of such Borrower pursuant to
agreement or overdrafts.
"Affiliate" means: (a) a Person which, directly or
indirectly, controls, is controlled by or is under common control
with, any Borrower; (b) a Person which beneficially owns or
holds, directly or indirectly, five percent or more of any class
of voting stock of any Borrower; or (c) a Person in which five
percent of any class of the voting stock is beneficially owned or
held, directly or indirectly, by any Borrower. The term control
(including the terms "controlled by" and "under common control
with"), means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and
policies of the Person in question.
"Agreement" means this Loan and Security Agreement, as
the same may be amended, supplemented or otherwise modified from
time to time in accordance with the terms hereof.
"Aggregate Availability" means, at any time of
determination, (a) the Aggregate Maximum Revolver Amount minus
(b) the sum of (i) the unpaid principal balance of Revolving
Loans outstanding to all Borrowers and (ii) the aggregate undrawn
face amount of all outstanding Letters of Credit which the Lender
has caused to be issued or obtained for the account of all
Borrowers.
"Aggregate Maximum Revolver Amount" means, at any time,
an amount representing the aggregate amount of the Maximum
Revolver Amounts with respect to all Borrowers at such time;
provided, however, that the aggregate amount of all Loans
outstanding at any one such time shall not exceed an amount equal
to ninety percent (90%) of the Net Amount of all Eligible
Accounts plus seventy-five percent (75%) of the value of all
Eligible Inventory; and provided further, however, that at all
times the Aggregate Maximum Revolver Amount shall be reduced
(without duplication) by the sum of:
(A) reserves for accrued interest on the
Revolving Loans;
(B) the Environmental Compliance Reserve;
(C) the ACH Settlement Risk Reserve;
(D) the Royalty Reserve; and
(E) all other reserves which the Lender in its
reasonable discretion deems necessary or desirable to maintain
with respect to any Borrower's account, including, without
limitation, any amounts which the Lender may be obligated to pay
in the future for the account of any Borrower.
The Lender agrees to give the Borrowers at least three Business
Days' notice prior to reducing any of the advance rates set forth
above, but the failure to give such notice shall not affect the
Lender's right to make such reduction or the validity thereof.
"Allowable Seasonal Overadvance" means, at any time
during each of the Fiscal Years ending September 30, 1997 and
September 30, 1998 and prior to the Overadvance Repayment Date in
such Fiscal Year, the Seasonal Overadvance Limit for such Fiscal
Year, less any outstanding Seasonal Overadvances already made in
such Fiscal Year.
"Anniversary Date" means each anniversary of the
Closing Date.
"Assigned Contracts" means, collectively and to the
maximum extent assignment thereof is permitted, all of the
Borrower's rights and remedies under, and all moneys and claims
for money due or to become due to the Borrower under the License
Agreements, the Settlement Documents, any other material
contracts and any and all amendments, supplements, extensions,
and renewals thereof including, without limitation, all rights
and claims of the Borrower now or hereafter existing:
(a) under any insurance, indemnities, warranties, and guarantees
provided for or arising out of or in connection with the
foregoing agreements; (b) for any damages arising out of or for
breach or default under or in connection with the foregoing
agreements; (c) to all other amounts from time to time paid or
payable under or in connection with the foregoing agreements; or
(d) to exercise or enforce any and all covenants, remedies,
powers and privileges thereunder.
"Availability" means, at any time of determination,
with respect to any Borrower, (a) the Maximum Revolver Amount for
such Borrower minus (b) the sum of (i) the unpaid principal
balance of Revolving Loans outstanding to such Borrower and (ii)
the aggregate undrawn face amount of all outstanding Letters of
Credit which the Lender has caused to be issued or obtained for
such Borrower's account.
"Bank" means Bank of America National Trust and Savings
Association in San Francisco, California.
"Bankruptcy Code" means Title 11 of the United States
Code (11 U.S.C. sec. 101 et seq.).
"Borrowing" means a borrowing hereunder consisting of
Revolving Loans by the Lender to any Borrower.
"Business Day" means (a) any day that is not a
Saturday, Sunday, or a day on which banks in San Francisco,
California or New York, New York are required or permitted to be
closed, and (b) with respect to all notices, determinations,
fundings and payments in connection with the LIBOR Rate or LIBOR
Rate Loans, any day that is a Business Day pursuant to clause (a)
above and that is also a day on which trading is carried on by
and between banks in the London interbank market.
"Capital Adequacy Regulation" means any guideline,
request or directive of any central bank or other Public
Authority, or any other law, rule or regulation, whether or not
having the force of law, in each case, regarding capital adequacy
of any bank or of any corporation controlling a bank.
"Capital Expenditures" means all payments due (whether
or not paid) from Pentech and its Subsidiaries during a Fiscal
Year in respect of the cost of any fixed asset or improvement, or
replacement, substitution, or addition thereto, which has a
useful life of more than one year, including, without limitation,
those arising in connection with the direct or indirect
acquisition of such assets by way of increased product or service
charges or offset items or in connection with Capital Leases.
"Capital Lease" means any lease of Property by any
Borrower that, in accordance with GAAP, should be reflected as a
liability on the consolidated balance sheet of Pentech and its
Subsidiaries.
"Closing Date" means the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, as
amended.
"Collateral" has the meaning given to such term in
Section 7.1.
"Contaminant" means any waste, pollutant, hazardous
substance, toxic substance, hazardous waste, special waste,
petroleum or petroleum-derived substance or waste, asbestos in
any form or condition, polychlorinated biphenyls ("PCBs"), or
other substance or material, the handling, release, or possession
of which is regulated to protect health, safety, or environment,
or any constituent of any such substance or waste.
"Cosmetics" has the meaning given to such term in the
Preamble.
"Debit Memo Accrual Reserve" means any and all reserves
which the Lender from time to time establishes, in its sole
discretion, with respect to the Borrowers' actual or anticipated
debit memoranda to Account Debtors.
"Debt" means all liabilities, obligations and
indebtedness of any Borrower to any Person, of any kind or
nature, now or hereafter owing, arising, due or payable,
howsoever evidenced, created, incurred, acquired or owing,
whether primary, secondary, direct, contingent, fixed or
otherwise, and including, without in any way limiting the
generality of the foregoing:
(a) such Borrower's liabilities and obligations to trade
creditors; (b) all Obligations; (c) all obligations and
liabilities of any Person secured by any Lien on such Borrower's
Property, even though such Borrower shall not have assumed or
become liable for the payment thereof; provided, however, that
all such obligations and liabilities which are limited in
recourse to such Property shall be included in Debt only to the
extent of the book value of such Property as would be shown on a
balance sheet of such Borrower prepared in accordance with GAAP;
(d) all obligations or liabilities created or arising under any
Capital Lease or conditional sale or other title retention
agreement with respect to Property used or acquired by such
Borrower, even if the rights and remedies of the lessor, seller
or lender thereunder are limited to repossession of such
Property; provided, however, that all such obligations and
liabilities which are limited in recourse to such Property shall
be included in Debt only to the extent of the book value of such
Property as would be shown on a balance sheet of such Borrower
prepared in accordance with GAAP; (e) all accrued pension fund
and other employee benefit plan obligations and liabilities; (f)
all obligations and liabilities under Guaranties; and (g)
deferred taxes.
"Default" means any event or condition which, with
notice, the passage of time, the happening of any other condition
or event, or any combination thereof, would constitute an Event
of Default.
"Distribution" means, in respect of any corporation:
(a) the payment or making of any dividend or other distribution
of Property in respect of capital stock of such corporation,
other than distributions in capital stock of the same class; or
(b) the redemption or other acquisition of any capital stock of
such corporation.
"DOL" means the United States Department of Labor or
any successor department or agency.
"EBITDA" means the consolidated net income of Pentech
and its Subsidiaries (determined in accordance with GAAP) plus
(to the extent deducted in computing such consolidated net
income) the sum of income tax expense, interest expense,
depreciation and amortization expense, and any non-cash charges
or non-cash losses, minus (to the extent added in computing
consolidated net income) any interest income and any non-cash
gains.
"Eligible Accounts" means, with respect to any
Borrower, those Accounts of such Borrower which are not
ineligible as the basis for Revolving Loans (as reduced by the
Debit Memo Accrual Reserve), based on the following criteria and
on such other criteria as the Lender may from time to time
establish in its reasonable commercial discretion. Without
intending to limit the Lender's discretion to establish other
criteria of eligibility, Eligible Accounts shall not include any
Account:
(a) with respect to which more than 150 days have elapsed since
the date of the original invoice therefor or if it is more than
60 days past due;
(b) with respect to which any of the
representations, warranties, covenants, and agreements contained
in this Agreement are not or have ceased to be complete and
correct or have been breached;
(c) with respect to which, in whole or in part, a
check, promissory note, draft, trade acceptance or other
instrument for the payment of money has been received, presented
for payment and returned uncollected for any reason;
(d) which represents a progress billing (as
hereinafter defined) or as to which such Borrower has extended
the time for payment without the consent of the Lender; for the
purposes hereof, "progress billing" means any invoice for goods
sold or leased or services rendered under a contract or agreement
pursuant to which the Account Debtor's obligation to pay such
invoice is conditioned upon such Borrower's completion of any
further performance under the contract or agreement;
(e) as to which any one or more of the following
events has occurred with respect to the Account Debtor on such
Account: death or judicial declaration of incompetency of an
Account Debtor who is an individual; the filing by or against the
Account Debtor of a request or petition for liquidation,
reorganization, arrangement, adjustment of debts, adjudication as
a bankrupt, winding-up, or other relief under the bankruptcy,
insolvency, or similar laws of the United States, any state or
territory thereof, or any foreign jurisdiction, now or hereafter
in effect; the making of any general assignment by the Account
Debtor for the benefit of creditors; the appointment of a
receiver or trustee for the Account Debtor or for any of the
assets of the Account Debtor, including, without limitation, the
appointment of or taking possession by a "custodian," as defined
in the Bankruptcy Code; the institution by or against the Account
Debtor of any other type of insolvency proceeding (under the
bankruptcy laws of the United States or otherwise) or of any
formal or informal proceeding for the dissolution or liquidation
of, settlement of claims against, or winding up of affairs of,
the Account Debtor; the sale, assignment, or transfer of all or
substantially all of the assets of the Account Debtor; the
nonpayment generally by the Account Debtor of its debts as they
become due; or the cessation of the business of the Account
Debtor as a going concern;
(f) owed by an Account Debtor if the aggregate
dollar amount of all Accounts owed by such Account Debtor exceeds
a credit limit determined by Lender in its sole discretion, but
only to the extent such Accounts exceed such limit;
(g) owed by an Account Debtor which: (i) does not
maintain its chief executive office in the United States, Canada
or Puerto Rico; or (ii) is not organized under the laws of the
United States or any state thereof, Canada or any Province
thereof or Puerto Rico; or (iii) is the government of any foreign
country or sovereign state, or of any state, province,
municipality, or other political subdivision thereof, or of any
department, agency, public corporation, or other instrumentality
thereof; except (x) for Accounts with respect to which the
Account Debtor is a Subsidiary of one of the entities listed on
Schedule 1.1 and the aggregate dollar amount of all Accounts owed
by such Account Debtors does not exceed $500,000, or (y) to the
extent that such Account is secured or payable by a letter of
credit acceptable to Lender;
(h) owed by an Account Debtor which is an
Affiliate or employee of such Borrower;
(i) except as provided in (g) above and (k) below,
as to which either the perfection, enforceability, or validity of
the Security Interest in such Account, or the Lender's right or
ability to obtain direct payment to the Lender of the Proceeds of
such Account, is governed by any federal, state, or local
statutory requirements other than those of the UCC;
(j) which is owed by an Account Debtor to which
such Borrower is indebted in any way, or which is subject to any
right of setoff or recoupment by the Account Debtor, unless the
Account Debtor has entered into an agreement acceptable to the
Lender to waive setoff and recoupment rights; or if the Account
Debtor thereon has disputed liability or made any claim with
respect to any other Account due from such Account Debtor; but in
each such case only to the extent of such indebtedness, setoff,
recoupment, dispute, or claim;
(k) which is owed by the government of the United
States of America, or any department, agency, public corporation,
or other instrumentality thereof, unless the Federal Assignment
of Claims Act of 1940, as amended, and any other steps necessary
to perfect the Security Interest and protect the Lender's rights
therein, have been complied with to the Lender's satisfaction
with respect to such Account;
(l) which is owed by any state, municipality, or
other political subdivision of the United States of America, or
any department, agency, public corporation, or other
instrumentality thereof and as to which the Lender determines
that its Security Interest therein is not or cannot be perfected;
(m) which arises out of a sale to an Account
Debtor on a bill-and-hold, guaranteed sale, sale and return, sale
on approval, consignment, or other repurchase or return basis;
(n) which is evidenced by a promissory note or
other instrument or by chattel paper;
(o) if fifty percent (50%) or more of the
aggregate dollar amount of outstanding Accounts owed at such time
by the Account Debtor thereon is classified as ineligible under
the other criteria set forth herein;
(p) with respect to which the Account Debtor is
located in any state requiring the filing of a "Notice of
Business Activities Report" or similar report in order to permit
the Borrower to seek judicial enforcement in such state of
payment of such Account, unless such Borrower has qualified to do
business in such state or has filed a "Notice of Business
Activities Report" or equivalent report for the then current
year; or
(q) which arises out of a sale not made in the
ordinary course of such Borrower's business;
(r) with respect to which the goods giving rise to
such Account have not been shipped and delivered to and accepted
by the Account Debtor or the services giving rise to such Account
have not been performed by such Borrower, and, if applicable,
accepted by the Account Debtor, or the Account debtor revokes its
acceptance of such goods or services;
(s) which is not subject to a first priority and
perfected security interest in favor of the Lender.
(t) if Lender believes in its reasonable credit
judgment that the prospect of collection of such Account is
impaired or that the Account may not be paid by reason of the
Account Debtor's financial inability to pay; or
(u) which is owed by an Account Debtor which the
Lender, in its reasonable credit judgment, otherwise deems to be
uncreditworthy.
If any Account at any time ceases to be an Eligible Account
by reason of any of the foregoing exclusions or any failure to
meet any other eligibility criteria established by the Lender in
the exercise of its reasonable discretion, then such Account
shall promptly be excluded from the calculation of Eligible
Accounts.
"Eligible Inventory" means, with respect to any
Borrower, Inventory of such Borrower, calculated at the lower of
cost (on a first-in, first-out basis) or market value, that
constitutes raw materials or first quality finished goods and
that: (a) is not, in the Lender's reasonable opinion, slow
moving, obsolete or unmerchantable; (b) is located at Premises
owned or leased by such Borrower or on Premises otherwise
reasonably acceptable to the Lender, provided, however, that,
commencing 90 days after the Closing Date, Inventory located on
Premises leased to such Borrower shall not be Eligible Inventory
unless such Borrower shall have delivered to the Lender a written
waiver, duly executed on behalf of the appropriate landlord and
in form and substance acceptable to the Lender, of all Liens
which the landlord for such Premises may be entitled to assert
against such Eligible Inventory; (c) is subject to the Lender's
first priority perfected security interest; (d) is not work-in-
process, spare parts, packaging and shipping materials, supplies,
bill-and-hold Inventory, returned or defective Inventory, or
Inventory delivered to any Borrower on consignment; and (e) the
Lender, in the exercise of its reasonable discretion, deems
eligible as the basis for Revolving Loans based on such
collateral and credit criteria as the Lender may from time to
time establish. If any Inventory at any time ceases to be
Eligible Inventory, such Inventory shall promptly be excluded
from the calculation of Eligible Inventory.
"Environmental Compliance Reserve" means all reserves
which the Lender from time to time establishes for amounts that
are reasonably required to be expended in order for any Borrower
and such Borrower's operations and Property to comply with
Environmental Laws or in order to correct any violation by such
Borrower or such Borrower's operations or Property of
Environmental Laws.
"Environmental Laws" means all federal, state and local
laws, rules, regulations, ordinances, programs, permits,
guidance, orders and consent decrees relating to health, safety,
hazardous substances, and environmental matters applicable to any
Borrower's business and facilities (whether or not owned by it).
Such laws and regulations include but are not limited to the
Resource Conservation and Recovery Act, 42 U.S.C. sec. 6901 et seq.,
as amended; the Comprehensive Environmental Response Compensation
and Liability Act, 42 U.S.C. sec. 9601 et seq., as amended; the
Toxic Substances Control Act, 15 U.S.C. sec. 2601 et seq., as
amended; the Clean Water Act, 33 U.S.C. sec. 466 et seq., as
amended; the Clean Air Act, 42 U.S.C. sec. 7401 et seq., as amended;
state and federal lien and environmental cleanup programs; and
U.S. Department of Transportation regulations.
"Environmental Lien" means a Lien in favor of any
Public Authority for
(a) any liability under any Environmental Laws, or (b) damages
arising from, or costs incurred by such Public Authority in
response to, a Release or threatened Release of a Contaminant
into the environment.
"Equipment" means, with respect to any Borrower, all of
such Borrower's now owned and hereafter acquired machinery,
equipment, furniture, furnishings, fixtures, and other tangible
personal property (except Inventory), including, without
limitation, data processing hardware and software, motor
vehicles, aircraft, dies, tools, jigs, and office equipment, as
well as all of such types of property leased by such Borrower and
all of such Borrower's rights and interests with respect thereto
under such leases (including, without limitation, options to
purchase); together with all present and future additions and
accessions thereto, replacements therefor, component and
auxiliary parts and supplies used or to be used in connection
therewith, and all substitutes for any of the foregoing, and all
manuals, drawings, instructions, warranties and rights with
respect thereto; wherever any of the foregoing is located.
"ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
"ERISA Affiliate" means any trade or business (whether
or not incorporated) under common control with any Borrower
within the meaning of Section 414(b) or (c) of the Code (and
Sections 414(m) and (o) of the Code for purposes of provisions
relating to Section 412 of the Code).
"ERISA Event" means, with respect to any Borrower, any
ERISA Affiliate or any Pension Plan, the occurrence of any of the
following: (a) a Reportable Event; (b) a withdrawal by a
substantial employer (as defined in Section 4001 (a)(12) of
ERISA) subject to Section 4063 of ERISA; (c) a cessation of
operations which is treated as a withdrawal under Section 4062(e)
of ERISA; (d) a complete or partial withdrawal under Section 4203
or 4205 of ERISA from a Multiemployer Plan; (e) a notification
that a Multiemployer Plan is in reorganization under Section 4242
of ERISA; (f) the filing of a notice of intent to terminate a
Pension Plan under 4041 of ERISA; (g) the treatment of an
amendment of a Pension Plan as a termination under 4041 of ERISA;
(h) the termination of a Multiemployer Plan under Section 4041A
of ERISA; (i) the commencement of proceedings by the PBGC to
terminate a Pension Plan under 4042 of ERISA; (j) an event or
condition which could reasonably be expected to constitute
grounds under Section 4042 of ERISA for the termination of, or
the appointment of a trustee to administer, a Pension Plan; or
(k) the imposition of any liability under Title IV of ERISA,
other than PBGC premiums due but not delinquent under Section
4007 of ERISA.
"Event of Default" has the meaning specified in Section
12.1.
"Facility Fee" has the meaning specified in Section
3.4.
"Federal Reserve Board" means the Board of Governors of
the Federal Reserve System.
"Financial Statements" means, according to the context
in which it is used, the financial statements attached hereto as
Exhibit B-l, and the pro forma balance sheet attached hereto as
Exhibit B-2 or any financial statements required to be given to
the Lender pursuant to Section 8.2(a) (b) and (c), or any
combination thereof.
"Fiscal Year" means the Borrowers' fiscal year for
financial accounting purposes. The current Fiscal Year of the
Borrowers will end on September 30, 1997.
"Fixed Charges" means, for Pentech and its
Subsidiaries, the sum of interest expense, principal payments,
Taxes, Distributions and the after-tax cost of restructuring
payments, all determined in accordance with GAAP on a
consolidated basis.
"Fixed Charge Coverage Ratio" means the ratio of (a)
the sum EBITDA minus Capital Expenditures to (b) Fixed Charges.
"Funding Date" means the date on which a Borrowing
occurs.
"GAAP" means generally accepted accounting principles
set forth from time to time in the opinions and pronouncements of
the Accounting Principles Board and the American Institute of
Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board (or agencies with
similar functions of comparable stature and authority within the
U.S. accounting profession).
"Guaranty" by any Person means all obligations of such
Person which in any manner directly or indirectly guarantee or
assure, or in effect guarantee or assure, the payment or
performance of any indebtedness, dividend or other obligation of
any other Person (the "guaranteed obligations"), or to assure or
in effect assure the holder of the guaranteed obligations against
loss in respect thereof, including, without limitation, any such
obligations incurred through an agreement, contingent or
otherwise: (a) to purchase the guaranteed obligations or any
Property constituting security therefor; (b) to advance or supply
funds for the purchase or payment of the guaranteed obligations
or to maintain a working capital or other balance sheet
condition; (c) to lease Property or to purchase any debt or
equity securities or other Property or services.
"Intercompany Accounts" means all assets and
liabilities, however arising, which are due to any Borrower from,
which are due from any Borrower to, or which otherwise arise from
any transaction by any Borrower with, another Borrower or such
Borrower's Affiliate.
"Interest Period" means, as to any LIBOR Rate Loan, the
period commencing on the Funding Date of such Loan or on the
Conversion/Continuation Date on which the Loan is converted into
or continued as a LIBOR Rate Loan, and ending on the date one,
two, or three months thereafter as selected by any Borrower in
its Notice of Borrowing or Notice of Conversion/Continuation;
provided, however, that:
(i) if any Interest Period would otherwise end on
a day that is not a Business Day, that Interest Period
shall be extended to the following Business Day unless
the result of such extension would be to carry such
Interest Period into another calendar month, in which
event such Interest Period shall end on the preceding
Business Day;
(ii) any Interest Period pertaining to a LIBOR
Rate Loan that begins on the last Business Day of a
calendar month (or on a day for which there is no
numerically corresponding day in the calendar month at
the end of such Interest Period) shall end on the last
Business Day of the calendar month at the end of such
Interest Period; and
(iii) no Interest Period shall extend beyond the
Stated Termination Date or any renewal term.
"Inventory" means, with respect to any Borrower, all of
such Borrower's now owned and hereafter acquired inventory,
goods, merchandise, and other personal property, wherever
located, to be furnished under any contract of service or held
for sale or lease, all raw materials, work-in-process, finished
goods, returned goods, and materials and supplies of any kind,
nature or description which are or might be used or consumed in
such Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing
of such goods, merchandise and such other personal property, and
all documents of title or other documents representing them.
"IRS" means the Internal Revenue Service or any
successor agency.
"Latest Projections" means: (a) on the Closing Date
and thereafter until the Lender receives new projections pursuant
to Section 8.2(f), the projections of Pentech and its
Subsidiaries, on a consolidated and consolidating basis, of
financial condition, results of operations, and cash flow, on a
monthly basis for the Fiscal Year ending September 30, 1997, and
on an annual basis for the each of the Fiscal Years ending
September 30, 1998 and September 30, 1999, attached hereto as
Exhibit B-3; and (b) thereafter, the projections most recently
received by the Lender pursuant to Section 8.2(f).
"Letter of Credit" means a Standby Letter of Credit or
a Merchandise Letter of Credit issued or caused to be issued for
the account of a Borrower pursuant to Section 2.3.
"Letter of Credit Fee" has the meaning specified in
Section 3.5.
"LIBOR Interest Rate Determination Date" means each
date of calculating the LIBOR Rate for purposes of determining
the interest rate with respect to an Interest Period. The LIBOR
Interest Rate Determination Date for any LIBOR Rate Loan shall be
the second Business Day prior to the first day of the related
Interest Period for such LIBOR Rate Loan.
"LIBOR Margin" means, as determined at the beginning of
an Interest Period, 2.50% per annum; provided, however, that the
LIBOR Margin shall be 2.25% per annum during a Performance
Pricing Period and shall be increased to 2.50% per annum on the
date that such Performance Pricing Period ends for any reason
whatsoever.
"LIBOR Rate" means, for any Interest Period, with
respect to LIBOR Rate Loans comprising part of the same
Borrowing, the rate of interest per annum (rounded upward to the
next 1/100th of 1.0%) determined as follows:
LIBOR Rate = LIBOR
1.00 - Eurodollar Reserve Percentage
Where,
"Eurodollar Reserve Percentage" means for any day
for any Interest Period the maximum reserve percentage
(expressed as a decimal, rounded upward to the next
1/100th of 1.0%) in effect on such day (whether or not
applicable to the Lender) under regulations issued from
time to time by the Federal Reserve Board for
determining the maximum reserve requirement (including
any emergency, supplemental or other marginal reserve
requirement) with respect to Eurocurrency funding
(currently referred to as "Eurocurrency liabilities");
and
"LIBOR" means the rate of interest per annum
(rounded upward to the next 1/16 of 1%) notified to the
Lender by Bank as the rate of interest at which United
States Dollar deposits in the approximate amount of the
Loan to be made or continued as, or converted into, a
LIBOR Rate Loan and having a maturity comparable to
such Interest Period would be offered by Bank's
applicable lending office to major banks in the London
interbank market at their request at approximately
11:00 a.m. (London time) two Business Days prior to the
commencement of such Interest Period.
"LIBOR Rate Loan" means a Revolving Loan during any
period in which it bears interest based on the LIBOR Rate.
"License Agreements" means the license agreements
listed on Schedule 7.13.
"Lien" means:
(a) any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether
such interest is based on the common law, statute, or contract,
and including without limitation, a security interest, charge,
claim, or lien arising from a mortgage, deed of trust,
encumbrance, pledge, hypothecation, assignment, deposit
arrangement, agreement, security agreement, conditional sale or
trust receipt or a lease, consignment or bailment for security
purposes; and (b) to the extent not included under clause (a),
any reservation, exception, encroachment, easement, right-of-way,
covenant, condition, restriction, lease or other title exception
or encumbrance affecting Property.
"Loans" means, collectively, all loans and advances
provided for in Section 2 (including the aggregate face amounts
of all letters of credit caused hereunder to be issued by the
Lender and any outstanding Seasonal Overadvances).
"Loan Documents" means this Agreement, the Patent,
Copyright and Trademark Assignments, the Pentech Pledge
Agreement, the Subordination Agreement, and all other agreements,
instruments, and documents heretofore, now or hereafter
evidencing, securing, guaranteeing or otherwise relating to the
Obligations, the Collateral, the Security Interest, or any other
aspect of the transactions contemplated by this Agreement.
"Maximum Rate" has the meaning specified in Section
3.3.
"Maximum Revolver Amount" means at any time, for any
Borrower, the lesser of:
(a) The amount of the Total Facility,
or
(b) The sum of
(i) up to eighty percent (80%) of the Net
Amount of Eligible Accounts of such
Borrower;
(ii) the lesser of
a) $12,000,000; or
b) the sum of: (i) up to 65% of such
Borrower's Eligible Inventory not
covered by any outstanding
Merchandise Letter of Credit; and
(ii) up to 60% of such Borrower's
Eligible Inventory covered by any
outstanding Merchandise Letter of
Credit; and
(iii) Allowable Seasonal Overadvances
available at such time;
provided, however, that the aggregate amount of all Loans
outstanding at any one such time to such Borrower shall not
exceed an amount equal to ninety percent (90%) of the Net Amount
of such Borrower's Eligible Accounts plus seventy-five percent
(75%) of the value of such Borrower's Eligible Inventory; and
provided further, however, that at all times the Maximum Revolver
Amount shall be reduced (without duplication) by the sum of:
(A) reserves for accrued interest on the
Revolving Loans;
(B) the Environmental Compliance Reserve;
(C) the ACH Settlement Risk Reserve;
(D) the Royalty Reserve; and
(E) all other reserves which the Lender in its
reasonable discretion deems necessary or desirable to maintain
with respect to any Borrower's account, including, without
limitation, any amounts which the Lender may be obligated to pay
in the future for the account of any Borrower.
The Lender agrees to give the Borrowers at least three Business
Day's notice prior to reducing any of the advance rates set forth
above, but the failure to give such notice shall not affect the
Lender's right to make such reduction or the validity thereof.
"Merchandise Letter of Credit" means a documentary
Letter of Credit issued for the account of a Borrower to provide
the intended means of making payment when due by such Borrower
for the purchase of Inventory and available for drawing against
presentation of, inter alia, negotiable documents of title
covering such Inventory.
"Multiemployer Plan" means a multiemployer as defined
in Section 4001(a)(3) of ERISA to which the Borrower or any ERISA
Affiliate makes, is making, made, or was at any time during the
current year or the immediately preceding six (6) years obligated
to make contributions.
"Net Amount of Eligible Accounts" means the gross
amount of Eligible Accounts less sales, excise or similar taxes,
and less returns, discounts, claims, credits and allowances of
any nature at any time issued, owing, granted, outstanding,
available or claimed in respect of such Eligible Accounts.
"Notice of Borrowing" has the meaning specified in
Section 2.2(b).
"Notice of Conversion/Continuation" has the meaning
specified in Section 3.2(b).
"Obligations" means all present and future loans,
advances, liabilities, obligations, covenants, duties, and Debt
owing by any Borrower to the Lender, whether or not arising under
this Agreement, whether or not evidenced by any note, or other
instrument or document, whether arising from an extension of
credit, opening of a letter of credit, acceptance, loan,
guaranty, indemnification or otherwise, whether direct or
indirect (including, without limitation, those acquired by
assignment from others, and any participation by the Lender in
any Borrower's debts owing to others), absolute or contingent,
due or to become due, primary or secondary, as principal or
guarantor, and including, without limitation, all interest,
charges, expenses, fees, attorneys' fees, filing fees and any
other sums chargeable to any Borrower hereunder, under another
Loan Document, or under any other agreement or instrument with
the Lender. "Obligations" includes, without limitation, (a) all
debts, liabilities, and obligations now or hereafter owing from
Borrower to Lender under or in connection with the Letters of
Credit and (b) all debts, liabilities and obligations now or
hereafter owing from the Borrower to the Lender arising from or
related to ACH Transactions.
"Other Taxes" means any present or future stamp or
documentary taxes or any other excise or property taxes, charges
or similar levies which arise from any payment made hereunder or
from the execution, delivery or registration of, or otherwise
with respect to, this Agreement or any other Loan Documents.
"Overadvance Repayment Date" means,
(a) with respect to any individual Seasonal
Overadvance of less than $100,000 (a "Short Term Overadvance")
made in any Fiscal Year, the earlier to occur of the following:
(i) a number of days after the date such Short Term
Overadvance was made equal to (X) 120 minus (Y) the
aggregate number of days during such Fiscal Year on which
any Seasonal Overadvances were outstanding; and
(ii) September 30, 1998;
and
(b) with respect to any other Seasonal Overadvance
made in any Fiscal Year, the earlier to occur of the following:
(i) 120 days after the date such Seasonal Overadvance
was made;
(ii) a number of days after the date such Seasonal
Overadvance was made equal to (X) 120 minus (Y) the
aggregate number of days during such Fiscal Year on which
any Seasonal Overadvances were outstanding; and
(iii) September 30, 1998.
"Participating Lender" means any Person who shall have
been granted the right by the Lender to participate in the Loans
and who shall have entered into a participation agreement in form
and substance satisfactory to the Lender.
"Patent, Copyright and Trademark Assignment" means,
collectively, the Patent Security Agreement, the Copyright
Security Agreement and the Trademark Security Agreement, now or
hereafter executed and delivered by any Borrower to the Lender to
evidence and perfect the Lender's Security Interest in such
Borrower's present and future patents, copyrights, trademarks,
and related licenses and rights.
"Payment Account" means each blocked bank account or
bank account associated with a lock box, established pursuant to
Section 7.10, to which the funds of the Borrowers (including,
without limitation, Proceeds of Accounts and other Collateral)
are deposited or credited, and which is maintained in the name of
the Lender or any Borrower, as the Lender may determine, on terms
acceptable to the Lender.
"PBGC" means the Pension Benefit Guaranty Corporation
or any Person succeeding to the functions thereof.
"Pension Plan" means a pension plan (as defined in
Section 3(2) of ERISA) subject to Title IV of ERISA which any
Borrower or an ERISA Affiliate sponsors, maintains, or to which
it makes, is making, or is obligated to make contributions or, in
the case of a Multiemployer Plan, has made contributions at any
time during the current year or the immediately preceding six (6)
plan years.
"Pentech" has the meaning given to such term in the
Preamble.
"Performance Pricing Period" means a period of three
months beginning with the first day of the first full calendar
month after the date (the "Beginning Date") that all of the
following conditions have been satisfied, provided that no
Default or Event of Default exists as of such Beginning Date:
(a) The Lender has received the financial statements
and certificates required by Sections 8.2(b) and (e) for the
fiscal quarter preceding such Beginning Date;
(b) The Fixed Charge Coverage Ratio for the four
fiscal quarters preceding such Beginning Date, as determined
at the end of such previous fiscal quarter, was greater than
1.25 to 1.0; and
(c) For each of the thirty (30) days immediately prior
to each Beginning Date, the Aggregate Availability has
exceeded $1,000,000 (determined for this purpose (i) without
giving effect to Allowable Seasonal Overadvances, (ii) after
taking into account the Revolving Loans and the Letters of
Credit issued or to be issued at each such time and (iii)
after reducing the Aggregate Availability by an amount equal
to the amount, if any, required at each such time to pay all
Indebtedness and trade and other obligations of the
Borrowers which is past due pursuant to the terms thereof;
provided, however, that trade obligations shall be
considered past due under this definition only when they are
30 days past due);
provided, however, that a Performance Pricing Period will end
immediately upon the occurrence of a Default or Event of Default.
A new Performance Pricing Period will commence on the last day
(an "Ending Date") of an expiring Performance Pricing Period, and
such Ending Date of the expiring Performance Pricing Period will
constitute the Beginning Date of such new Performance Pricing
Period, if all of the conditions for the commencement of a new
Performance Pricing Period set forth in clauses (a) through (c)
above have been satisfied as of such Ending Date and no Default
or Event of Default exists as of such Ending Date.
"Permitted Liens" means: (a) Liens for taxes not yet
delinquent or Liens for taxes in an amount not to exceed $100,000
being contested in good faith by appropriate proceedings
diligently pursued, provided that a reserve or other appropriate
provision, if any, as shall be required by GAAP shall have been
made therefor on the applicable Financial Statements and that a
stay of enforcement of any such Lien is in effect; (b) Liens in
favor of the Lender; (c) Liens arising by operation of law in
favor of warehouseman, landlords, carriers, mechanics,
materialmen, laborers, employees or suppliers, incurred in the
ordinary course of business of any Borrower and not in connection
with the borrowing of money, for sums not yet delinquent or which
are being contested in good faith and by proper proceedings
diligently pursued, provided that a reserve or other appropriate
provision, if any, required by GAAP shall have been made therefor
on the applicable Financial Statements and a stay of enforcement
of any such Lien is in effect; (d) Liens in connection with
worker's compensation or other unemployment insurance incurred in
the ordinary course of any Borrower's business; (e) Liens created
by deposits of cash to secure performance of bids, tenders,
leases (to the extent permitted under this Agreement), or trade
contracts, incurred in the ordinary course of business of any
Borrower and not in connection with the borrowing of money; (f)
Liens arising by reason of cash deposit for surety or appeal
bonds in the ordinary course of business of any Borrower; (g)
Liens of or resulting from any judgment or award, the time for
the appeal or petition for rehearing of which has not yet
expired, or in respect of which any Borrower is in good faith
prosecuting an appeal or proceeding for a review, and in respect
of which a stay of execution pending such appeal or proceeding
for review has been secured; (h) so long as the Subordination
Agreement is in full force and effect, Liens on the Collateral in
favor of the Subordinated Creditors, and solely as security for,
the Subordinated Obligations; (i) with respect to any Premises:
easements, rights of way, zoning and similar covenants and
restrictions and similar encumbrances which customarily exist on
properties of corporations engaged in similar activities and
similarly situated and which in any event do not materially
interfere with or impair the use or operation of the Collateral
by any Borrower or the value of the Lender's Security Interest
therein, or materially interfere with the ordinary conduct of the
business of such Borrower; and, (j) purchase money security
interests and liens of lessors under capital leases to the extent
that the acquisition or lease of the underlying asset was
permitted under Section 10.20, the security interest or lien only
encumbers the asset purchased or leased, and so long as the
security interest or lien only secures the purchase price of the
asset and (h) cash collateral deposited with the Prior Lenders in
an amount not to exceed $1,811,085.73 as security for certain
obligations set forth in the payoff letter addressed to Pentech
and the Lender, dated January 10, 1997.
"Permitted Rentals" has the meaning specified in
Section 10.20.
"Person" means any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization,
limited liability company association, corporation, Public
Authority, or any other entity.
"Plan" means an employee benefit plan (as defined in
Section 3(3) of ERISA) which any Borrower or an ERISA Affiliate
sponsors or maintains or to which any Borrower or an ERISA
Affiliate of such Borrower makes, is making, or is obligated to
make contributions and includes any Pension Plan.
"Pledge Agreement" means the Pledge Agreement dated as
of the Closing Date, in form and substance satisfactory to the
Lender, executed and delivered by Pentech, pursuant to which (i)
all of the issued and outstanding capital stock of Cosmetics and
Sawdust shall be pledged to the Lender as additional security for
the Obligations.
"Premises" means the land identified by addresses on
Schedule 9.13 together with all buildings, improvements, and
fixtures thereon and all tenements, hereditaments, and
appurtenances belonging or in any way appertaining thereto, and
which constitutes all of the real property in which any Borrower
has any interests on the Closing Date.
"Prior Lenders" means European American Bank and The
Chase Manhattan Bank.
"Private Offering" means a private offering, in
December 1996 and January 1997, of at least 19 Units, each Unit
consisting of 100,000 shares of Common Stock of Pentech, for not
less than $50,000 per unit.
"Proceeds" means all products and proceeds of any
Collateral, and all proceeds of such proceeds and products,
including, without limitation, all cash and credit balances, all
payments under any indemnity, warranty, or guaranty payable with
respect to any Collateral, all awards for taking by eminent
domain, all proceeds of fire or other insurance, and all money
and other Property obtained as a result of any claims against
third parties or any legal action or proceeding with respect to
Collateral.
"Property" means any interest in any kind of property
or asset, whether real, personal or mixed, or tangible or
intangible.
"Proprietary Rights" means, with respect to any
Borrower, all of such Borrower's now owned and hereafter arising
or acquired: licenses, franchises, permits, patents, patent
rights, copyrights, mask works, works which are the subject
matter of copyrights, trademarks, trade names, trade styles,
patent and trademark applications and licenses and rights
thereunder, including without limitation those patents,
trademarks and copyrights set forth on Schedule 9.14, and all
other rights under any of the foregoing, all extensions,
renewals, reissues, divisions, continuations, and continuations-
in-part of any of the foregoing, and all rights to sue for past,
present, and future infringement of any of the foregoing;
inventions, trade secrets, formulae, processes, compounds,
drawings, designs, blueprints, surveys, reports, manuals, and
operating standards; goodwill; customer and other lists in
whatever form maintained; and trade secret rights, copyright
rights, rights in works of authorship, and contract rights
relating to computer software programs, in whatever form created
or maintained.
"Public Authority" means the government of any country
or sovereign state, or of any state, province, municipality, or
other political subdivision thereof, or any department, agency,
public corporation or other instrumentality of any of the
foregoing.
"Receivables" means, with respect to any Borrower, all
of such Borrower's now owned and hereafter arising or acquired:
Accounts (whether or not earned by performance), including
Accounts owed to such Borrower by any of its Subsidiaries or
Affiliates, together with all interest, late charges, penalties,
collection fees, and other sums which shall be due and payable in
connection with any Account; proceeds of any letters of credit
naming such Borrower as beneficiary; contract rights, chattel
paper, instruments, documents, investment property, general
intangibles (including without limitation choses in action,
causes of action, tax refunds, tax refund claims, and Reversions
and other amounts payable to such Borrower from or with respect
to any Plan) and all forms of obligations owing to such Borrower
(including, without limitation, in respect of loans, advances,
and extensions of credit by such Borrower to its Subsidiaries and
Affiliates); guarantees and other security for any of the
foregoing; goods represented by or the sale, lease or delivery of
which gave rise to any of the foregoing; merchandise returned to
or repossessed by such Borrower and rights of stoppage in
transit, replevin, and reclamation; and other rights or remedies
of an unpaid vendor, lienor, or secured party.
"Reference Rate" means the rate of interest publicly
announced from time to time by the Bank as its reference rate.
It is a rate set by the Bank based upon various factors including
the Bank's costs and desired return, general economic conditions,
and other factors, and is used as a reference point for pricing
some loans. However, the Bank may price loans at, above, or
below such announced rate. Any changes in the Reference Rate
shall take effect on the day specified in the public announcement
of such change.
"Reference Rate Loan" means a Revolving Loan during any
period in which it bears interest based on the Reference Rate.
"Reference Rate Margin" means 0.50% per annum;
provided, however, that the Reference Rate Margin shall be 0.25%
per annum during a Performance Pricing Period and shall be
increased to 0.50% per annum on the date that such Performance
Pricing Period ends for any reason whatsoever.
"Release" means a release, spill, emission, leaking,
pumping, injection, deposit, disposal, discharge, dispersal,
leaching or migration of a Contaminant into the indoor or outdoor
environment or into or out of any real estate or other property,
including the movement of Contaminants through or in the air,
soil, surface water, groundwater or real estate or other
property.
"Reportable Event" means, any of the events set forth
in Section 4043(b) of ERISA or the regulations thereunder, other
than any such event for which the 30-day notice requirement under
ERISA has been waived in regulations issued by the PBGC.
"Requirement of Law" means any law (statutory or
common), treaty, rule or regulation or determination of an
arbitrator or of
a Public Authority.
"Restricted Investment" means any acquisition of
Property by Pentech or any of its Subsidiaries in exchange for
cash or other Property, whether in the form of an acquisition of
stock, debt security, or other indebtedness or obligation, or the
purchase or acquisition of any other Property, or a loan,
advance, capital contribution, or subscription, except
acquisitions of the following:
(a) fixed assets to be used in the business of such Borrower, so
long as the acquisition costs thereof constitute Capital
Expenditures permitted hereunder; (b) current assets arising from
the sale or lease of goods or rendition of services in the
ordinary course of business of Pentech or one of its
Subsidiaries; (c) direct obligations of the United States of
America, or any agency thereof, or obligations guaranteed by the
United States of America, provided that such obligations mature
within one year from the date of acquisition thereof; (d)
certificates of deposit maturing within one year from the date of
acquisition, bankers acceptances, Eurodollar bank deposits, or
overnight bank deposits, in each case issued by, created by, or
with a bank or trust company organized under the laws of the
United States or any state thereof having capital and surplus
aggregating at least $100,000,000; and (e) commercial paper given
the highest rating by a national credit rating agency and
maturing not more than 270 days from the date of creation
thereof.
"Reversions" means any funds which may become due to
the Borrower in connection with the termination of any Plan or
other employee benefit plan.
"Revolving Loans" has the meaning specified in Section
2.2.
"Royalty Reserve" means any and all reserves which the
Lender from time to time establishes, in its sole discretion,
with respect to amounts payable by the Borrowers under or in
connection with the License Agreements.
"Sawdust" has the meaning given to such term in the
Preamble.
"Seasonal Overadvance" means special advances to be
made available to the Borrowers in each of the Fiscal Years
ending September 30, 1997, and September 30, 1998, up to the
respective Seasonal Overadvance Limits.
"Seasonal Overadvance Limit" means the respective
amounts indicated below for the corresponding periods:
Period Amount
Fiscal Year ending September 30, 1997 $3,000,000
Fiscal Year ending September 30, 1998 $1,500,000
At all times after September 30, 1998 $0
"Security Interest" means collectively the Liens
granted to the Lender in the Collateral pursuant to this
Agreement, the other Loan Documents, or any other agreement or
instrument.
"Settlement Agreement" means the Settlement Agreement,
dated December 9, 1996, between Pentech and the Subordinated
Creditors.
"Settlement Documents" means the Settlement Agreement;
the Promissory Note dated December 9, 1996, made by Pentech to
the order of Paradise Creations, Inc., in the original principal
amount of $3 million; the Subordination Agreement; and all other
agreements, documents and other instruments now or hereafter
executed and delivered in connection with or pursuant to any of
the foregoing.
"Solvent" shall mean when used with respect to any
Person that:
(a) the fair value of all its Property is in excess of the total
amount of its debts (including contingent liabilities); (b) it is
able to pay its debts as they mature; and (c) it does not have
unreasonably small capital for the business in which it is
engaged or for any business or transaction in which it is about
to engage.
"Standby Letter of Credit" means any Letter of Credit
other than a Merchandise Letter of Credit.
"Stated Termination Date" means January 13, 2000.
"Subordinated Creditors" means Leon Hayduchok, All-Mark
Corporation, Inc., and Paradise Creations, Inc., together with
their successors and assigns.
"Subordinated Obligations" has the meaning ascribed to
such term in the Subordination Agreement.
"Subordination Agreement" means the Subordination
Agreement, dated as of December 10, 1996, made by the
Subordinated Creditors in favor of the Prior Lenders and certain
other Persons.
"Subsidiary" of a Person means any corporation,
association, partnership, joint venture or other business entity
of which more than 50% of the voting stock or other equity
interests (in the case of Persons other than corporations), is
owned or controlled directly or indirectly by the Person, or one
or more of the Subsidiaries of the Person, or a combination
thereof. Unless the context otherwise clearly requires,
references herein to a "Subsidiary" refer to a Subsidiary of a
Borrower.
"Tangible Net Worth" means, at any date, the sum of (a)
common and preferred equity plus (b) the positive amount, if any,
of retained earnings minus (c) the negative amount, if any, of
retained earnings, and minus (d) unamortized goodwill, all as
would be shown on a consolidated balance sheet of Pentech and its
Subsidiaries at such date prepared in accordance with GAAP.
"Taxes" means any and all present or future taxes,
assessments, levies, imposts, impositions, deductions, charges or
withholdings, and all liabilities with respect thereto,
excluding, in the case of the Lender, such taxes (including
income taxes or franchise taxes) as are imposed on or measured by
the Lender's net income by the jurisdiction (or any political
subdivision thereof) under the laws of which the Lender is
organized or maintains a lending office.
"Total Facility" has the meaning specified in Section
2.1.
"UCC" means the Uniform Commercial Code (or any
successor statute) of the State of New York or of any other state
the laws of which are required by Section 9-103 thereof to be
applied in connection with the issue of perfection of security
interests.
"Unused Line Fee" has the meaning specified in Section
3.1(c).
1.2 Accounting Terms. Any accounting term used in
this Agreement shall have, unless otherwise specifically provided
herein, the meaning customarily given in accordance with GAAP,
and all financial computations hereunder shall be computed,
unless otherwise specifically provided herein, in accordance with
GAAP as consistently applied and using the same method for
inventory valuation as used in the preparation of the Financial
Statements; provided, however, that no change in GAAP that would
affect the method of calculation of any of the financial
covenants, restrictions or standards or definitions of terms used
therein shall be given effect in such calculations until such
financial covenants, restrictions or standards or definitions are
amended in a manner reasonably acceptable to the Borrowers and
the Lender, so as to reflect such change in GAAP.
1.3 Other Terms. (a) The meanings of defined terms
are equally applicable to the singular and plural forms of the
defined terms.
(b) The words "hereof," "herein," "hereunder" and
similar words refer to this Agreement as a whole and not to any
particular provision of this Agreement; and Subsection, Section,
Schedule and Exhibit references are to this Agreement unless
otherwise specified.
(c) (i) The term "documents" includes any and all
instruments, documents, agreements, certificates, indentures,
notices and other writings, however evidenced.
(ii) The term "including" is not limiting and
means "including without limitation."
(iii) In the computation of periods of time from
a specified date to a later specified date, the word "from" means
"from and including," the words "to" and "until" each mean "to
but excluding" and the word "through" means "to and including."
(d) Unless otherwise expressly provided herein, (i)
references to agreements (including this Agreement) and other
contractual instruments shall be deemed to include all subsequent
amendments and other modifications thereto, but only to the
extent such amendments and other modifications are not prohibited
by the terms of any Loan Document, and (ii) references to any
statute or regulation are to be construed as including all
statutory and regulatory provisions consolidating, amending,
replacing, supplementing or interpreting the statute or
regulation.
(e) The captions and headings of this Agreement are
for convenience of reference only and shall not affect the
interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use
several different limitations, tests or measurements to regulate
the same or similar matters. All such limitations, tests and
measurements are cumulative and shall each be performed in
accordance with their terms.
(g) This Agreement and the other Loan Documents are
the result of negotiations among and have been reviewed by
counsel to the Lender, the Borrower and the other parties, and
are the products of all parties. Accordingly, they shall not be
construed against the Lender merely because of the Lender's
involvement in their preparation.
2. LOANS AND LETTERS OF CREDIT.
2.1 Total Facility. Subject to all of the terms and
conditions of this Agreement, the Lender shall make available a
total credit facility of up to $30,000,000 (the "Total Facility")
for Borrower's use from time to time during the term of this
Agreement. The Total Facility shall be comprised of a revolving
line of credit up to the limits, for each Borrower, of such
Borrower's Maximum Revolver Amount, and for all Borrowers, of the
Aggregate Maximum Revolver Amount, consisting of revolving loans,
seasonal overadvances and letters of credit as described in
Sections 2.2 and 2.3.
2.2 Revolving Loans.
(a) The Lender shall, upon Pentech's request on
behalf of a Borrower, from time to time until, but not including,
the Stated Termination Date, make revolving loans, including
Allowable Seasonal Overadvances (the "Revolving Loans") to the
Borrowers up to the limits, for each Borrower, of such Borrower's
Availability, and for all Borrowers, of up to the Aggregate
Availability. Each Borrowing shall consist of the same type of
Revolving Loans which shall, at the option of Pentech on behalf
of the Borrower requesting such Borrowing, be either Reference
Rate Loans or LIBOR Rate Loans, as specified by Pentech in the
Notice of Borrowing requesting the same. The Lender, in its
discretion, may elect to exceed the limits of the Availability
for any Borrower or the Aggregate Availability on one or more
occasions, but if it does so, the Lender shall not be deemed
thereby to have changed the limits of the Availability for such
Borrower or the Aggregate Availability or to be obligated to
exceed the limits of the Availability for such Borrower or the
Aggregate Availability on any other occasion. If at any time the
unpaid balance of the Revolving Loans to any Borrower exceeds the
Maximum Revolver Amount for such Borrower (determined for this
purpose as if the amount of the Revolving Loans were zero) or the
unpaid balance of the Revolving Loans to all Borrowers exceeds
the Aggregate Maximum Revolver Amount (determined for this
purpose as if the amount of the Revolving Loans were zero), then
the Lender may refuse to make or may otherwise restrict Revolving
Loans on such terms as the Lender determines until such excess
has been eliminated. Pentech may request Revolving Loans on
behalf of any Borrower either telephonically or in writing. Each
oral request for a Revolving Loan shall be conclusively presumed
to be made by a person authorized by Pentech and the Borrower on
behalf of which such request is made to do so, and the crediting
of a Revolving Loan to such Borrower's deposit account, or
transmittal to such Person as such Borrower shall direct, shall
conclusively establish the obligation of the Borrowers to repay
such Revolving Loan as provided herein. The Lender will charge
all Revolving Loans and other Obligations to a loan account of
the Borrowers maintained with the Lender. All fees, commissions,
costs, expenses, and other charges under or pursuant to the Loan
Documents, and all payments made and out-of-pocket expenses
incurred by the Lender pursuant to the Loan Documents, will be
charged as Revolving Loans to the Borrowers' loan account as of
the date due from the Borrowers or the date paid or incurred by
the Lender, as the case may be.
(b) Procedure for Borrowing.
(i) Each Borrowing shall be made upon
Pentech's irrevocable written notice, on behalf of a Borrower,
delivered to the Lender in the form of Exhibit C (a "Notice of
Borrowing"), which must be received by the Lender (A) prior to
11:00 a.m. (New York time) three Business Days prior to the
requested Funding Date, in the case of LIBOR Rate Loans, and (B)
no later than 12:00 noon (New York time) on the requested Funding
Date, in the case of Reference Rate Revolving Loans, specifying:
(I) the amount of the Borrowing, which, in
the case of LIBOR Rate Loans, shall be in an aggregate principal
amount of $2,000,000 or an integral multiple of $1,000,000 in
excess thereof;
(II) the requested Funding Date, which shall
be a Business Day;
(III) whether the Revolving Loans requested
are to be Reference Rate Loans or LIBOR Rate Loans; provided,
however, that with respect to Seasonal Overadvances, such
Borrowings will consist of Reference Rate Loans only;
(IV) whether the requested Revolving Loan is
to be Seasonal Overadvance;
(V) the duration of the Interest Period if
the requested Revolving Loans are to be LIBOR Rate Loans. If the
Notice of Borrowing fails to specify the duration of the Interest
Period for any Borrowing comprised of LIBOR Rate Loans, such
Interest Period shall be three months; provided, however, that
with respect to the Borrowings to be made on the Closing Date,
such Borrowings will consist of Reference Rate Loans only;
(VI) the Borrower on whose behalf such Notice
of Borrowing is being delivered.
Each Borrower hereby authorizes Pentech to execute and deliver
Notices of Borrowing and Notices of Conversion/Continuation on
such Borrower's behalf and agrees to be bound by the same.
(ii) After giving effect to any Borrowing,
there may not be more than four different Interest Periods in
effect.
(iii) With respect to any request for
Reference Rate Revolving Loans, in lieu of delivering the above-
described Notice of Borrowing, a Borrower may give the Lender
telephonic notice of such request by the required time, with such
telephonic notice to be confirmed in writing within 24 hours
after the giving of such notice, but the Lender shall be entitled
to rely on the telephonic notice in making such Revolving Loans.
2.3 Letters of Credit.
(a) Subject to the terms and conditions of this
Agreement, the Lender shall, upon Pentech's request on behalf of
a Borrower, from time to time, cause Letters of Credit to be
issued for such Borrower's account. The Lender will not cause
any Letter of Credit to be opened if: (i) the maximum face
amount of the requested Letter of Credit, plus the aggregate
undrawn face amount of all outstanding Letters of Credit, would
exceed $10,000,000; (ii) the maximum face amount of the requested
Letter of Credit, and all commissions, fees, and charges due from
the Borrowers to Lender in connection with the opening thereof,
would cause such Borrower's Availability or the Aggregate
Availability of all Borrowers to be exceeded at such time; or
(iii) the expiration date of the Letter of Credit would occur (X)
with respect to any Merchandise Letter of Credit, more than 180
days after the date of issuance thereof, (Y) with respect to any
Standby Letter of Credit, more than twelve months after the date
of issuance thereof, and (Z) with respect to any Letter of
Credit, later than 10 Business Days prior to the Termination
Date. All payments made and expenses incurred by the Lender
pursuant to or in connection with the Letters of Credit will be
charged to the Borrowers' loan account as Revolving Loans.
(b) Other Conditions. In addition to being
subject to the satisfaction of the applicable conditions
precedent contained in Section 11, the obligation of the Lender
to cause any Letter of Credit to be issued is subject to the
following conditions precedent having been satisfied in a manner
satisfactory to the Lender:
(1) Pentech, on behalf of the Borrower
requesting a Letter of Credit, shall have delivered to the
proposed issuer of such Letter of Credit, at such times and in
such manner as such proposed issuer may prescribe, an application
in form and substance satisfactory to such proposed issuer and
the Lender for the issuance of the Letter of Credit and such
other documents as may be required pursuant to the terms thereof,
and the form and terms of the proposed Letter of Credit shall be
satisfactory to the Lender and such proposed issuer; and
(2) As of the date of issuance, no order of
any court, arbitrator or Public Authority shall purport by its
terms to enjoin or restrain money center banks generally from
issuing letters of credit of the type and in the amount of the
proposed Letter of Credit, and no law, rule or regulation
applicable to money center banks generally and no request or
directive (whether or not having the force of law) from any
Public Authority with jurisdiction over money center banks
generally shall prohibit, or request that the proposed issuer of
such Letter of Credit refrain from, the issuance of letters of
credit generally or the issuance of such Letters of Credit.
(c) Issuance of Letters of Credit.
(1) Request for Issuance. Pentech, on
behalf of the Borrower requesting the Letter of Credit, shall
give the Lender not less than two (2) Business Days' prior
written notice of such Borrower's request for the issuance of a
Letter of Credit. Such notice shall be irrevocable and shall
specify the Borrower for whose account such Letter of Credit is
to be issued, the original face amount of the Letter of Credit
requested, the effective date (which date shall be a Business
Day) of issuance of such requested Letter of Credit, whether such
Letter of Credit may be drawn in a single or in partial draws,
the date on which such requested Letter of Credit is to expire
(which date shall be a Business Day), the purpose for which such
Letter of Credit is to be issued, and the beneficiary of the
requested Letter of Credit. Pentech, on behalf of the Borrower
requesting the Letter of Credit, shall attach to such notice the
proposed form of the Letter of Credit that the Lender is
requested to cause to be issued. Each Borrower hereby authorizes
Pentech to execute and deliver on its behalf notices requesting
the issuance of Letters of Credit for such Borrower's account and
agrees to be bound by the same.
(2) No Extensions or Amendment. The Lender
shall not be obligated to cause any Letter of Credit to be
extended or amended unless the requirements of this Section 2.3
are met as though a new Letter of Credit were being requested and
issued.
(d) Payments Pursuant to Letters of Credit.
(1) Payment of Letter of Credit Obligations.
Each Borrower agrees to reimburse the issuer for any draw under
any Letter of Credit immediately upon demand, and to pay the
issuer of the Letter of Credit the amount of all other
obligations and other amounts payable to such issuer under or in
connection with any Letter of Credit immediately when due,
irrespective of any claim, setoff, defense or other right which
such Borrower may have at any time against such issuer or any
other Person.
(2) Revolving Loans to Satisfy Reimbursement
Obligations. In the event that the issuer of any Letter of
Credit honors a draw under such Letter of Credit and the relevant
Borrower shall not have repaid such amount to the issuer of such
Letter of Credit pursuant to Section 2.3(d)(1), the Lender shall
pay the issuer and such amount when paid shall constitute a
Revolving Loan which shall be deemed to have been requested by
such Borrower.
(e) Compensation for Letters of Credit.
(1) Letter of Credit Fee. Each Borrower
agrees to pay to the Lender, with respect to each Letter of
Credit, the Letter of Credit Fee specified in, and in accordance
with the terms of, Section 3.5.
(2) Issuer Fees and Charges. Each Borrower
shall pay to the issuer of any Letter of Credit, or to the
Lender, for the account of the issuer of any such Letter of
Credit, solely for such issuer's account, such fees and other
charges as are charged by such issuer for letters of credit
issued by it, including, without limitation, its standard fees
for issuing, administering, amending, renewing, paying and
canceling letters of credit and all other fees associated with
issuing or servicing letters of credit, as and when assessed.
(f) Indemnification; Exoneration; Power of
Attorney
(1) Indemnification. In addition to amounts
payable as elsewhere provided in this Section 2.3, each Borrower
hereby agrees to protect, indemnify, pay and save the Lender
harmless from and against any and all claims, demands,
liabilities, damages, losses, costs, charges and expenses
(including reasonable attorneys' fees) which the Lender may incur
or be subject to as a consequence, direct or indirect, of the
issuance of any Letter of Credit or the provision of any credit
support or enhancement in connection therewith. The agreement in
this Section 2.3(f)(1) shall survive payments of all Obligations
and the termination of this Agreement.
(2) Assumption of Risk by the Borrowers. As
between Borrower and the Lender, the Borrowers assume all risks
of the acts and omissions of, or misuse of any of the Letters of
Credit by, the respective beneficiaries of such Letters of
Credit. In furtherance and not in limitation of the foregoing,
the Lender shall not be responsible for: (A) the form, validity,
sufficiency, accuracy, genuineness or legal effect of any
document submitted by any Person in connection with the
application for and issuance of and presentation of drafts with
respect to any of the Letters of Credit, even if it should prove
to be in any or all respects invalid, insufficient, inaccurate,
fraudulent or forged; (B) the validity or sufficiency of any
instrument transferring or assigning or purporting to transfer or
assign any Letter of Credit or the rights or benefits thereunder
or proceeds thereof, in whole or in part, which may prove to be
invalid or ineffective for any reason; (C) the failure of the
beneficiary of any Letter of Credit to comply duly with
conditions required in order to draw upon such Letter of Credit;
(D) errors, omissions, interruptions, or delays in transmission
or delivery of any messages, by mail, cable, telegraph, telex or
otherwise, whether or not they be in cipher; (E) errors in
interpretation of technical terms; (F) any loss or delay in the
transmission or otherwise of any document required in order make
a drawing under any Letter of Credit or of the proceeds thereof;
(G) the misapplication by the beneficiary of any Letter of Credit
of the proceeds of any drawing under such Letter of Credit; or
(H) any consequences arising from causes beyond the control of
the Lender, including, without limitation, any act or omission,
whether rightful or wrongful, of any present or future de jure or
de facto Public Authority. None of the foregoing shall affect,
impair or prevent the vesting of any rights or powers of the
Lender under this Section 2.3.
(3) Exoneration. In furtherance and
extension, and not in limitation, of the specific provisions set
forth above, any action taken or omitted by the Lender under or
in connection with any of the Letters of Credit or any related
certificates, if taken or omitted in the absence of gross
negligence or willful misconduct, shall not put the Lender under
any resulting liability to any Borrower or relieve any Borrower
of any of its obligations hereunder to any such Person.
(4) Power of Attorney. In connection with
all Inventory financed by Letters of Credit, each Borrower hereby
appoints the Lender, or the Lender's designee, as its attorney,
with full power and authority: (a) to sign and/or endorse such
Borrower's name upon any warehouse or other receipts; (b) to sign
such Borrower's name on bills of lading and other negotiable and
non-negotiable documents; (c) to clear Inventory through customs
in the Lender's or such Borrower's name, and to sign and deliver
to customs officials powers of attorney in such Borrower's name
for such purpose; (d) to complete in such Borrower's or the
Lender's name, any order, sale, or transaction, obtain the
necessary documents in connection therewith, and collect the
proceeds thereof; and (e) to do such other acts and things as are
necessary in order to enable the Lender to obtain possession of
the Inventory and to obtain payment of the Obligations. Neither
the Lender nor its designee, as each Borrower's attorney, will be
liable for any acts or omissions, nor for any error of judgment
or mistakes of fact or law. This power, being coupled with an
interest, is irrevocable until all Obligations have been paid and
satisfied.
(5) Account Party. Each Borrower hereby
authorizes and directs any issuer of a Letter of Credit to name
such Borrower as the "Account Party" therein and to deliver to
the Lender all instruments, documents and other writings and
property received by the issuer pursuant to the Letter of Credit,
and to accept and rely upon the Lender's instructions and
agreements with respect to all matters arising in connection with
the Letter of Credit or the application therefor.
(6) Control of Inventory. In connection
with all Inventory financed by Letters of Credit, each Borrower
will, at the Lender's request, instruct all suppliers, carriers,
forwarders, warehouses or others receiving or holding cash,
checks, Inventory, documents or instruments in which the Lender
holds a security interest to deliver them to the Lender and/or
subject to the Lender's order, and if they shall come into any
Borrower's possession, to deliver them, upon request, to the
Lender in their original form. Each Borrower shall also, at the
Lender's request, designate the Lender as the consignee on all
bills of lading and other negotiable and non-negotiable
documents.
(g) Supporting Letter of Credit; Cash Collateral.
If, notwithstanding the provisions of this Section 2.3 and
Section 14 any Letter of Credit is outstanding upon the
termination of this Agreement, then upon such termination the
Borrowers shall deposit with the Lender, at its discretion, with
respect to each Letter of Credit then outstanding, either (A) a
standby letter of credit (a "Supporting Letter of Credit") in
form and substance satisfactory to the Lender, issued by an
issuer satisfactory to the Lender in an amount equal to the
greatest amount for which such Letter of Credit may be drawn,
under which Supporting Letter of Credit the Lender is entitled to
draw amounts necessary to reimburse the Lender for payments made
by the Lender under such Letter of Credit or under any credit
support or enhancement provided through the Lender with respect
thereto, or (B) cash in amounts necessary to reimburse the Lender
for payments made by the Lender under such Letter of Credit or
under any credit support or enhancement provided through the
Lender. Such Supporting Letter of Credit or deposit of cash
shall be held by the Lender, as security for, and to provide for
the payment of, the aggregate undrawn amount of such Letters of
Credit remaining outstanding.
(h) Airway Bills, Etc. Each Borrower hereby confirms
and agrees that (i) from time to time such Borrower may request
the Lender to issue or cause to be issued Letters of Credit
providing for direct consignment of goods to the Lender or the
issuer of a Letter of Credit and providing that the original
bills of lading, airway bills and other documents be forwarded
directly to the Lender or any such issuer; (ii) such Borrower may
request that the Lender or any such issuer from time to time
endorse the bills of lading or other shipping documents and
deliver them to such Borrower so as to permit such Borrower to
obtain the goods covered by the Letters of Credit without first
waiting for the bank that issued the Letter of Credit to examine
the documents to be submitted by the beneficiary of the Letter of
Credit to determine whether the documents conform to the terms of
the Letter of Credit, and (iii) such Borrower may request that
the Lender or the issuer of a Letter of Credit from time to time
issue letters of indemnity, guarantees, air releases, and/or
other documents (each a "Shipping Release Indemnity") to
steamship companies, air freight companies and other shippers in
order to permit such Borrower to take possession of the goods
covered by Letters of Credit without production and surrender to
the shipper of the original bill of lading, airway bill or other
shipping documents. In connection with the foregoing, each
Borrower hereby expressly and irrevocably:
(1) represents and warrants that it is otherwise
entitled to the delivery of the goods and no other person or
entity has any claim to its delivery;
(2) agrees to indemnify the Lender and any issuer
of a Shipping Release Indemnity and to hold the Lender and any
such issuer harmless from and against any and all claims, actions
and suits, whether groundless or otherwise, and from and against
all liabilities, losses, damages, judgments, attorneys' fees
(including any in-house counsel costs and expenses) and other
expenses of every nature and character, by reason of the Lender
or any such issuer of a Shipping Release Indemnity (i) issuing
its Shipping Release Indemnities to steamship companies, freight
companies or other shippers and (ii) endorsing and/or delivering
to such Borrower the bills of lading and other documents so as to
permit such Borrower to obtain possession of the goods covered by
the Letters of Credit; agrees to reimburse the Lender and each
issuer of a Shipping Release Indemnity on demand for any and all
payments of or with respect to the foregoing which the Lender or
any issuer of a Shipping Release Indemnity is required to make by
any of such actions or in accordance with the terms or provisions
of said Shipping Release Indemnities, regardless of any offsets,
counterclaims or other defenses thereto which the Lender or any
issuer of a Shipping Release Indemnity might have or be entitled
to assert, all of which offsets, counterclaims or other defenses
the Lender and each issuer of a Shipping Release Indemnity is
hereby expressly and irrevocably authorized to waive at its
discretion; and further agrees that upon the Lender's request,
such Borrower shall appear and defend, represented by counsel
satisfactory to the Lender and at such Borrower's cost and
expense, any action or proceeding which may be commenced against
the Lender or the issuer in connection with any of the
aforementioned actions; provided, that the Borrowers shall have
no obligation to the Lender or any issuer of a Shipping Release
Indemnity under this clause (2) with respect to any such
liabilities, losses, damages, judgments, attorneys' fees and
other expenses to the extent resulting from the gross negligence
or wilful misconduct of the Lender or such issuer;
(3) authorizes and requests the Lender and the
issuer of any Letters of Credit to honor and pay any drawing
under the Letters of Credit covering the shipping,
notwithstanding the absence of any or all documents required
thereunder or any discrepancy, defect or omission which may exist
at the time of presentment in any of the required documents, all
of which deficiencies, discrepancies, defects and omissions such
Borrower hereby expressly and irrevocably waives. Such Borrower
further authorizes the Lender to charge its Loan Account for all
amounts drawn plus any applicable charges;
(4) agrees to pay on demand or to reimburse to
the Lender and each issuer of a Shipping Release Indemnity upon
demand all freight and other charges which may be due or may
appear to be due and chargeable to the said goods;
(5) agrees to procure and to subsequently
surrender to the Lender all original bills of lading and other
negotiable documents relating to the shipment of goods properly
endorsed; and
(6) agrees to execute such other documents and
indemnities relating to the foregoing as the Lender may from time
to time reasonably request.
2.4 Automated Clearing House Transfers and Overdrafts.
A Borrower may request and the Lender may, in its sole and
absolute discretion, arrange for such Borrower to obtain ACH
Transactions from the Bank. Each Borrower agrees to indemnify
and hold the Lender harmless from all losses, liabilities, costs,
expenses and claims incurred by the Lender arising from or
related to such ACH Transactions. Each Borrower acknowledges and
agrees that the obtaining of ACH Transactions from the Bank (a)
is in the sole and absolute discretion of the Bank, (b) is
subject to all rules and regulations of the Bank, and (c) is due
to the Bank relying on the indemnity of the Lender to the Bank
with respect to all risks of loss associated with the ACH
Transactions.
3. INTEREST AND OTHER CHARGES.
3.1 Interest.
(a) All Obligations shall bear interest on the
unpaid principal amount thereof from the date made until paid in
full in cash at a rate determined by reference to the Reference
Rate or the LIBOR Rate and Section 3.1 (a)(i) or (ii), as
applicable, but not to exceed the Maximum Rate. Subject to the
provisions of Section 3.2, any of the Loans (other than
Seasonable Overadvances) may be converted into, or continued as,
Reference Rate Loans or LIBOR Rate Loans in the manner provided
in Section 3.2. If at any time Loans are outstanding with
respect to which notice has not been delivered to Lender in
accordance with the terms of this Agreement specifying the basis
for determining the interest rate applicable thereto, then those
Loans shall be Reference Rate Loans and shall bear interest at a
rate determined by reference to the Reference Rate until notice
to the contrary has been given to the Lender and such notice has
become effective. Except as otherwise provided herein, the
Obligations shall bear interest as follows:
(i) For all Obligations, other than LIBOR
Rate Loans and Seasonal Overadvances, then at a fluctuating per
annum rate equal to the Reference Rate Margin plus the Reference
Rate;
(ii) If the Loans are LIBOR Rate Loans, then
at a per annum rate equal to the LIBOR Margin plus the LIBOR Rate
determined for the applicable Interest Period; and
(iii) If the Loans are Seasonal Overadvances,
then at a fluctuating per annum rate equal to the Reference Rate
Margin plus the Reference Rate plus 0.75%.
Each change in the Reference Rate shall be reflected in the
interest rate described in (i) above as of the effective date of
such change. All interest charges shall be computed on the basis
of a year of three hundred sixty (360) days and actual days
elapsed. All interest shall be payable to Lender on the first
day of each month hereafter and, for LIBOR Rate Loans, at the end
of each Interest Period, if such Interest Period ends on a day
other than the last day of a calendar month.
(b) If any Event of Default occurs, then, from the
date such Event of Default occurs until it is cured, or if not
cured until all Obligations are paid and performed in full, the
Borrowers will pay (A) interest (including the margin applicable
thereto) on the unpaid principal balances of the Loans and (B)
the Letter of Credit Fee at a per annum rate two percent (2%)
greater than otherwise specified herein for interest and the
Letter of Credit Fee.
(c) Unused Line Fee. For every month during the
term of this Agreement, the Borrowers shall pay to the Lender a
fee (the "Unused Line Fee") in an amount equal to three-eighths
of one percent (0.375%) per annum, multiplied by the average
daily amount by which the Maximum Revolving Credit Line exceeds
the sum of (i) the average daily outstanding amount of all
Revolving Loans and (ii) the average daily undrawn face amount of
all outstanding Letters of Credit during such month, with the
unpaid balance calculated for this purpose by applying payments
immediately upon receipt. Such a fee, if any, shall be
calculated on the basis of a year of three hundred sixty (360)
days and actual days elapsed, and shall be payable to the Lender
on the first day of each month with respect to the prior month,
and on the Stated Termination Date.
3.2 Conversion and Continuation Elections.
(a) Each Borrower may, upon irrevocable written
notice to the Lender in accordance with Subsection 3.2(b):
(i) elect, as of any Business Day, in the
case of Reference Rate Loans (other than Seasonal
Overadvances) to convert any such Loans (or any part thereof
in an amount not less than $2,000,000, or that is in an
integral multiple of $1,000,000 in excess thereof) into
LIBOR Rate Loans; or
(ii) elect, as of the last day of the
applicable Interest Period, to continue any LIBOR Rate Loans
having Interest Periods expiring on such day (or any part
thereof in an amount not less than $2,000,000, or that is in
an integral multiple of $1,000,000 in excess thereof);
provided, that if at any time the aggregate amount of LIBOR Rate
Loans in respect of any Borrowing is reduced, by payment,
prepayment, or conversion of part thereof to be less than
$2,000,000, such LIBOR Rate Loans shall automatically convert
into Reference Rate Loans, and on and after such date the right
of the Borrower to continue such Loans as, and convert such Loans
into, LIBOR Rate Loans, as the case may be, shall terminate.
(b) Pentech, on behalf of the Borrower desiring
to convert or continue any Revolving Loans, shall deliver a
notice in the form of Exhibit D (a "Notice of Conversion/
Continuation") to be received by the Lender not later than 11:00
a.m. (New York time) at least three Business Days in advance of
the date of conversion or continuation, if the Loans are to be
converted into or continued as LIBOR Rate Loans, specifying:
(A) the proposed conversion/continuation
date;
(B) the aggregate amount of Loans to be
converted or continued;
(C) the type of Loans resulting from the
proposed conversion or continuation;
(D) the duration of the requested Interest
Period; and
(E) the Borrower on whose behalf such Notice
of Conversion/Continuation is being delivered.
(c) If upon the expiration of any Interest Period
applicable to LIBOR Rate Loans, a Borrower has failed to select
timely a new Interest Period to be applicable to LIBOR Rate Loans
or if any Default or Event of Default then exists, the Borrower
shall be deemed to have elected to convert such LIBOR Rate Loans
into Reference Rate Loans effective as of the expiration date of
such Interest Period.
(d) During the existence of a Default or Event of
Default, no Borrower may elect to have a Loan converted into or
continued as a LIBOR Rate Loan.
(e) After giving effect to any conversion or
continuation of Loans, there may not be more than four (4)
different Interest Periods in effect.
3.3 Maximum Interest Rate. In no event shall any
interest rate provided for hereunder exceed the maximum rate
permissible for corporate borrowers under applicable law for
loans of the type provided for hereunder (the "Maximum Rate").
If, in any month, any interest rate, absent such limitation,
would have exceeded the Maximum Rate, then the interest rate for
that month shall be the Maximum Rate, and, if in future months,
that interest rate would otherwise be less than the Maximum Rate,
then that interest rate shall remain at the Maximum Rate until
such time as the amount of interest paid hereunder equals the
amount of interest which would have been paid if the same had not
been limited by the Maximum Rate. In the event that, upon
payment in full of the Obligations under this Agreement, the
total amount of interest paid or accrued under the terms of this
Agreement is less than the total amount of interest which would,
but for this Section 3.3, have been paid or accrued if the
interest rates otherwise set forth in this Agreement had at all
times been in effect, then the Borrower shall, to the extent
permitted by applicable law, pay the Lender, an amount equal to
the difference between (a) the lesser of (i) the amount of
interest which would have been charged if the Maximum Rate had,
at all times, been in effect or (ii) the amount of interest which
would have accrued had the interest rates otherwise set forth in
this Agreement, at all times, been in effect and (b) the amount
of interest actually paid or accrued under this Agreement. In
the event that a court determines that the Lender has received
interest and other charges hereunder in excess of the Maximum
Rate, such excess shall be deemed received on account of, and
shall automatically be applied to reduce, the Obligations other
than interest, in the inverse order of maturity, and if there are
no Obligations outstanding, the Lender shall refund such excess
to the Borrowers.
3.4 Facility Fee. The Borrowers will pay to the Lender
on the Closing Date a facility fee in the amount of one-half of
one percent (0.50%) of the amount of the Total Facility (the
"Facility Fee"). The Lender and each Borrower agree that the
Facility Fee shall be financed by the Lender as a Revolving Loan,
to the extent not previously paid.
3.5 Letter of Credit Fee. The Borrowers agree to pay
to the Lender, for each Letter of Credit, a fee (the "Letter of
Credit Fee") equal to one and one-half percent (1.50%) per annum
of the undrawn face amount of each Letter of Credit plus all out-
of-pocket costs, fees and expenses incurred by the Lender in
connection with the application for, issuance of, or amendment to
any Letter of Credit, which costs, fees and expenses could
include a "fronting fee" required to be paid by the Lender to
such issuer for the assumption of the settlement risk in
connection with the issuance of such Letter of Credit. The
Letter of Credit Fee shall be payable monthly in arrears on the
first day of each month following any month in which a Letter of
Credit was issued and/or in which a Letter of Credit remains
outstanding. The Letter of Credit Fee shall be computed on the
basis of a year of three hundred sixty (360) days for the actual
number of days elapsed.
4. PAYMENTS AND PREPAYMENTS.
4.1 Revolving Loans. The Borrowers shall repay the
outstanding principal balance of the Revolving Loans, plus all
accrued but unpaid interest thereon, upon the termination of this
Agreement for any reason. The Borrowers may prepay Revolving
Loans at any time, and reborrow subject to the terms of this
Agreement. In addition, and without limiting the generality of
the foregoing, the Borrowers shall (a) repay any outstanding
Seasonal Overadvances by the Overadvance Repayment Date
applicable thereto, and (b) pay to the Lender, on demand, the
amount by which the unpaid principal balance of the Revolving
Loans made to any Borrower at any time exceeds the Maximum
Revolver Amount for such Borrower (determined for this purpose as
if the amount of the Revolving Loans were zero) at such time or
the unpaid principal balance of the Revolving Loans to all
Borrowers exceeds the Aggregate Maximum Revolver Amount
(determined for this purpose as if the amount of the Revolving
Loans were zero) at such time.
4.2 Place and Form of Payments; Extension of Time. All
payments of principal, interest, premium, and other sums due to
the Lender shall be made at the Lender's address set forth in
Section 15.8. Except for Proceeds received directly by the
Lender, all such payments shall be made in immediately available
funds. If any payment of principal, interest, premium, or other
sum to be made hereunder becomes due and payable on a day other
than a Business Day, the due date of such payment shall be
extended to the next succeeding Business Day and interest thereon
shall be payable at the applicable interest rate during such
extension.
4.3 Application and Reversal of Payments. The Lender
shall determine in its sole discretion the order and manner in
which Proceeds of Collateral and other payments that the Lender
receives are applied to the Revolving Loans, interest thereon,
and the other Obligations, and each Borrower hereby irrevocably
waives the right to direct the application of any payment or
Proceeds. The Lender shall have the continuing and exclusive
right to apply and reverse and reapply any and all such Proceeds
and payments to any portion of the Obligations.
4.4 INDEMNITY FOR RETURNED PAYMENTS. IF AFTER RECEIPT
OF ANY PAYMENT WHICH IS APPLIED TO THE PAYMENT OF ALL OR ANY PART
OF THE OBLIGATIONS, THE LENDER IS FOR ANY REASON COMPELLED TO
SURRENDER SUCH PAYMENT TO ANY PERSON BECAUSE SUCH PAYMENT IS
INVALIDATED, DECLARED FRAUDULENT, SET ASIDE, DETERMINED TO BE
VOID OR VOIDABLE AS A PREFERENCE, AN IMPERMISSIBLE SETOFF, OR A
DIVERSION OF TRUST FUNDS, OR FOR ANY OTHER REASON, THEN: THE
OBLIGATIONS OR PART THEREOF INTENDED TO BE SATISFIED SHALL BE
REVIVED AND CONTINUE AND THIS AGREEMENT SHALL CONTINUE IN FULL
FORCE AS IF SUCH PAYMENT HAD NOT BEEN RECEIVED BY THE LENDER AND
THE BORROWER SHALL BE LIABLE TO PAY TO THE LENDER AND HEREBY DOES
INDEMNIFY THE LENDER AND HOLD THE LENDER HARMLESS FOR THE AMOUNT
OF SUCH PAYMENT SURRENDERED. The provisions of this Section 4.4
shall be and remain effective notwithstanding any contrary action
which may have been taken by the Lender in reliance upon such
payment, and any such contrary action so taken shall be without
prejudice to the Lender's rights under this Agreement and shall
be deemed to have been conditioned upon such payment having
become final and irrevocable. The provisions of this Section 4.4
shall survive the termination of this Agreement.
5. LENDER'S BOOKS AND RECORDS; MONTHLY STATEMENTS. Each
Borrower agrees that the Lender's books and records showing the
Obligations and the transactions pursuant to this Agreement and
the other Loan Documents shall be admissible in any action or
proceeding arising therefrom, and shall constitute prima facie
proof thereof, irrespective of whether any Obligation is also
evidenced by a promissory note or other instrument. The Lender
will provide to the Borrowers a monthly statement of Loans,
payments, and other transactions pursuant to this Agreement.
Such statement shall be deemed correct, accurate, and binding on
each Borrower and as an account stated (except for reversals and
reapplications of payments made as provided in Section 4.3 and
corrections of errors discovered by the Lender), unless any
Borrower notifies the Lender in writing to the contrary within
sixty (60) days after such statement is rendered. In the event a
timely written notice of objections is given by any Borrower,
only the items to which exception is expressly made will be
considered to be disputed by such Borrower.
6. TAXES, YIELD PROTECTION AND ILLEGALITY
6.1 Taxes.
(a) Any and all payments by the Borrowers to the
Lender under this Agreement and any other Loan Document shall be
made free and clear of, and without deduction or withholding for
any Taxes. In addition, the Borrowers shall pay all Other Taxes.
(b) Each Borrower agrees to indemnify and hold
harmless the Lender for the full amount of Taxes or Other Taxes
(including any Taxes or Other Taxes imposed by any jurisdiction
on amounts payable under this Section) paid by the Lender and any
liability (including penalties, interest, additions to tax and
expenses) arising therefrom or with respect thereto, whether or
not such Taxes or Other Taxes were correctly or legally asserted.
Payment under this indemnification shall be made within 30 days
after the date the Lender makes written demand therefor.
(c) If any Borrower shall be required by law to
deduct or withhold any Taxes or Other Taxes from or in respect of
any sum payable hereunder to Lender, then:
(i) the sum payable shall be increased as
necessary so that after making all required deductions and
withholdings (including deductions and withholdings applicable to
additional sums payable under this Section) the Lender receives
an amount equal to the sum it would have received had no such
deductions or withholdings been made;
(ii) such Borrower shall make such
deductions and withholdings;
(iii) such Borrower shall pay the full
amount deducted or withheld to the relevant taxing authority or
other authority in accordance with applicable law; and
(iv) such Borrower shall also pay to the
Lender at the time interest is paid, all additional amounts which
the Lender specifies as necessary to preserve the after-tax yield
the Lender would have received if such Taxes or Other Taxes had
not been imposed.
(d) Within 30 days after the date of any payment
by any Borrower of Taxes or Other Taxes, such Borrower shall
furnish the Lender the original or a certified copy of a receipt
evidencing payment thereof, or other evidence of payment
satisfactory to the Lender.
6.2 Illegality.
(a) If the Lender determines that the
introduction of any Requirement of Law, or any change in any
Requirement of Law, or in the interpretation or administration of
any Requirement of Law, has made it unlawful, or that any central
bank or other Public Authority has asserted that it is unlawful,
for the Lender or its applicable lending office to make LIBOR
Rate Loans, then, on notice thereof by the Lender to the
Borrowers, any obligation of the Lender to make LIBOR Rate Loans
shall be suspended until the Lender notifies the Borrowers that
the circumstances giving rise to such determination no longer
exist.
(b) If the Lender determines that it is unlawful
to maintain any LIBOR Rate Loan, each Borrower shall, upon its
receipt of notice of such fact and demand from the Lender, prepay
in full such LIBOR Rate Loans then outstanding, together with
interest accrued thereon and amounts required under Section 6.4,
either on the last day of the Interest Period thereof, if the
Lender may lawfully continue to maintain such LIBOR Rate Loans to
such day, or immediately, if the Lender may not lawfully continue
to maintain such LIBOR Rate Loans. If any Borrower is required
to so prepay any LIBOR Rate Loan, then concurrently with such
prepayment, such Borrower shall borrow from the Lender, in the
amount of such repayment, a Reference Rate Loan.
6.3 Increased Costs and Reduction of Return.
(a) If the Lender determines that, due to either
(i) the introduction of or any change in the interpretation of
any law or regulation or (ii) the compliance by the Lender with
any guideline or request from any central bank or other Public
Authority (whether or not having the force of law), there shall
be any increase in the cost to the Lender of agreeing to make or
making, funding or maintaining any LIBOR Rate Loans, then the
Borrowers shall be liable for, and shall from time to time, upon
demand, pay to the Lender, additional amounts as are sufficient
to compensate the Lender for such increased costs.
(b) If the Lender shall have determined that (i)
the introduction of any Capital Adequacy Regulation, (ii) any
change in any Capital Adequacy Regulation, (iii) any change in
the interpretation or administration of any Capital Adequacy
Regulation by any central bank or other Public Authority charged
with the interpretation or administration thereof, or (iv)
compliance by the Lender or any corporation controlling the
Lender with any Capital Adequacy Regulation, affects or would
affect the amount of capital, reserves, or special deposits
required or expected to be maintained by the Lender or any
corporation controlling the Lender and (taking into consideration
such Lender's or such corporation's policies with respect to
capital adequacy and such Lender's desired return on capital)
determines that the amount of such capital, reserves, or special
deposits is increased as a consequence of its loans, credits or
obligations under this Agreement, then, upon demand of the Lender
to the Borrowers, the Borrowers shall pay to the Lender, from
time to time as specified by the Lender, additional amounts
sufficient to compensate the Lender for such increase.
Notwithstanding the foregoing, all such amounts shall be subject
to the provisions of Section 3.3.
6.4 Funding Losses. The Borrowers shall reimburse the
Lender and hold the Lender harmless from any loss or expense
which the Lender may sustain or incur as a consequence of:
(a) the failure of any Borrower to make on a
timely basis any payment of principal of any LIBOR Rate Loan;
(b) the failure of any Borrower to borrow,
continue or convert a Loan after such Borrower has given (or is
deemed to have given) a Notice of Borrowing or a Notice of
Conversion/ Continuation;
(c) the prepayment or other payment (including
after acceleration thereof) of an LIBOR Rate Loan on a day that
is not the last day of the relevant Interest Period;
including any such loss or expense arising from the liquidation
or reemployment of funds obtained by it to maintain its LIBOR
Rate Loans or from fees payable to terminate the deposits from
which such funds were obtained.
6.5 Inability to Determine Rates. If the Lender
determines that for any reason adequate and reasonable means do
not exist for determining the LIBOR Rate for any requested
Interest Period with respect to a proposed LIBOR Rate Loan, or
that the LIBOR Rate for any requested Interest Period with
respect to a proposed LIBOR Rate Loan does not adequately and
fairly reflect the cost to the Lender of funding such Loan, the
Lender will promptly so notify the Borrowers. Thereafter, the
obligation of the Lender to make or maintain LIBOR Rate Loans
hereunder shall be suspended until the Lender revokes such notice
in writing. Upon receipt of such notice, the Borrowers may
revoke any Notice of Borrowing or Notice of
Conversion/Continuation then submitted by it. If a Borrower does
not revoke such Notice, the Lender shall make, convert or
continue the Loans, as proposed by such Borrower, in the amount
specified in the applicable notice submitted by such Borrower,
but such Loans shall be made, converted or continued as Reference
Rate Loans instead of LIBOR Rate Loans.
6.6 Survival. The agreements and obligations of the
Borrowers in this Section 6 shall survive the payment of all
other Obligations.
7. COLLATERAL.
7.1 Grant of Security Interest.
(a) As security for the Obligations, each Borrower
hereby grants to the Lender a continuing security interest in,
lien on, and assignment of all of the following Property of such
Borrower: (i) all Receivables, Inventory, Equipment, Assigned
Contracts, Proprietary Rights and Proceeds, wherever located and
whether now existing or hereafter arising or acquired; (ii) all
moneys, securities and other property and the Proceeds thereof,
now or hereafter held or received by, or in transit to, the
Lender from or for such Borrower, whether for safekeeping,
pledge, custody, transmission, collection or otherwise,
including, without limitation, all of such Borrower's deposit
accounts, credits, and balances with the Lender and all claims of
such Borrower against the Lender at any time existing; (iii) all
of such Borrower's deposit accounts with any financial
institutions with which such Borrower maintains deposits; and
(iv) all books, records and other Property relating to or
referring to any of the foregoing, including, without limitation,
all books, records, ledger cards, data processing records,
computer software and other property and general intangibles at
any time evidencing or relating to the Receivables, Inventory,
Equipment, Assigned Contracts, Proprietary Rights, Proceeds, and
other property referred to above (all of the foregoing, and all
other property in which the Lender may at any time be granted a
Lien, being herein collectively referred to as the "Collateral").
The Lender shall have all of the rights of a secured party with
respect to the Collateral under the UCC and other applicable
laws.
(b) All Obligations shall constitute a single loan
secured by the Collateral. The Lender may, in its sole
discretion, (i) exchange, waive, or release any of the
Collateral, (ii) apply Collateral and direct the order or manner
of sale thereof as the Lender may determine, and (iii) settle,
compromise, collect, or otherwise liquidate any Collateral in any
manner, all without affecting the Obligations or the Lender's
right to take any other action with respect to any other
Collateral.
7.2 Perfection and Protection of Security Interest.
Each Borrower shall, at its expense, perform all steps requested
by the Lender at any time to perfect, maintain, protect, and
enforce the Security Interest including, without limitation: (a)
executing and filing financing or continuation statements, and
amendments thereof, and (upon the Lender's request) executing and
recording of additional Patent, Copyright and Trademark
Assignments, all in form and substance satisfactory to the
Lender; (b) delivering to the Lender the original certificates of
title for motor vehicles with the Security Interest properly
endorsed thereon; (c) delivering to
the Lender the originals of all instruments, documents, and
chattel paper, and all other Collateral of which the Lender
determines it should have physical possession in order to perfect
and protect the Security Interest therein, duly endorsed or
assigned to the Lender without restriction; (d) delivering to the
Lender warehouse receipts covering any portion of the Collateral
located in warehouses and for which warehouse receipts are
issued; (e) transferring Inventory to warehouses designated by
the Lender; (f) placing notations on such Borrower's books of
account to disclose the Security Interest; (g) executing and
delivering to the Lender a security agreement relating to the
Reversions in form and substance satisfactory to the Lender; (h)
delivering to the Lender all letters of credit on which such
Borrower is named beneficiary; and (i) taking such other steps as
are deemed necessary by the Lender to maintain the Security
Interest. To the extent permitted by applicable law, the Lender
may file, without any Borrower's signature, one or more financing
statements disclosing the Security Interest. Each Borrower
agrees that a carbon, photographic, photostatic, or other
reproduction of this Agreement or of a financing statement is
sufficient as a financing statement. If any Collateral is at any
time in the possession or control of any warehouseman, bailee or
agent or processor of a Borrower, then such Borrower shall notify
the Lender thereof and shall notify such Person of the Security
Interest in such Collateral and, upon the Lender's request,
instruct such Person to hold all such Collateral for the Lender's
account subject to the Lender's instructions. If at any time any
Collateral of any Borrower is located on any Premises that are
not owned by such Borrower, then such Borrower shall obtain
written waivers, in form and substance satisfactory to the
Lender, of all present and future Liens to which the owner or
lessor or any mortgagee of such Premises may be entitled to
assert against the Collateral. From time to time, each Borrower
shall, upon Lender's request, execute and deliver confirmatory
written instruments pledging to the Lender the Collateral, but a
Borrower's failure to do so shall not affect or limit the
Security Interest or the Lender's other rights in and to the
Collateral. So long as this Agreement is in effect and until all
Obligations have been fully satisfied, the Security Interest
shall continue in full force and effect in all Collateral
(whether or not deemed eligible for the purpose of calculating
the Maximum Revolver Amount or Availability for any Borrower or
as the basis for any advance, loan, extension of credit, or other
financial accommodation).
7.3 Location of Collateral. Each Borrower represents
and warrants to the Lender that: (a) Schedule 7.3 is a correct
and complete list of each Borrower's chief executive office, the
location of its books and records, the locations of the
Collateral (except for (1) not more than $1,750,000 in the
aggregate for all Borrowers of Inventory located temporarily at
third-party processors for completion of packaging (of which not
more than $250,000 can be located outside of the state of New
Jersey), and (2) not more than $500,000 in the aggregate for all
Borrowers of Inventory located in The Netherlands), and the
locations of all of its other places of business and (b) Schedule
7.3 correctly identifies any of such facilities and locations
that are not owned by such Borrower and sets forth the names of
the owners and lessors or sub-lessors of, and, to the best of
such Borrower's knowledge, the holders of any mortgages on, such
facilities and locations. Each Borrower covenants and agrees
that it will not maintain any Collateral (except for (1) not more
than $1,750,000 in the aggregate for all Borrowers of Inventory
located temporarily at third-party processors for completion of
packaging (of which not more than $250,000 can be located outside
of the state of New Jersey), and (2) not more than $500,000 in
the aggregate for all Borrowers of Inventory located in The
Netherlands) at any location other than those listed on Schedule
7.3, and it will not otherwise change or add to any of such
locations, unless it gives the Lender at least 30 days' prior
written notice thereof and executes any and all financing
statements and other documents that the Lender requests in
connection therewith.
7.4 Title to, Liens on, and Sale and Use of Collateral.
Each Borrower represents and warrants to the Lender that: (a)
all Collateral is and will continue to be owned by the Borrowers
free and clear of all Liens whatsoever, except for the Security
Interest and other Permitted Liens; (b) the Security Interest
will not be subject to any prior Lien except for the Liens
described in (b), (c), (e), (f), (i) and (j) of the definition of
Permitted Liens; (c) each Borrower will use, store, and maintain
the Collateral with all reasonable care and will use the
Collateral for lawful purposes only; (d) upon the Lender's
request, Accounts due from the United States or any agency or
department of the United States shall be duly assigned to the
Lender in full compliance with the Federal Assignment of Claims
Act (31 U.S.C.A. sec. 3727 et seq.); and (e) no Borrower will,
without the Lender's prior written approval, sell, lease, or
dispose of or permit the sale or disposition of the Collateral or
any portion thereof, except for sales of Inventory in the
ordinary course of business and as permitted by Section 7.11.
The inclusion of Proceeds in the Collateral shall not be deemed
the Lender's consent to any sale or other disposition of the
Collateral except as expressly permitted herein.
7.5 Appraisals. Whenever a Default or Event of Default
exists, and at such other times not more frequently than once a
year as the Lender requests, each Borrower shall, at its expense
and upon the Lender's request, provide the Lender with appraisals
or updates thereof of any or all of the Collateral from an
appraiser.
7.6 Access and Examination. The Lender may at all
reasonable times have access to, examine, audit, make extracts
from and inspect the Borrowers' records, files, and books of
account and the Collateral and may discuss the Borrowers' affairs
with the Borrowers' officers and management. Each Borrower will
deliver to the Lender any instrument necessary for the Lender to
obtain records from any service bureau maintaining records for
such Borrower. The Lender may, at any time when a Default or
Event of Default exists and at the Borrowers' expense, make
copies of all of such Borrower's books and records, or require
the Borrowers to deliver such copies to the Lender. The Lender
may, without expense to the Lender, use such of the Borrowers'
personnel, supplies, and Premises as may be reasonably necessary
for maintaining or enforcing the Security Interest. The Lender
shall have the right, at any time, in the Lender's name or in the
name of a nominee of the Lender, to verify the validity, amount
or any other matter relating to the Accounts, by mail, telephone,
or otherwise.
7.7 Insurance. The Borrowers shall insure the
Collateral against loss or damage by fire with extended coverage
for theft, burglary, pilferage, loss in transit, and such other
hazards as the Lender shall specify, in amounts, under policies
and by insurers acceptable to the Lender. The Borrowers shall
also maintain flood insurance for any Equipment and Inventory
located in an area in which real estate is designated as a "flood
prone" or a "flood risk area," (hereinafter "SFHA") as defined by
the Flood Disaster Protection Act of 1973, in an amount to be
reasonably determined by the Lender. The Borrowers shall cause
the Lender to be named in each such policy as secured party and
loss payee or additional insured, in a manner acceptable to the
Lender. Each policy of insurance shall contain a clause or
endorsement requiring the insurer to give not less than thirty
(30) days' prior written notice to the Lender in the event of
cancellation of the policy for any reason whatsoever and a clause
or endorsement stating that the interest of the Lender shall not
be impaired or invalidated by any act or neglect of any Borrower
or the owner of any premises where Collateral is located nor by
the occupation of such premises for purposes more hazardous than
are permitted by such policy. The Borrowers shall pay, upon
Lender's request, all fees incurred by the Lender to determine
whether any of the real estate and other Collateral is located in
a SFHA. The Borrowers shall also pay all premiums for such
insurance when due, and shall deliver to the Lender certificates
of insurance and, if requested, photocopies of the policies. If
the Borrowers fail to pay such fees or to procure such insurance
or the premiums therefor when due, the Lender may (but shall not
be required to) do so and charge the costs thereof to the
Borrowers' loan account as a Revolving Loan. The Borrowers shall
promptly notify the Lender of any loss, damage, or destruction to
the Collateral or arising from its use, whether or not covered by
insurance. The Lender is hereby authorized to collect all
insurance proceeds directly. After deducting from such proceeds
the expenses, if any, incurred by Lender in the collection or
handling thereof, the Lender may apply such proceeds to the
reduction of the Obligations in such order as Lender determines,
or at the Lender's option may permit or require the Borrowers to
use such money, or any part thereof, to replace, repair, restore
or rebuild the Collateral in a diligent and expeditious manner
with materials and workmanship of substantially the same quality
as existed before the loss, damage or destruction.
7.8 Collateral Reporting. Each Borrower will provide
the Lender with the following documents at the following times in
form satisfactory to the Lender: (a) on a weekly basis (on each
Tuesday for the week ending on the previous Friday) or more
frequently if so requested by the Lender, a borrowing base
report, a schedule of credit memos and reports, a schedule of
collections of accounts receivable, a schedule of Accounts
created since the last such schedule and a report of the
inventory balance based on the perpetual inventory reports; (b)
upon request, copies of invoices, credit memos, shipping and
delivery documents; (c) monthly ageings (on both a due date basis
and an invoice date basis) of accounts receivable no later than
the 10th day of the following month; (d) monthly aged inventory
reports by category no later than the 10th day of the following
month and a report of the inventory balance (by location) based
on the perpetual inventory reports; (e) upon request, monthly
perpetual inventory reports; (f) monthly ageings of accounts
payable no later than the 10th day of the following month; (g)
upon request, copies of purchase orders, invoices, and delivery
documents for Inventory and Equipment acquired by any Borrower;
(h) such other reports as to the Collateral as the Lender shall
request from time to time; and (i) certificates of an officer of
each Borrower certifying as to the foregoing. If any Borrower's
records or reports of the Collateral are prepared by an
accounting service or other agent, such Borrower hereby
authorizes such service or agent to deliver such records,
reports, and related documents to the Lender.
7.9 Accounts.
(a) Each Borrower hereby represents and warrants
to the Lender and agrees with the Lender that, with respect to
the Borrowers' Accounts: (i) each existing Account represents,
and each future Account will represent, a bona fide sale or lease
and delivery of goods by a Borrower, or rendition of services by
a Borrower, in the ordinary course of such Borrower's business;
(ii) each existing Account is, and each future Account will be,
for a liquidated amount payable by the Account Debtor thereon on
the terms set forth in the invoice therefor or in the schedule
thereof delivered to the Lender, without offset, deduction,
defense, or counterclaim; (iii) no payment will be received with
respect to any Account, and no credit, discount, or extension, or
agreement therefor will be granted on any Account, except as
reported to the Lender in accordance with this Agreement; (iv)
each copy of an invoice delivered to the Lender by any Borrower
will be a genuine copy of the original invoice sent to the
Account Debtor named therein; and (v) all goods described in each
invoice will have been delivered to the Account Debtor and all
services of any Borrower described in each invoice will have been
performed.
(b) No Borrower shall re-date any invoice or sale
or make sales on extended dating beyond that customary in such
Borrower's business or extend or modify any Account. If any
Borrower becomes aware of any matter affecting any Account,
including information regarding the Account Debtor's
creditworthiness, such Borrower will promptly so advise the
Lender.
(c) No Borrower shall accept any note or other
instrument (except a check or other instrument for the immediate
payment of money) with respect to any Account without the
Lender's written consent. If the Lender consents to the
acceptance of any such note or other instrument, it shall be
considered as evidence of the Account and not payment thereof,
and such Borrower will promptly deliver such note or instrument
to the Lender appropriately endorsed. Regardless of the form of
presentment, demand, notice of dishonor, protest, and notice of
protest with respect thereto, such Borrower will remain liable
thereon until such note or instrument is paid in full.
(d) Each Borrower shall notify the Lender promptly
of all disputes and claims with Account Debtors and settle or
adjust them at no expense to the Lender, but no discount, credit
or allowance shall be granted to any Account Debtor without the
Lender's consent, except for discounts, credits and allowances
made or given in the ordinary course of such Borrower's business
when no Event of Default exists hereunder. Each Borrower shall
send the Lender a copy of each credit memorandum in excess of
$50,000 as soon as issued and copies of all credit memorandum on
a weekly basis. The Lender may at all times when an Event of
Default exists hereunder settle or adjust disputes and claims
directly with customers or Account Debtors for amounts and upon
terms which the Lender considers advisable and, in all cases, the
Lender will credit the Borrowers' loan account with only the net
amounts received by the Lender in payment of any Accounts.
(e) If an Account Debtor returns any Inventory to
any Borrower when no Event of Default exists, then such Borrower
shall promptly determine the reason for such return and shall
issue a credit memorandum to the Account Debtor in the
appropriate amount. Such Borrower shall immediately report to
the Lender any return involving an amount in excess of $50,000
and shall report all returns to the Lender on a weekly basis.
Each such report shall indicate the reasons for the returns and
the locations and condition of the returned Inventory. In the
event any Account Debtor returns Inventory to any Borrower when
an Event of Default exists, such Borrower shall: (i) hold the
returned Inventory in trust for the Lender; (ii) segregate all
returned Inventory from all of its other Property; (iii) dispose
of the returned Inventory solely according to the Lender's
written instructions; and (iv) not issue any credits or
allowances with respect thereto without the Lender's prior
written consent. All returned Inventory shall remain subject to
the Security Interest. Whenever any Inventory is returned, the
related Account shall be deemed ineligible, and the relevant
Borrower's Maximum Revolver Amount shall be adjusted accordingly.
7.10 Collection of Accounts; Payments.
(a) Until the Lender notifies any Borrower to the
contrary, each Borrower shall make collection of all Accounts and
other Collateral for the Lender, shall receive all payments as
the Lender's trustee, and shall immediately deliver all payments
to the Lender in their original form duly endorsed in blank or
deposit them into a Payment Account established at the Lender's
request, as the Lender may direct. If the Lender requests, the
Borrowers shall establish a lock-box service for collections of
Accounts at a bank mutually acceptable to the Lender and the
Borrowers and pursuant to documentation satisfactory to the
Lender. If such lock-box service is established, each Borrower
shall instruct all of its Account Debtors to make all payments
directly to the address established for such service. If,
notwithstanding such instructions, any Borrower receives any
Proceeds of Accounts, it shall receive such payments as the
Lender's trustee, and shall immediately deliver such payments to
the Lender in their original form duly endorsed in blank or
deposit them into a Payment Account, as the Lender may direct.
All collections received in any such lock box or Payment Account
or directly by any Borrower or the Lender, and all funds in any
Payment Account or other account to which such collections are
deposited, shall be the sole property of the Lender and subject
to the Lender's sole control. The Lender or the Lender's
designee may, at any time, notify obligors that the Accounts have
been assigned to the Lender and of the Security Interest therein,
and may collect them directly and charge the collection costs and
expenses to the Borrowers' loan account as a Revolving Loan. At
the Lender's request, each Borrower shall execute and deliver to
the Lender such documents as the Lender shall require to grant
the Lender access to any post office box in which collections of
Accounts are received.
(b) If sales of Inventory are made for cash, each
Borrower shall immediately deliver to the Lender the identical
checks, cash, or other forms of payment which such Borrower
receives.
(c) All payments received by the Lender on account
of Accounts or as Proceeds of other Collateral will be the
Lender's sole property and will be credited to the Borrowers'
loan account (conditional upon final collection) upon the
Lender's receipt of such funds at its account.
(d) In the event the Borrowers repay all of the
Obligations upon the termination of this Agreement, other than
through the Lender's receipt of payments on account of Accounts
or Proceeds of other Collateral, such payment will be credited
(conditional upon final collection) to the Borrowers' loan
account after the Lender's receipt thereof at its account.
7.11 Inventory. Each Borrower represents and warrants
to the Lender that all of the Inventory is and will be held for
sale or lease, or to be furnished in connection with the
rendition of services in the ordinary course of the Borrowers'
business and is and will be fit for such purposes. Each Borrower
will keep the Inventory in good and marketable condition, at its
own expense. No Borrower will, without prior written notice to
the Lender, acquire or accept any Inventory on consignment or
approval. Each Borrower agrees that all Inventory will be
produced in accordance with the Federal Fair Labor Standards Act
of 1938, as amended, and all rules, regulations, and orders
thereunder. Each Borrower will maintain a perpetual inventory
reporting system at all times. Each Borrower will conduct a
physical count of its Inventory at least once per Fiscal Year,
and at such other times as the Lender requests, and shall
promptly supply the Lender with a copy of such count accompanied
by a report of the value of such Inventory (valued at the lower
of cost, on a first-in, first-out basis, or market value). No
Borrower will, without the Lender's prior written consent, sell
any Inventory on a bill-and-hold, guaranteed sale, sale and
return, sale on approval, consignment, or other repurchase or
return basis.
7.12 Equipment. Each Borrower represents and warrants
to the Lender that all of the Equipment is and will be used or
held for use in the Borrowers' business and is and will be fit
for such purposes. Each Borrower shall keep and maintain the
Equipment in good operating condition and repair (ordinary wear
and tear excepted) and shall make all necessary replacements
thereof. Each Borrower shall promptly inform the Lender of any
material additions to or deletions from the Equipment. No
Borrower shall permit any Equipment to become a fixture to real
property or an accession to other personal property, unless the
Lender has a valid, perfected, and first priority Security
Interest in such real or personal property. No Borrower will,
without the Lender's prior written consent, alter or remove any
identifying symbol or number on the Equipment. No Borrower
shall, without the Lender's prior written consent, sell, lease as
a lessor, or otherwise dispose of any of the Equipment provided,
however, that a Borrower may dispose of obsolete or unusable
Equipment having an orderly liquidation value no greater than
$100,000 individually and $250,000 in the aggregate in any Fiscal
Year, without the Lender's consent, subject to the conditions set
forth below. In the event any of the Equipment is sold,
transferred or otherwise disposed of with the Lender's prior
written consent or as otherwise permitted hereby and: (a) such
sale, transfer or disposition is effected without replacement of
such Equipment, or such Equipment is replaced by Equipment leased
by a Borrower, or by Equipment purchased by a Borrower subject to
a lien or other right constituting a Permitted Lien, then such
Borrower shall deliver all of the cash proceeds of any such sale,
transfer or disposition to the Lender, which proceeds shall be
applied to the repayment of the Obligations; or (b) such sale,
transfer or disposition is made in connection with the purchase
by a Borrower of replacement Equipment (other than subject to a
Permitted Lien), then such Borrower shall use the proceeds of
such sale, transfer or disposition to finance the purchase by
such Borrower of replacement Equipment and shall deliver to the
Lender written evidence of the use of the proceeds for such
purchase. All replacement Equipment purchased by a Borrower
shall be free and clear of all liens, claims and encumbrances,
except for the Security Interest and other Permitted Liens.
7.13 Licenses; Settlement Documents; Assigned
Contracts. Each Borrower shall fully and timely perform all of
its obligations under each of the Licenses and each of the
Settlement Documents and shall enforce all of its rights and
remedies thereunder (in each case whether or not they are
assigned or assignable to the Lender). Each Borrower shall fully
and timely perform all of its obligations under each of the other
Assigned Contracts, and shall enforce all of its rights and
remedies thereunder as it deems appropriate in its business
judgment, provided, however, that no Borrower shall take any
action or fail to take any action with respect to such other
Assigned Contracts that would result in a waiver or other loss of
any material right or remedy of such Borrower thereunder.
Without limiting the generality of the foregoing, each Borrower
shall take all action necessary or appropriate to permit, and
shall not take any action which would have any adverse effect
upon, the full enforcement of all indemnification rights under
the Licenses and Settlement Documents (whether or not they
constitute Assigned Contracts) and other Assigned Contracts. No
Borrower shall, without the Lender's prior written consent,
modify, amend, supplement, compromise, satisfy, release, or
discharge any of the Licenses and Settlement Documents (whether
or not they constitute Assigned Contracts) and other Assigned
Contracts, any collateral securing the same, any Person liable
directly or indirectly with respect thereto, or any agreement
relating to any of the Licenses and Settlement Documents (whether
or not they constitute Assigned Contracts) and other Assigned
Contracts or the collateral therefor; provided, however, that the
Borrowers may terminate or modify individual Licenses in the
ordinary course of their business, consistent with past
practices. Each Borrower shall notify the Lender in writing,
promptly after it becomes aware thereof, of any event or fact
which could give rise to a claim by it for indemnification under
any of the Licenses, Settlement Documents (whether or not they
constitute Assigned Contracts) and other Assigned Contracts and
shall diligently pursue such right and report to the Lender on
all further developments with respect thereto. Each Borrower
shall remit directly to the Lender, for application to the
Obligations in such order as the Lender determines, all amounts
received by such Borrower as indemnification or otherwise
pursuant to the Licenses, Settlement Documents (whether or not
they constitute Assigned Contracts) and other Assigned Contracts.
If any Borrower shall fail after the Lender's demand to
diligently pursue any right under the Assigned Contracts, or if
an Event of Default exists, then the Lender may directly enforce
such right in its own or any Borrower's name and may enter into
such settlements or other agreements with respect thereto as the
Lender determines. All amounts thereby recovered by the Lender,
after deducting Lender's costs and expenses in connection
therewith, shall be applied to the Obligations in such order as
the Lender determines. In any suit, proceeding or action brought
by the Lender under any Assigned Contract for any sum owing
thereunder or to enforce any provision thereof, the Borrowers
shall indemnify and hold the Lender harmless from and against all
expense, loss or damage suffered by reason of any defense,
setoff, counterclaim, recoupment, or reduction of liability
whatsoever of the obligor thereunder arising out of a breach by
any Borrower of any obligation thereunder or arising out of any
other agreement, indebtedness or liability at any time owing from
any Borrower to or in favor of such obligor or its successors.
All such obligations of any Borrower shall be and remain
enforceable only against a Borrower and shall not be enforceable
against the Lender. Notwithstanding any provision hereof to the
contrary, the Borrowers shall at all times remain liable to
observe and perform all of its duties and obligations under the
Assigned Contracts and the Lender's exercise of any of its rights
with respect to the Collateral shall not release any Borrower
from any of such duties and obligations. The Lender shall not be
obligated to perform or fulfill any of the Borrower's duties or
obligations under the Assigned Contracts or to make any payment
thereunder or to make any inquiry as to the nature or sufficiency
of any payment or Property received by it thereunder or the
sufficiency of performance by any party thereunder, or to present
or file any claim, or to take any action to collect or enforce
any performance or payment of any amounts due.
7.14 Documents, Instruments, and Chattel Paper. Each
Borrower represents and warrants to the Lender that: (a) all
documents, instruments, and chattel paper describing, evidencing,
or constituting Collateral, and all signatures and endorsements
thereon, are and will be complete, valid, and genuine; and (b)
all goods evidenced by such documents, instruments, and chattel
paper are and will be owned by a Borrower free and clear of all
Liens other than Permitted Liens.
7.15 Right to Cure. The Lender may, in its sole
discretion and at any time, pay any amount or do any act required
of any Borrower hereunder to preserve, protect, maintain or
enforce the Obligations, the Collateral or the Security Interest,
and which such Borrower fails to pay or do, including, without
limitation, payment of any judgment against such Borrower, any
insurance premium, any warehouse charge, any finishing or
processing charge, any landlord's claim, and any other Lien upon
or with respect to the Collateral. All payments that the Lender
makes under this Section 7.15 and all out-of-pocket costs and
expenses that the Lender pays or incurs in connection with any
action taken by it hereunder shall be charged to the Borrowers'
loan account as a Revolving Loan. The Lender may make all such
payments according to any bill, statement or estimate received
without inquiring into the accuracy of such bill, statement or
estimate or into the validity of any tax, assessment, sale,
forfeiture, tax lien or title or claim thereof. Any payment made
or other action taken by the Lender under this Section 7.15 shall
be without prejudice to any right to assert an Event of Default
hereunder and to proceed thereafter as herein provided.
7.16 Power of Attorney. Each Borrower hereby appoints
the Lender and the Lender's designees as such Borrower's
attorney, with power: (a) to endorse such Borrower's name on any
checks, notes, acceptances, money orders, or other forms of
payment or security that come into the Lender's possession; (b)
to sign such Borrower's name on any invoice, bill of lading, or
other document of title relating to any Collateral, on drafts
against customers, on assignments of Accounts, on notices of
assignment, financing statements and other public records, on
verifications of Accounts and on notices to Account Debtors and
to file any such financing statements by electronic means with or
without a signature as authorized or required by applicable law
or filing procedure; (c) to notify the post office authorities,
when an Event of Default exists, to change the address for
delivery of any Borrower's mail to an address designated by the
Lender and to receive, open and dispose of all mail addressed to
any Borrower; (d) to send requests for verification of Accounts
to Account Debtors; and (e) to do all things necessary to carry
out this Agreement. Each Borrower ratifies and approves all acts
of such attorney. Neither the Lender nor the attorney will be
liable for any acts or omissions or for any error of judgment or
mistake of fact or law. This power, being coupled with an
interest, is irrevocable until this Agreement has been terminated
and the Obligations have been fully satisfied.
7.17 Lender's Rights, Duties, and Liabilities. Each
Borrower assumes all responsibility and liability arising from or
relating to the use, sale, or other disposition of the
Collateral. Neither the Lender nor any of its officers,
directors, employees, and agents shall be liable or responsible
in any way for the safekeeping of any of the Collateral, or for
any act or failure to act with respect to the Collateral, or for
any loss or damage thereto, or for any diminution in the value
thereof, or for any act of default or any warehouseman, carrier,
forwarding agency or other person whomsoever, all of which shall
be at the Borrowers' sole risk. The Obligations shall not be
affected by any failure of the Lender to take any steps to
perfect the Security Interest or to collect or realize upon the
Collateral, nor shall loss of or damage to the Collateral release
any Borrower from any of the Obligations. The Lender may (but
shall not be required to), without notice to or consent from any
Borrower, sue upon or otherwise collect, extend the time for
payment of, modify or amend the terms of, compromise or settle
for cash, credit, or otherwise upon any terms, grant other
indulgences, extensions, renewals, compositions, or releases, and
take or omit to take any other action with respect to the
Collateral, any security therefor, any agreement relating
thereto, any insurance applicable thereto, or any Person liable
directly or indirectly in connection with any of the foregoing,
without discharging or otherwise affecting the liability of any
Borrower for the Obligations or under this Agreement or any other
agreement now or hereafter existing between the Lender and any
Borrower.
8. BOOKS AND RECORDS; FINANCIAL INFORMATION; NOTICES.
8.1 Books and Records. Each Borrower shall maintain,
at all times, correct and complete books, records and accounts in
which complete, correct and timely entries are made of its
transactions in accordance with GAAP consistent with those
applied in the preparation of the Financial Statements. Each
Borrower shall, by means of appropriate entries, reflect in such
accounts and in all Financial Statements proper liabilities and
reserves for all taxes and proper provision for depreciation and
amortization of Property and bad debts, all in accordance with
GAAP. Each Borrower shall maintain at all times books and
records pertaining to the Collateral in such detail, form, and
scope as the Lender shall reasonably require, including without
limitation records of: (a) all payments received and all credits
and extensions granted with respect to the Accounts; (b) the
return, rejection, repossession, stoppage in transit, loss,
damage, or destruction of any Inventory; and (c) all other
dealings affecting the Collateral.
8.2 Financial Information. Each Borrower shall
promptly furnish to the Lender or its agents all such financial
information as the Lender shall reasonably request, and notify
its auditors and accountants that the Lender is authorized to
obtain such information directly from them. Without limiting the
foregoing, each Borrower and its Subsidiaries will furnish to the
Lender, in such detail as the Lender shall request, the
following:
(a) As soon as available, but in any event not
later than 90 days after the close of each Fiscal Year, (i)
consolidated audited balance sheets, and statements of income and
expense, and cash flow statements and statements of stockholders'
investment for Pentech and its Subsidiaries for such Fiscal Year,
and the accompanying notes thereto, and (ii) consolidating
unaudited balance sheets, and statements of income and expense
for Pentech and its Subsidiaries for such Fiscal Year, setting
forth in each case in comparative form figures for the previous
Fiscal Year, all in reasonable detail, fairly presenting the
financial position and the results of operations of Pentech and
its consolidated Subsidiaries as at the date thereof and for the
Fiscal Year then ended, and prepared in accordance with GAAP.
Such audited statements shall be examined in accordance with
generally accepted auditing standards and accompanied by a report
thereon unqualified as to scope by independent certified public
accountants selected by such Borrower and reasonably satisfactory
to the Lender.
(b) As soon as available, but in any event not
later than 45 days after the close of each fiscal quarter other
than the fourth quarter of a Fiscal Year, consolidated and
consolidating unaudited balance sheets of Pentech and its
Subsidiaries as at the end of such quarter, and consolidated and
consolidating unaudited statements of income and expense and cash
flow statements and statements of stockholders' investment for
Pentech and its Subsidiaries for such quarter and for the period
from the beginning of the Fiscal Year to the end of such quarter,
together with the accompanying notes thereto, all in reasonable
detail, fairly presenting the financial position and results of
operation of Pentech and its Subsidiaries as at the date thereof
and for such periods, prepared in accordance with GAAP consistent
with the audited Financial Statements required pursuant to
Section 8.2(a). Such statements shall be certified to be correct
by the chief financial or accounting officer of such Pentech
subject to normal year-end adjustments.
(c) As soon as available, but in any event not
later than 30 days after the end of each month, consolidated and
consolidating unaudited balance sheets of Pentech and its
Subsidiaries as at the end of such month, and consolidated and
consolidating unaudited statements of income and expenses for
Pentech and its Subsidiaries for such month and for the period
from the beginning of the Fiscal Year to the end of such month,
all in reasonable detail, fairly presenting the financial
position and results of operation of Pentech and its Subsidiaries
as at the date thereof and for such periods, and prepared in
accordance with GAAP consistent with the audited Financial
Statements required pursuant to Section 8.2(a). Such statements
shall be certified to be correct by the chief financial or
accounting officer of Pentech, subject to normal year-end
adjustments.
(d) Upon request of the Lender, with each of the
audited Financial Statements delivered pursuant to Section
8.2(a), a certificate of the independent certified public
accountants that examined such statements to the effect that they
have reviewed and are familiar with the Loan Documents and that,
in examining such Financial Statements, they did not become aware
of any fact or condition which then constituted a Default or
Event of Default, except for those, if any, described in
reasonable detail in such certificate, and setting forth in
reasonable detail the calculations required to establish that
Pentech and its consolidated Subsidiaries were in compliance with
the covenants set forth in Sections 10.19 through 10.22 during
the period covered in such Financial Statements.
(e) (i) With each of the annual audited and
quarterly unaudited Financial Statements delivered pursuant to
Sections 8.2(a) and 8.2(b), a certificate of the chief executive
or chief financial officer of Pentech (A) setting forth in
reasonable detail the calculations required (I) to establish that
Pentech and its consolidated Subsidiaries were in compliance with
the covenants set forth in Sections 10.19 through 10.22 during
the period covered in such Financial Statements and (II) to
determine the Fixed Charge Coverage Ratio for the purposes of
subparagraph (b) of the definition of Performance Pricing Period,
(B) stating that, except as explained in reasonable detail in
such certificate, (I) all of the representations and warranties
of each Borrower contained in this Agreement and the other Loan
Documents are correct and complete as at the date of such
certificate as if made at such time, and (II) no Default or Event
of Default then exists or existed during the period covered by
such Financial Statements, and (C) describing and analyzing in
reasonable detail all material trends, changes and developments
in such Financial Statements. If any such certificate discloses
that a representation or warranty is not correct or complete, or
that a covenant has not been complied with, or that a Default or
Event of Default existed or exists, such certificate shall set
forth what action such Borrower has taken or proposes to take
with respect thereto.
(ii) With each of the monthly unaudited Financial
Statements delivered pursuant to Section 8.2(c), a certificate of
the chief executive or chief financial officer of Pentech setting
forth in reasonable detail the calculations required to establish
that Pentech and its consolidated Subsidiaries were in compliance
with the covenants set forth in Sections 10.19 through 10.22
during the period covered in such Financial Statements.
(f) No sooner than 90 days and no later than 30
days prior to the beginning of each Fiscal Year, consolidated and
consolidating projected balance sheets, statements of income and
expense, and statements of cash flow for Pentech and its
Subsidiaries as at the end of and for each month of such Fiscal
Year, and on an annual basis for the next succeeding two Fiscal
Years thereafter.
(g) Within 45 days after the end of each fiscal
quarter, a report of the Capital Expenditures of the Pentech and
its Subsidiaries for such quarter and a statement of cash flow
for Pentech and its Subsidiaries for the period from the
beginning of the then current Fiscal Year to the end of such
quarter, prepared in accordance with GAAP consistent with the
audited Financial Statements required pursuant to Section 8.2(a).
(h) Promptly after their preparation, copies of
any and all proxy statements, financial statements, and reports
which such Borrower makes available to its stockholders.
(i) Promptly after filing with the PBGC, DOL, or
IRS, a copy of each annual report or other filing or notice filed
with respect to each Plan of such Borrower or any ERISA
Affiliate.
(j) Promptly after filing with the IRS, a copy of
each tax return filed by Pentech and each of its Subsidiaries.
(k) Such additional information as the Lender may
from time to time reasonably request regarding the financial and
business affairs of such Borrower or any Subsidiary, including,
without limitation, projections of future operations on both a
consolidated and consolidating basis.
8.3 Notices to Lender. Each Borrower shall notify the
Lender in writing of the following matters at the following
times:
(a) Immediately after becoming aware of the
existence of any Default or Event of Default.
(b) Immediately after becoming aware that the
holder of any Subordinated Obligations, of any other Debt of the
Borrowers in an outstanding principal amount in excess of
$25,000, or of any capital stock of Pentech has given notice or
taken any action with respect to a claimed default.
(c) Immediately after becoming aware of any
material adverse change in any Borrower's Property, business,
operations, or condition (financial or otherwise).
(d) Immediately after becoming aware of any
pending or threatened action, suit, proceeding, or counterclaim
by any Person, or any pending or threatened investigation by a
Public Authority, which may materially and adversely affect the
Collateral, the repayment of the Obligations, the Lender's rights
under the Loan Documents, or any Borrower's Property, business,
operations, or condition (financial or otherwise).
(e) Immediately after becoming aware of any
pending or threatened strike, work stoppage, material unfair
labor practice claim, or other material labor dispute affecting
Pentech or any of its Subsidiaries.
(f) Immediately after becoming aware of any
violation of any law, statute, regulation, or ordinance of a
Public Authority applicable to any Borrower, any Subsidiary, or
their respective Properties which may materially and adversely
affect the Collateral, the repayment of the Obligations, the
Lender's rights under the Loan Documents, or any Borrower's
Property, business, operations, or condition (financial or
otherwise).
(g) Immediately after becoming aware of any
violation by any Borrower of Environmental Laws or immediately
upon receipt of and any notice that a Public Authority has
asserted that any Borrower is not in compliance with
Environmental Laws or that its compliance is being investigated.
(h) Thirty (30) days prior to any Borrower
changing its name or the address of its chief executive office.
(i) Immediately after becoming aware of any ERISA
Event, accompanied by any materials required to be filed with the
PBGC with respect thereto; immediately after any Borrower's
receipt of any notice concerning the imposition of any withdrawal
liability under Section 4042 of ERISA with respect to a Plan;
immediately upon the establishment of any Pension Plan not
existing at the Closing Date or the commencement of contributions
by any Borrower to any Pension Plan to which such Borrower was
not contributing at the Closing Date; and immediately upon
becoming aware of any other event or condition regarding a Plan
or any Borrower's or an ERISA Affiliate's compliance with ERISA,
which may materially and adversely affect such Borrower's
Property, business, operation, or condition (financial or
otherwise).
(j) Promptly, but in any event within two (2)
Business Days, after any notice (other than routine notices under
or in connection with the License Agreements) is sent by such
Borrower to, or received by such Borrower from, licensors under
the License Agreements or sent by such Borrower or received by
such Borrower under or in connection with the Settlement
Documents, together with a copy of such notice.
Each notice given under this Section 8.3 shall describe the
subject matter thereof in reasonable detail and shall set forth
the action that such Borrower has taken or proposes to take with
respect thereto.
9. GENERAL WARRANTIES AND REPRESENTATIONS.
Each Borrower continuously warrants and represents to
the Lender, at all times during the term of this Agreement and
until all Obligations have been satisfied, that, except as
hereafter disclosed to and accepted by the Lender in writing:
9.1 Authorization, Validity, and Enforceability of
this Agreement and the Loan Documents. Each Borrower has the
corporate power and authority to execute, deliver and perform
this Agreement and the other Loan Documents, to incur the
Obligations, and to grant the Security Interest. Each Borrower
has taken all necessary corporate action (including, without
limitation, obtaining approval of its stockholders) to authorize
its execution, delivery, and performance of this Agreement and
the other Loan Documents. No consent, approval, or authorization
of, or declaration or filing with, any Public Authority, and no
consent of any other Person, is required in connection with any
Borrower's execution, delivery, and performance of this Agreement
and the other Loan Documents, except for those already duly
obtained. This Agreement and the other Loan Documents have been
duly executed and delivered by each Borrower and constitutes the
legal, valid and binding obligation of each Borrower, enforceable
against it in accordance with its terms without defense, setoff,
or counterclaim. The Borrowers' execution, delivery, and
performance of this Agreement and the other Loan Documents do not
and will not conflict with, or constitute a violation or breach
of, or constitute a default under, or result in the creation or
imposition of any Lien upon the Property of any Borrower or any
of its Subsidiaries (except as contemplated by this Agreement and
the other Loan Documents) by reason of the terms of (a) any
mortgage, lease, agreement, or instrument to which such Borrower
or any of its Subsidiaries is a party or which is binding upon
it, (b) any judgment, law, statute, rule or governmental
regulation applicable to such Borrower or any of its
Subsidiaries, or (c) the Certificate or Articles of Incorporation
or By-Laws of such Borrower or any of its Subsidiaries.
9.2 Validity and Priority of Security Interest. The
provisions of this Agreement and the other Loan Documents create
legal and valid Liens on all the Collateral in the Lender's
favor, and when all proper filings, recordings, and other actions
necessary to perfect such Liens have been made or taken, such
Liens will constitute perfected and continuing Liens on all the
Collateral, having priority over all other Liens on the
Collateral except for the Permitted Liens identified in Section
7.4 and enforceable against such Borrower and all third parties.
9.3 Organization and Qualification. Each of the
Borrowers (a) is duly incorporated and organized and validly
existing in good standing under the laws of the state specified
on Schedule 9.3-A, (b) is qualified to do business as a foreign
corporation and is in good standing in the jurisdictions set
forth opposite its name on Schedule 9.3-B, which are the only
jurisdictions in which qualification is necessary in order for
the applicable Borrower to own or lease its property and conduct
its business, and (c) has all requisite power and authority to
conduct its business and to own its Property.
9.4 Corporate Name; Prior Transactions. No Borrower
has, during the past five years, been known by or used any other
corporate or fictitious name, or been a party to any merger or
consolidation, or acquired all or substantially all of the assets
of any Person, or acquired any of its Property out of the
ordinary course of business, except as set forth on Schedule 9.4.
9.5 Subsidiaries and Affiliates. Schedule 9.5-A is a
correct and complete list of the name and relationship to each
Borrower of each and all of the Borrowers' Subsidiaries and other
Affiliates. Each Subsidiary is (a) duly incorporated and
organized and validly existing in good standing under the laws of
its state of incorporation set forth on Schedule 9.5-B, and (b)
qualified to do business as a foreign corporation and in good
standing in the states set forth opposite its name on Schedule
9.5-C, which are the only states in which such qualification is
necessary in order for it to own or lease its Property and
conduct its business.
9.6 Financial Statements and Projections.
(a) The Borrowers have delivered to the Lender
the consolidated audited balance sheets, and statements of income
and expense, and cash flow statements and statements of
stockholders' investment for Pentech and its Subsidiaries as of
September 30, 1996, and for the Fiscal Year then ended,
accompanied by the report thereon of Pentech's independent
certified public accountants, Ernst & Young LLP. The Borrowers
have also delivered to the Lender the consolidated and
consolidating unaudited balance sheets of Pentech and its
Subsidiaries, and consolidated and consolidating unaudited
statements of income and expenses for Pentech and its
Subsidiaries, as at November 30, 1996, and for the two months
then ended. Such financial statements are attached hereto as
Exhibit B-l. All such financial statements have been prepared in
accordance with GAAP and present accurately and fairly such
Borrower's financial position as at the dates thereof and its
results of operations for the periods then ended.
(b) The Latest Projections represent each
Borrower's best estimate of the Borrowers' future financial
performance for the periods set forth therein. The Latest
Projections have been prepared on the basis of the assumptions
set forth therein, which the Borrowers believe are fair and
reasonable in light of current and reasonably foreseeable
business conditions.
9.7 Capitalization. The authorized and outstanding
capital stock of Pentech and each of its Subsidiaries is
described on Schedule 9.7-A; all such stock of Pentech and each
of such Subsidiaries is validly issued and outstanding, fully
paid and non-assessable; Pentech is the sole beneficial and
record holder of all of such stock of each of such Subsidiaries;
and each of the record holders of 5% or more of the outstanding
stock of Pentech is set forth on Schedule 9.7-B.
9.8 Solvency. Pentech and its consolidated
Subsidiaries, on a consolidated basis, are Solvent prior to, and
after giving effect to, the transactions contemplated by this
Agreement and the making of each Revolving Loan.
9.9 Debt. Such Borrower has no Debt, except (a) the
Obligations, (b) the Subordinated debt, (c) other Debt set forth
in the most recent Financial Statements delivered to the Lender,
or the notes thereto, (d) trade payables and other contractual
obligations arising in the ordinary course of business since the
date of such Financial Statements, and (e) Debt incurred since
the date of such Financial Statements to finance Capital
Expenditures permitted hereby.
9.10 Distributions. Since October 1, 1995, no
Distribution has been declared, paid, or made upon or in respect
of any capital stock or other securities of any Borrower.
9.11 Title to Property. Except for Property which a
Borrower leases, each Borrower has good and marketable title in
fee simple to the Premises and good, indefeasible, and
merchantable title to all of its other Property including,
without limitation, the assets reflected on the most recent
Financial Statements delivered to the Lender, except as disposed
of since the date thereof in the ordinary course of business.
9.12 Adequate Assets. Each Borrower possesses adequate
assets for the conduct of its business.
9.13 Real Property; Leases. Schedule 9.13 is a correct
and complete list of all real property owned by each Borrower,
all leases and subleases of real or personal property by each
Borrower as lessee or sublessee, and all leases and subleases of
real or personal property by each Borrower as lessor or
sublessor. Each of such leases and subleases is valid and
enforceable in accordance with its terms and is in full force and
effect and no default by any party to any such lease or sublease
exists.
9.14 Proprietary Rights. Schedule 9.14 contains a
correct and complete list of all of each Borrower's Proprietary
Rights. None of the Proprietary Rights are subject to any
licensing agreement or similar arrangement except as set forth on
Schedule 9.14. None of the Proprietary Rights infringe on or
conflict with any other Person's Property and no other Person's
Property infringes on or conflicts with the Proprietary Rights.
The Proprietary Rights described on Schedule 9.14 constitute all
of the Property of such type necessary to the current and
anticipated future conduct of such Borrower's business.
9.15 Trade Names and Terms of Sale. All trade names or
styles under which each Borrower will sell Inventory or create
Accounts, or to which instruments in payment of Accounts may be
made payable, are listed on Schedule 9.15.
9.16 Litigation; Certain Settlement Agreement Matters.
(a) There is no pending or, to the best of each
Borrower's knowledge, threatened action, suit, proceeding, or
counterclaim by any Person, or investigation by any Public
Authority, or any basis for any of the foregoing, which may
materially and adversely affect the Collateral, the repayment of
the Obligations, the Lender's rights under the Loan Documents, or
any Borrower's Property, business, operations, or condition
(financial or otherwise).
(b) Pentech, on or before December 31, 1996, and in
compliance with the requirements of Paragraph (1) of the
Settlement Agreement, made payment to the Paradise Defendants of
the Initial Payment (as such terms are defined in the Settlement
Agreement) from funds obtained through the sale of Pentech's
equity securities. No judgment has been entered on the Consent
Judgment (as defined in the Settlement Agreement). The
Satisfaction of Judgment and the stipulation of discontinuation
referred to in Paragraphs (9) and (10) of the Settlement
Agreement have been released from escrow and duly filed with the
United States District Court for the Southern District of New
York and all other appropriate Public Authorities, and, as a
result thereof, the Action (as defined in the Settlement
Agreement) has been discontinued with prejudice and all judgments
in favor of the Paradise Defendants against any Borrower have
been satisfied and expunged of record.
9.17 Restrictive Agreements. No Borrower is a party to
any contract or agreement, or is subject to any charter or other
corporate restriction, which affects its ability to execute,
deliver, and perform the Loan Documents and repay the Obligations
which materially and adversely affects such Borrower's Property,
business, operations, or condition (financial or otherwise).
9.18 Labor Disputes. Except as set forth on Schedule
9.18: (a) there is no collective bargaining agreement or other
labor contract covering employees of Pentech or any of its
Subsidiaries; (b) no such collective bargaining agreement or
other labor contract is scheduled to expire during the term of
this Agreement; (c) no union of other labor organization is
seeking to organize, or to be recognized as, a collective
bargaining unit of employees of Pentech or any of its
Subsidiaries or for any similar purpose; and (d) there is no
pending or, to the best of such Borrower's knowledge, threatened
strike, work stoppage, material unfair labor practice claims, or
other material labor dispute against or affecting Pentech or any
of its Subsidiaries or their respective employees.
9.19 Environmental Laws. Except as otherwise disclosed
on Schedule 9.19:
(a) Pentech and its Subsidiaries have complied in
all material respects with all Environmental Laws applicable to
their Premises and business, and neither Pentech nor Subsidiary
nor any of its present Premises or operations, nor its past
property or operations, is subject to any enforcement order from
or liability agreement with any Public Authority or private
Person respecting (i) compliance with any Environmental Law or
(ii) any potential liabilities and costs or remedial action
arising from the Release or threatened Release of a Contaminant.
(b) Pentech and its Subsidiaries have obtained
all permits necessary for their current operations under
Environmental Laws, and all such permits are in good standing and
Pentech and its Subsidiaries are in compliance with all terms and
conditions of such permits.
(c) Neither Pentech nor any of its Subsidiaries,
nor, to the best of each Borrower's knowledge, any predecessors
in interest to Pentech and its Subsidiaries, has stored, treated
or disposed of any hazardous waste on any Premises, as defined
pursuant to 40 CFR Part 261 or any equivalent Environmental Law.
(d) Neither Pentech nor any of its Subsidiaries
has received any summons, complaint, order or similar written
notice that it is not currently in compliance with, or that any
Public Authority is investigating its compliance with, any
Environmental Laws or that it is or may be liable to any other
Person as a result of a Release or threatened Release of a
Contaminant.
(e) None of the present or past operations of
Pentech and its Subsidiaries is the subject of any investigation
by any Public Authority evaluating whether any remedial action is
needed to respond to a Release or threatened Release of a
Contaminant.
(f) There is not now, nor to the best of each
Borrower's knowledge has there ever been on or in the Premises:
(i) any underground storage tanks or
surface impoundments,
(ii) any asbestos containing material, or
(iii) any polychlorinated biphenyls (PCB's)
used in hydraulic oils, electrical transformers or other equip-
ment.
(g) Neither Pentech nor any of its Subsidiaries
has filed any notice under any requirement of Environmental Law
reporting a spill or accidental and unpermitted release or
discharge of a Contaminant into the environment.
(h) Neither Pentech nor any of its Subsidiaries
has entered into any negotiations or settlement agreements with
any Person (including, without limitation, the prior owner of its
property) imposing material obligations or liabilities on such
Borrower or any of its Subsidiaries with respect to any remedial
action in response to the Release of a Contaminant or
environmentally related claim.
(i) None of the products manufactured,
distributed or sold by Pentech or any of its Subsidiaries contain
asbestos material.
(j) No Environmental Lien has attached to any
Premises of Pentech or any of its Subsidiaries.
9.20 No Violation of Law. No Borrower is in violation
of any law, statute, regulation, ordinance, judgment, order, or
decree applicable to it which violation would in any respect
materially and adversely affect the Collateral, the repayment of
the Obligations, the Lender's rights under the Loan Documents, or
any Borrower's Property, business, operations, or condition
(financial or otherwise).
9.21 Settlement Documents and Other Material Contracts.
The Borrowers have delivered to the Lender true, complete and
correct copies of the License Agreements, the Settlement
Documents and, to the extent requested by the Lender, all other
Assigned Contracts. All of such License Agreements, Settlement
Documents, and other Assigned Contracts are in full force and
effect, and no provisions thereof have been amended, modified or
waived since the execution thereof. No Borrower is in default or
breach under any of the Settlement Documents or License
Agreements, nor, to the best of the Borrowers' knowledge, is any
other party thereto in default or breach thereunder. No Borrower
is in default with respect to any other note, indenture, loan
agreement, mortgage, lease, deed, or other agreement to which
such Borrower is a party or bound, which default could reasonably
be expected to materially and adversely affect the Collateral,
the repayment of the Obligations, the Lender's rights under the
Loan Documents, or any Borrower's Property, business, operations,
or condition (financial or otherwise). The Lender is a Senior
Creditor, as defined in, and a third-party beneficiary of, the
Subordination Agreement; this Agreement constitutes the "Senior
Loan Agreement" and the other Loan Documents constitute the "Loan
Documents", as such terms are defined or used in the
Subordination Agreement; and all of the Obligations constitute
"Senior Obligations" under and as defined in the Subordination
Agreement.
9.22 ERISA Compliance. (a) Each Plan is in compliance
in all material respects with the applicable provisions of ERISA,
the Code and other federal or state law. Each Plan which is
intended to qualify under Section 401(a) of the Code has received
a favorable determination letter from the IRS and to the best
knowledge of such Borrower, nothing has occurred which would
cause the loss of such qualification. Each Borrower and each
ERISA Affiliate has made all required contributions to any Plan
subject to Section 412 of the Code, and no application for a
funding waiver or an extension of any amortization period
pursuant to Section 412 of the Code has been made with respect to
any Plan.
(b) There are no pending or, to the best
knowledge of each Borrower, threatened claims, actions or
lawsuits, or action by any Public Authority, with respect to any
Plan which has resulted or could reasonably be expected to result
in a material adverse effect on any Borrower's business or
operations. There has been no prohibited transaction or
violation of the fiduciary responsibility rules with respect to
any Plan which has resulted or could reasonably be expected to
result in a material adverse effect on any Borrower's business or
operations.
(c) (i) No ERISA Event has occurred or is
reasonably expected to occur; (ii) no Pension Plan has any
unfunded pension liability; (iii) neither any Borrower nor any
ERISA Affiliate has incurred, or reasonably expects to incur, any
liability under Title IV of ERISA with respect to any Pension
Plan (other than premiums due and not delinquent under Section
4007 of ERISA); (iv) neither any Borrower nor any ERISA Affiliate
has incurred, or reasonably expects to incur, any liability (and
no event has occurred which, with the giving of notice under
Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer
Plan; and (v) neither any Borrower nor any ERISA Affiliate has
engaged in a transaction that could subject any Person to Section
4069 or 4212(c) of ERISA.
9.23 Taxes. Pentech and its Subsidiaries have filed
all tax returns and other reports required to be filed and have
paid all Taxes, assessments, fees and other governmental charges
levied or imposed upon them or their properties, income or assets
that are otherwise due and payable.
9.24 Use of Proceeds. None of the transactions
contemplated in this Agreement (including, without limitation,
the use of proceeds from the Loans) will violate or result in the
violation of Section 7 of the Securities Exchange Act of 1934, as
amended, or any regulations issued pursuant thereto, including
without limitation, Regulations G, T, U and X of the Federal
Reserve Board, 12 CFR, Chapter II. No Borrower owns or intends
to carry or purchase any "margin stock" within the meaning of
said Regulation U or G. None of the proceeds of the Loans will
be used, directly or indirectly, to purchase or carry (or
refinance any borrowing, the proceeds of which were used to
purchase or carry) any "security" within the meaning of the
Securities Exchange Act of 1934, as amended. The Borrowers' uses
of the proceeds of the Loans and uses of the Letters of Credit
are, and will continue to be, legal and proper uses, duly
authorized by the applicable Borrower's Board of Directors; such
uses are, and will continue to be, consistent with all applicable
laws and statutes, as in effect from time to time; and such uses
are, and will continue to be, permitted pursuant to the terms of
this Agreement.
9.25 Private Offerings. Such Borrower has not,
directly or indirectly, offered the Loans for sale to, or
solicited offers to buy part thereof from, or otherwise
approached or negotiated with respect thereto with any
prospective purchaser other than Lender. Such Borrower hereby
agrees that neither it nor anyone acting on its behalf has
offered or will offer the Loans or any part thereof or any
similar securities for issue or sale to or solicit any offer to
acquire any of the same from anyone so as to bring the issuance
thereof within the provisions of Section 5 of the Securities Act
of 1933, as amended.
9.26 Broker's Fees. No Person is entitled to any
brokerage or finder's fee with respect to the transactions
described in this Agreement.
9.27 No Material Adverse Change. No material adverse
change has occurred in any Borrower's Property, business,
operations, or condition (financial or otherwise) since the date
of the Financial Statements delivered to the Lender.
9.28 Disclosure. Neither this Agreement nor any
document or statement furnished to the Lender by or on behalf of
any Borrower hereunder or in connection herewith contains any
untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements contained
herein or therein not misleading.
10. AFFIRMATIVE AND NEGATIVE COVENANTS. Each Borrower
covenants that, so long as any of the Obligations remain
outstanding or this Agreement is in effect:
10.1 Taxes and Other Obligations. Each Borrower and
each of its Subsidiaries shall: (a) file when due all tax
returns and other reports which it is required to file, pay, or
provide for the payment, when due, of all Taxes, fees,
assessments and other governmental charges against it or upon its
Property, income, and franchises, make all required withholding
and other tax deposits, and establish adequate reserves for the
payment of all such items, and shall provide to the Lender, upon
request, satisfactory evidence of its timely compliance with the
foregoing; and (b) pay when due all Debt owed by it and perform
and discharge in a timely manner all other obligations undertaken
by it; provided, however that such Borrower and its Subsidiaries
need not pay any tax, fee, assessment, governmental charge, or
Debt, or perform or discharge any other obligation, that it is
contesting in good faith by appropriate proceedings diligently
pursued; and provided, further, that no Borrower shall pay,
perform, discharge or provide collateral security for any
Subordinated Obligations except at such times, to the extent and
in the manner permitted in the Subordination Agreement.
10.2 Corporate Existence and Good Standing. Each
Borrower and each of its Subsidiaries shall maintain its
corporate existence and its qualification and good standing in
all states necessary to conduct its business and own its
Property, and shall obtain and maintain all licenses, permits,
franchises and governmental authorizations necessary to conduct
its business and own its Property.
10.3 Compliance with Law and Agreements. Each Borrower
and each of its Subsidiaries shall comply with the terms and
provisions of each judgment, law, statute, rule, and governmental
regulation applicable to it and each contract, mortgage, lien,
lease, indenture, order, instrument, agreement, or document to
which it is a party or by which it is bound.
10.4 Maintenance of Property and Insurance. Each
Borrower and each of its Subsidiaries shall: (a) maintain all of
its Property necessary and useful in its business in good
operating condition and repair, ordinary wear and tear excepted;
and (b) in addition to the insurance required by Section 7.7,
maintain with financially sound and reputable insurers such other
insurance with respect to its Property and business against
casualties and contingencies of such types (including, without
limitation, business interruption, environmental liability,
public liability, product liability, and larceny, embezzlement or
other criminal misappropriation) and in such amounts as is
customary for Persons of established reputation engaged in the
same or a similar business and similarly situated, naming the
Lender, at its request, as additional insured under each such
policy.
10.5 Environmental Laws. Each Borrower shall conduct
its business in full compliance with all Environmental Laws
applicable to it, including, without limitation, those relating
to such Borrower's generation, handling, use, storage, and
disposal of hazardous and toxic wastes and substances. Each
Borrower shall take prompt and appropriate action to respond to
any non-compliance with Environmental Laws and shall regularly
report to the Lender on such response. Without limiting the
generality of the foregoing, whenever any Borrower gives notice
to the Lender pursuant to Section 8.3(g), the Borrowers shall, at
the Lender's request and the Borrowers' expense: (a) cause an
independent environmental engineer acceptable to the Lender to
conduct such tests of the site where such Borrower's non-
compliance or alleged non-compliance with Environmental Laws has
occurred and prepare and deliver to the Lender a report setting
forth the results of such tests, a proposed plan for responding
to any environmental problems described therein, and an estimate
of the costs thereof; and (b) provide to the Lender a
supplemental report of such engineer whenever the scope of the
environmental problems, or the Borrowers' response thereto or the
estimated costs thereof, shall change.
10.6 ERISA. Each Borrower shall cause each Plan, which
has been designated to be so, to be qualified within the meaning
of Section 401(a) of the Code and to be administered in all
respects in compliance with Section 401(a) of the Code. Each
Borrower shall cause each Plan to be administered in all respect
in compliance with ERISA.
10.7 Mergers, Consolidations, Acquisitions, or Sales.
Neither any Borrower nor any of its Subsidiaries shall enter into
any transaction of merger, reorganization, or consolidation, or
transfer, sell, assign, lease, or otherwise (except as expressly
otherwise permitted hereby) dispose of all or any part of its
Property, or wind up, liquidate or dissolve, or agree to do any
of the foregoing, except sales of Inventory in the ordinary
course of its business.
10.8 Distributions; Capital Changes. Neither any
Borrower nor any of its Subsidiaries shall: (a) directly or
indirectly declare or make, or incur any liability to make, any
Distribution, except Distributions to Pentech by one of its
wholly-owned Subsidiaries; or (b) make any change in its capital
structure which could adversely affect the repayment of the
Obligations.
10.9 Transactions Affecting Collateral or Obligations.
Neither any Borrower nor any of its Subsidiaries shall enter into
any transaction which materially and adversely affects the
Collateral or any Borrower's ability to repay the Obligations.
10.10 Guaranties. Neither any Borrower nor any of its
Subsidiaries shall make, issue, or become liable on any Guaranty,
except Guaranties in favor of the Lender, endorsements of
instruments for deposit and, in the ordinary course of business
consistent with past practices, guaranties of the liabilities of
another Borrower.
10.11 Debt. Neither any Borrower nor any of its
Subsidiaries shall incur or maintain any Debt, other than: (a)
the Obligations; (b) trade payables and contractual obligations
to suppliers and customers incurred in the ordinary course of
business; (c) the Subordinated Obligations; (d) Capital
Expenditures to the extent permitted pursuant to Section 10.19;
and (e) other Debt existing on the Closing Date and reflected in
the Financial Statements attached as Exhibit B-l.
10.12 Prepayment. Neither any Borrower nor any of its
Subsidiaries shall voluntarily prepay any Debt, except the
Obligations in accordance with their terms.
10.13 Transactions with Affiliates. Except as set
forth below, neither any Borrower nor any of its Subsidiaries
shall: sell, transfer, distribute, or pay any money or Property
to any Affiliate, or lend or advance money or Property to any
Affiliate, or invest in (by capital contribution or otherwise) or
purchase or repurchase any stock or indebtedness or any Property
of any Affiliate, or become liable on any Guaranty of the
indebtedness, dividends, or other obligations of any Affiliate.
Notwithstanding the foregoing, (a) any Borrower may engage in
such transactions with each other in the ordinary course of
business, consistent with past practices; (b) Pentech may sublet
from a company controlled by Norman Melnick and David Melnick
certain premises located at 2 Ethel Road, Edison, New Jersey and
make monthly rental payments in respect thereof in an amount not
to exceed $3,000 per month; (c) the Borrowers may make payments,
in an annual amount not to exceed $40,000, of premiums on
policies of insurance on the life of Norman Melnick; and (d) if
no Event of Default has occurred and is continuing, any Borrower
and its Subsidiaries may engage in transactions with other
Affiliates in the ordinary course of business in amounts and upon
terms fully disclosed to the Lender and no less favorable to such
Borrower or such Subsidiary than would obtain in a comparable
arm's length transaction with a third party who is not an
Affiliate.
10.14 Business Conducted. Each Borrower and its
Subsidiaries shall not engage, directly or indirectly, in any
line of business other than the businesses in which such Borrower
and its Subsidiaries are engaged on the Closing Date.
10.15 Liens. Neither any Borrower nor any of its
Subsidiaries shall create, incur, assume, or permit to exist any
Lien on any Property now owned or hereafter acquired by any of
them, except Permitted Liens.
10.16 Sale and Leaseback Transactions. Neither any
Borrower nor any of its Subsidiaries shall, directly or
indirectly, enter into any arrangement with any Person providing
for such Borrower or a Subsidiary to lease or rent Property that
such Borrower or a Subsidiary has or will sell or otherwise
transfer to such Person.
10.17 New Subsidiaries. No Borrower shall, directly or
indirectly, organize or acquire any Subsidiary other than those
listed on Schedule 10.17.
10.18 Restricted Investments. Neither any Borrower nor
any of its Subsidiaries shall make any Restricted Investment.
10.19 Capital Expenditures. Neither any Borrower nor
any of its Subsidiaries shall make or incur any Capital
Expenditure if, after giving effect thereto, the aggregate amount
of all Capital Expenditures by Pentech and its Subsidiaries would
exceed $870,000 during the Fiscal Year ending September 30, 1997
and $1,000,000 during any Fiscal Year thereafter.
10.20 Operating Lease Obligations. Neither any
Borrower nor any of its Subsidiaries shall enter into any lease
of real or personal property as lessee or sublessee (other than
Capital Leases), if, after giving effect thereto, the aggregate
amount of Rentals (as hereinafter defined) payable by Pentech and
its Subsidiaries in any Fiscal Year in respect of such lease and
all other such leases would exceed $1,250,000 (such amount being
referred to herein as "Permitted Rentals"). The term "Rentals"
means all payments due from the lessee or sublessee under a
lease, including, without limitation, basic rent, percentage
rent, property taxes, utility or maintenance costs, and insurance
premiums.
10.21 Minimum Interest Coverage. The Borrowers will
maintain a ratio of (a) EBITDA, as determined at the end of each
fiscal quarter set forth below, for the preceding four fiscal
quarters, to (b) interest expense for such preceding four fiscal
quarter period, of not less than the ratios indicated below
(except that the calculation of the Minimum Interest Coverage
Ratio at the end of the fiscal quarter ending on June 30, 1997,
will be for the preceding three fiscal quarters then ended):
Quarter Ending Ratio
June 30, 1997 1.5 to 1.0
September 30, 1997 1.9 to 1.0
December 31, 1997 1.9 to 1.0
March 31, 1998 2.0 to 1.0
June 30, 1998 2.3 to 1.0
September 30, 1998,
and each fiscal
quarter thereafter 2.6 to 1.0
10.22 Adjusted Tangible Net Worth. The Borrowers will
have Tangible Net Worth of not less than the following amounts at
the end of each of the following fiscal quarters:
Fiscal Quarter Ending Amount
December 31, 1996 $ 15,300,000
March 31, 1997 15,700,000
June 30, 1997 17,100,000
September 30, 1997 17,500,000
December 31, 1997 17,200,000
March 31, 1998 17,500,000
June 30, 1998 18,200,000
September 30, 1998 18,500,000
December 31, 1998 18,200,000
March 31, 1999 18,500,000
June 30, 1999 19,200,000
September 30, 1999,
and each fiscal
quarter thereafter 19,500,000
10.23 Landlord Waivers; Credit Insurance; etc. The
Borrowers shall use their best efforts (a) to cause to be
delivered to the Lender, within 90 days after the Closing Date to
the extent not theretofore delivered, written waivers, duly
executed on behalf of the landlord of each of the Premises, and
in form and substance acceptable to the Lender, of all Liens
which such landlord for such Premises may be entitled to assert
against such Borrowers' Inventory and other Collateral; and (b)
to assign to the Lender any and all policies of credit insurance
insuring the Borrowers' Accounts, any and all policies of life
insurance with respect to which any Borrower is the beneficiary
or payee, and all of the Borrowers' rights thereunder, together
with such consents or acknowledgments with respect thereto as the
Lender shall require, all in form and substance satisfactory to
the Lender.
10.24 Further Assurances. Each Borrower shall execute
and deliver, or cause to be executed and delivered, to the Lender
such documents and agreements, and shall take or cause to be
taken such actions, as the Lender may, from time to time, request
to carry out the terms and conditions of this Agreement and the
other Loan Documents.
11. CLOSING; CONDITIONS TO CLOSING. The Lender will not be
obligated to make the initial Loans or to obtain any Letters of
Credit on the Closing Date, unless the following conditions
precedent have been satisfied in a manner satisfactory to Lender:
11.1 Conditions Precedent to Making of Loans and
Issuance of Letters of Credit on the Closing Date.
(a) Representations and Warranties; Covenants.
Each Borrower's representations and warranties contained in this
Agreement and the other Loan Documents shall be correct and
complete; each Borrower shall have performed and complied with
all covenants, agreements, and conditions contained herein and in
the other Loan Documents which are required to have been
performed or complied with.
(b) Delivery of Documents. Each Borrower shall
have delivered, or caused to be delivered, to the Lender such
documents, instruments and agreements as the Lender shall request
in connection herewith, duly executed by all parties thereto
other than the Lender, and in form and substance satisfactory to
the Lender and its counsel.
(c) Termination of Existing Debt and Liens. All
indebtedness under and in connection with that certain Revolving
Credit and Guaranty Agreement, dated as of December 10, 1996,
between the Borrowers and the Prior Lenders, and that certain
International Foreign Exchange Agreement, dated as of December
10, 1996, between Pentech and one or more of the Prior Lenders,
and all Liens thereunder or otherwise on the Property of each
Borrower and its Subsidiaries, except Permitted Liens, shall have
been satisfied and terminated.
(d) Settlement Documents. The Lender shall be
satisfied with the terms and conditions of the Settlement
Documents and, in particular, the subordination provisions
thereof and the limitations on the remedies of the Subordinated
Creditors with respect to the Subordinated Obligations and any
collateral therefor (all of which shall accrue to the benefit of
the Lender in a manner and in form and substance satisfactory to
the Lender), and the Lender shall have received an estoppel
certificate or other written confirmation concerning the
Settlement Documents, in form and substance satisfactory to the
Lender, duly executed and delivered by each of the Subordinated
Creditors.
(e) License Agreements. The Lender shall have
reviewed and be satisfied with the all terms and conditions of
the License Agreements.
(f) Private Offering. The Lender shall have
received evidence satisfactory to it that Pentech has completed
the Private Offering, has received not less than $500,000 of the
proceeds thereof and has made provision satisfactory to the
Lender that Pentech will receive the balance thereof on or
promptly after the Closing Date.
(g) Environmental Compliance. The Lender shall
have received evidence satisfactory to it that there does not
exist on the Premises or in connection with the operation thereof
or of any Borrower's business, any violation of any Environmental
Laws.
(h) Facility Fee. The Borrowers shall have paid
in full the Facility Fee.
(i) Payment of Fees and Expenses. The Borrowers
shall have paid all fees and expenses of the Lender's internal
and outside counsel and all other fees and expenses of the Lender
incurred in connection with this Agreement and any of the other
Loan Documents and the transactions contemplated hereby and
thereby.
(j) Required Approvals. The Lender shall have
received certified copies of all consents or approvals of any
Public Authority or other Person which the Lender determines is
required in connection with the transactions contemplated by this
Agreement.
(k) No Material Adverse Change. There shall have
occurred no material adverse change in any Borrower's business or
financial condition or in the Collateral since September 30,
1996, and the Lender shall have received a certificate of each
Borrower's chief executive officer to such effect.
(l) Proceedings. All proceedings to be taken in
connection with the transactions contemplated by this Agreement,
and all documents, contemplated in connection herewith, shall be
satisfactory in form and substance to the Lender and its counsel.
(m) Excess Availability. There shall be
remaining Aggregate Availability of at least $1,000,000
(determined for this purpose (i) without giving effect to
Allowable Seasonal Overadvances, (ii) after giving effect to the
consummation of the Private Offering, (iii) after taking into
account the Revolving Loans and the Letters of Credit issued or
to be issued at each such time and (iv) after reducing the
Aggregate Availability by an amount equal to the amount, if any,
required at each such time to pay all Indebtedness and trade and
other obligations of the Borrowers which is past due pursuant to
the terms thereof; provided, however, that trade obligations
shall be considered past due under this Section 11.1(m) only if
they are 30 days past due).
11.2 Conditions Precedent to Each Loan. The obligation
of the Lender to make each Loan or to provide for the issuance of
any Letter of Credit shall be subject to the conditions precedent
that on the date of any such extension of credit the following
statements shall be true, and the acceptance by any Borrower of
any extension of credit shall be deemed to be a statement to the
effect set forth in clauses (a) and (b), with the same effect as
the delivery to the Lender of a certificate signed by the chief
executive officer and chief financial officer of such Borrower,
dated the date of such extension of credit, stating that:
(a) The representations and warranties contained
in this Agreement and the other Loan Documents are correct in all
material respects on and as of the date of such extension of
credit as though made on and as of such date, except to the
extent the Lender has been notified by a Borrower that any
representation or warranty is not correct and the Lender has
explicitly waived in writing compliance with such representation
or warranty; and
(b) No Default or Event of Default has occurred
and is continuing, or would result from such extension of credit.
12. DEFAULT.
12.1 Events of Default. It shall constitute an event
of default ("Event of Default") if any one or more of the
following shall occur for any reason:
(a) any failure to make payment of principal,
interest, fees or premium on any of the Obligations when due;
(b) any representation or warranty made or deemed
made by any Borrower or any Subsidiary in this Agreement, any of
the other Loan Documents, any Financial Statement, or any
certificate furnished by such Borrower or any Subsidiary at any
time to the Lender shall prove to be untrue in any material
respect as of the date when made, deemed made, or furnished;
(c) default shall occur in the observance or
performance of any of the covenants and agreements contained in
this Agreement, the other Loan Documents, or any other agreement
entered into at any time to which any Borrower and the Lender are
party, or if any such agreement or document shall terminate
(other than in accordance with its terms or with the written
consent of the Lender) or become void or unenforceable without
the written consent of the Lender;
(d) (i) any breach or default by any Borrower
shall occur under any of the Settlement Documents and shall
remain uncured beyond any period of grace provided with respect
thereto; or (ii) any material breach or material default by any
Borrower shall occur under any of the Licenses, which breach or
default is reasonably likely to have a material adverse effect
upon a material part of the business of any of the Borrowers and
shall remain uncured beyond any period of grace provided with
respect thereto; or (iii) any breach or default by any Borrower
in the payment of any principal or interest on any indebtedness
for borrowed money (other than the Obligations) beyond any period
of grace provided with respect thereto;
(e) any Borrower or any Subsidiary shall: (i)
file a voluntary petition in bankruptcy or file a voluntary
petition or an answer or otherwise commence any action or
proceeding seeking reorganization, arrangement or readjustment of
its debts or for any other relief under the Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency act or law,
state or federal, now or hereafter existing, or consent to,
approve of, or acquiesce in, any such petition, action or
proceeding; (ii) apply for or acquiesce in the appointment of a
receiver, assignee, liquidator, sequestrator, custodian, trustee
or similar officer for it or for all or any part of its Property;
(iii) make an assignment for the benefit of creditors; or (iv) be
unable generally to pay its debts as they become due;
(f) an involuntary petition shall be filed or an
action or proceeding otherwise commenced seeking reorganization,
arrangement or readjustment of any Borrower's or any Subsidiary's
debts or for any other relief under the Bankruptcy Code, as
amended, or under any other bankruptcy or insolvency act or law,
state or federal, now or hereafter existing;
(g) a receiver, assignee, liquidator,
sequestrator, custodian, trustee or similar officer for any
Borrower or any Subsidiary or for all or any part of their
Property shall be appointed involuntarily; or a warrant of
attachment, execution or similar process shall be issued against
any part of the Property of any Borrower or any Subsidiary;
(h) A Borrower or any Subsidiary shall file a
certificate of dissolution under applicable state law or shall be
liquidated, dissolved or wound-up or shall commence or have
commenced against it any action or proceeding for dissolution,
winding-up or liquidation, or shall take any corporate action in
furtherance thereof;
(i) all or any part of the Property of any
Borrower shall be nationalized, expropriated or condemned, seized
or otherwise appropriated, or custody or control of such Property
or of any Borrower shall be assumed by any Public Authority or
any court of competent jurisdiction at the instance of any Public
Authority, except where contested in good faith by proper
proceedings diligently pursued where a stay of enforcement is in
effect;
(j) any guaranty of the Obligations shall be
terminated, revoked or declared void or invalid;
(k) one or more final judgments for the payment of
money aggregating in excess of $250,000 (whether or not covered
by insurance) shall be rendered against any Borrower or any
Subsidiary and such Borrower or Subsidiary shall fail to
discharge the same within thirty (30) days after the date of
notice of entry thereof or to appeal therefrom;
(l) any loss, theft, damage or destruction of any
item or items of Collateral occurs which: (i) materially and
adversely affects the operation of any Borrower's business or
(ii) is material in amount and is not adequately covered by
insurance;
(m) any event or condition shall occur or exist
with respect to a Plan that could, in the Lender's reasonable
judgment, subject a Borrower or any Subsidiary to any tax,
penalty or liability under ERISA, the Code or otherwise which in
the aggregate is material in relation to the business,
operations, Property or financial or other condition of such
Borrower;
(n) for any 12-month period during the term of
this Agreement, individuals who at the beginning of such period
constituted the board of directors of Pentech cease for any
reason to constitute a majority of such board of directors in
office at the end of such period; or any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Securities
Exchange Act of 1934 (the "Exchange Act")), other than Norman
Melnick and David Melnick is or becomes the "beneficial owner"
(as defined in Rules 13d-3 and 13d-5 under the Exchange Act),
directly or indirectly, of more than 25% of the total outstanding
capital stock of Pentech. For purposes of this paragraph, a
Person shall be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time; or
(o) there occurs any material adverse change in
any Borrower's Property, business, operations, or condition
(financial or otherwise).
13. REMEDIES.
(a) If an Event of Default exists, the Lender may,
without notice to or demand on any Borrower, do one or more of
the following at any time or times and in any order: (i) reduce
such Borrower's Maximum Revolver Amount or one or more of the
elements thereof; (ii) restrict the amount of or refuse to make
Revolving Loans and restrict or refuse to arrange for Letters of
Credit; (iii) terminate this Agreement; (iv) declare any or all
Obligations to be immediately due and payable (provided however
that upon the occurrence of any Event of Default described in
Sections 12.1(e). 12.1(f), 12.1(g), or 12.1(h), all Obligations
shall automatically become immediately due and payable); and (v)
pursue its other rights and remedies under the Loan Documents and
applicable law.
(b) If an Event of Default exists: (i) the Lender
shall have, in addition to all other rights, the rights and
remedies of a secured party under the UCC; (ii) the Lender may,
at any time, take possession of the Collateral and keep it on any
Borrower's premises, at no cost to the Lender, or remove any part
of it to such other place or places as the Lender may desire, or
any Borrower shall, upon the Lender's demand, at such Borrower's
cost, assemble the Collateral and make it available to the Lender
at a place reasonably convenient to the Lender; and (iii) the
Lender may sell and deliver any Collateral at public or private
sales, for cash, upon credit or otherwise, at such prices and
upon such terms as the Lender deems advisable, in its sole
discretion, and may, if the Lender deems it reasonable, postpone
or adjourn any sale of the Collateral by an announcement at the
time and place of sale or of such postponed or adjourned sale
without giving a new notice of sale. Without in any way
requiring notice to be given in the following manner, each
Borrower agrees that any notice by the Lender of sale,
disposition or other intended action hereunder or in connection
herewith, whether required by the UCC or otherwise, shall
constitute reasonable notice to such Borrower if such notice is
mailed by registered or certified mail, return receipt requested,
postage prepaid, or is delivered personally against receipt, at
least five (5) days prior to such action to such Borrower's
address specified in or pursuant to Section 15.8. If any
Collateral is sold on terms other than payment in full at the
time of sale, no credit shall be given against the Obligations
until the Lender receives payment, and if the buyer defaults in
payment, the Lender may resell the Collateral without further
notice to any Borrower. In the event the Lender seeks to take
possession of all or any portion of the Collateral by judicial
process, each Borrower irrevocably waives: (a) the posting of
any bond, surety or security with respect thereto which might
otherwise be required; (b) any demand for possession prior to the
commencement of any suit or action to recover the Collateral; and
(c) any requirement that the Lender retain possession and not
dispose of any Collateral until after trial or final judgment.
Each Borrower agrees that the Lender has no obligation to
preserve rights to the Collateral or marshal any Collateral for
the benefit of any Person. The Lender is hereby granted a
license or other right to use, without charge, any Borrower's
labels, patents, copyrights, name, trade secrets, trade names,
trademarks, and advertising matter, or any similar property, in
completing production of, advertising or selling any Collateral,
and such Borrower's rights under all licenses and all franchise
agreements shall inure to the Lender's benefit. The proceeds of
sale shall be applied first to all expenses of sale, including
attorneys' fees, and second, in whatever order the Lender elects,
to all Obligations. The Lender will return any excess to such
Borrower or such other Person as shall be legally entitled
thereto and such Borrower shall remain liable for any deficiency.
(c) If an Event of Default occurs, each Borrower hereby
waives (i) all rights to notice and hearing prior to the exercise
by the Lender of the Lender's rights to repossess the Collateral
without judicial process or to replevy, attach or levy upon the
Collateral without notice or hearing, and (ii) all rights of set-
off and counterclaim against Lender.
(d) If the Lender terminates this Agreement upon an
Event of Default, the Borrowers shall pay the Lender, immediately
upon termination, a fee equal to the early termination fee that
would have been payable under Section 14 if this Agreement had
been terminated on that date pursuant to the Borrowers' election.
14. TERM AND TERMINATION. This Agreement shall expire on
the Stated Termination Date unless earlier terminated as provided
in this Section. The Borrowers may terminate this Agreement at
any time prior to the Stated Termination Date if: (a) they give
the Lender sixty (60) days' prior written notice of termination
by registered or certified mail; (b) they pay and perform all
Obligations on or prior to the effective date of termination; and
(c) they pay to the Lender, on or prior to the effective date of
termination, and in addition to any other prepayment premium
required hereunder and the fees required by Section 6.4, (i) one
and one-half percent (1.50%) of the Total Facility if such
termination is made on or prior to the first Anniversary Date;
and (ii) one-half percent (0.50%) of the Total Facility if such
termination is made after the first Anniversary Date but on or
prior to the second Anniversary Date. The Lender may also
terminate this Agreement without notice upon an Event of Default.
Upon the effective date of termination of this Agreement for any
reason whatsoever, all Obligations shall become immediately due
and payable and the Borrowers shall immediately arrange for the
cancellation of Letters of Credit then outstanding or deposit a
Supporting Letter of Credit or cash pursuant to the provisions of
Section 2.3(g). Notwithstanding the termination of this
Agreement, until all Obligations are paid and performed in full,
the Lender shall retain all of its rights and remedies hereunder
(including, without limitation, in all then existing and after-
arising Collateral).
15. MISCELLANEOUS.
15.1 Cumulative Remedies; No Prior Recourse to
Collateral. The enumeration herein of the Lender's rights and
remedies is not intended to be exclusive, and such rights and
remedies are in addition to and not by way of limitation of any
other rights or remedies that the Lender may have under the UCC
or other applicable law. The Lender shall have the right, in its
sole discretion, to determine which rights and remedies are to be
exercised and in which order. The exercise of one right or
remedy shall not preclude the exercise of any others, all of
which shall be cumulative. The Lender may, without limitation,
proceed directly against any Borrower to collect the Obligations
without any prior recourse to the Collateral.
15.2 No Implied Waivers. No act, failure or delay by
the Lender shall constitute a waiver of any of its rights and
remedies. No single or partial waiver by the Lender of any
provision of this Agreement or any other Loan Document, or of
breach or default hereunder or thereunder, or of any right or
remedy which the Lender may have, shall operate as a waiver of
any other provision, breach, default, right or remedy or of the
same provision, breach, default, right or remedy on a future
occasion. No waiver by the Lender shall affect its rights to
require strict performance of this Agreement.
15.3 Severability. If any provision of this Agreement
shall be prohibited or invalid, under applicable law, it shall be
ineffective only to such extent, without invalidating the
remainder of this Agreement.
15.4 Governing Law; Choice of Forum; Service of
Process; Jury Trial Waiver; Waivers. (a) THIS AGREEMENT SHALL
BE INTERPRETED, AND THE RIGHTS AND LIABILITIES OF THE PARTIES
HERETO DETERMINED, IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK.
(b) SUBJECT ONLY TO THE EXCEPTION IN THE NEXT SENTENCE, THE
BORROWERS AND THE LENDER HEREBY AGREE TO THE EXCLUSIVE
JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE STATE OF NEW YORK SITTING IN THE CITY AND
COUNTY OF NEW YORK AND WAIVE ANY OBJECTION BASED ON VENUE OR
FORUM NON CONVENIENS WITH RESPECT TO ANY ACTION INSTITUTED
THEREIN, AND AGREE THAT ANY DISPUTE CONCERNING THE RELATIONSHIP
BETWEEN THE LENDER AND ANY BORROWER OR THE CONDUCT OF ANY PARTY
IN CONNECTION WITH THIS AGREEMENT OR OTHERWISE SHALL BE HEARD
ONLY IN THE COURTS DESCRIBED ABOVE. NOTWITHSTANDING THE
FOREGOING, THE LENDER SHALL HAVE THE RIGHT TO BRING ANY ACTION OR
PROCEEDING AGAINST ANY BORROWER OR ITS RESPECTIVE PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTION THE LENDER DEEMS NECESSARY OR
APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR OTHER
SECURITY FOR THE OBLIGATIONS.
(c) EACH BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND
ALL PROCESS UPON IT AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS
MAY BE MADE BY REGISTERED MAIL (RETURN RECEIPT REQUESTED)
DIRECTED TO SUCH BORROWER AT ITS ADDRESS SET FORTH IN SECTION
15.8 AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5)
DAYS AFTER THE SAME SHALL HAVE BEEN SO DEPOSITED IN THE U.S.
MAILS, OR, AT THE LENDER'S OPTION, BY SERVICE UPON KALIN &
BANNER, AT ITS NOTICE ADDRESS SET FORTH IN SECTION 15.8, WHICH
EACH BORROWER IRREVOCABLY APPOINTS AS SUCH BORROWER'S AGENT FOR
THE PURPOSE OF ACCEPTING SERVICE OF PROCESS WITHIN THE STATE OF
NEW YORK. IN ADDITION, THE LENDER AGREES PROMPTLY TO FORWARD BY
REGISTERED MAIL ANY PROCESS SO SERVED UPON SAID AGENT TO ANY
BORROWER AT ITS ADDRESS SET FORTH IN SECTION 15.8. EACH BORROWER
HEREBY CONSENTS TO SERVICE OF PROCESS AS AFORESAID.
(d) THE BORROWERS AND THE LENDER EACH HEREBY WAIVES ANY
RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION (i) ARISING UNDER THIS AGREEMENT OR ANY OTHER INSTRUMENT,
DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION
HEREWITH OR (ii) IN ANY WAY CONNECTED WITH OR RELATED OR
INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM
IN RESPECT TO THIS AGREEMENT OR ANY OTHER INSTRUMENT, DOCUMENT OR
AGREEMENT EXECUTED OR DELIVERED, IN CONNECTION HEREWITH OR THE
TRANSACTIONS RELATED HERETO, IN EACH CASE WHETHER NOW EXISTING OR
HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR
OTHERWISE. THE BORROWERS AND THE LENDER EACH HEREBY AGREES AND
CONSENTS THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION
SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY AND THAT ANY OF
THEM MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS AGREEMENT
WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES
HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY.
(e) NOTHING IN THIS SECTION 15.4 SHALL AFFECT THE RIGHTS OF
THE LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED
BY LAW OR AFFECT THE RIGHTS OF THE LENDER TO BRING ANY ACTION OR
PROCEEDING AGAINST ANY BORROWER OR ITS PROPERTY IN THE COURTS OF
ANY OTHER JURISDICTION.
(f) EACH OF THE BORROWERS HEREBY IRREVOCABLY AND
UNCONDITIONALLY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY
LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL
ACTION OR PROCEEDING REFERRED TO IN THIS SECTION 15.4 ANY
SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.
15.5 Survival of Representations and Warranties. All
of the representations and warranties of each Borrower contained
in this Agreement shall survive the execution, delivery, and
acceptance thereof by the parties, notwithstanding any
investigation by the Lender or its agents.
15.6 Other Security and Guaranties. The Lender may,
without notice or demand and without affecting any Borrower's
obligations hereunder, from time to time: (a) take from any
Person and hold collateral (other than the Collateral) for the
payment of all or any part of the Obligations and exchange,
enforce or release such collateral or any part thereof; and (b)
accept and hold any endorsement or guaranty of payment of all or
any part of the Obligations and release or substitute any such
endorser or guarantor, or any Person who has given any Lien in
any other collateral as security for the payment of all or any
part of the Obligations, or any other Person in any way obligated
to pay all or any part of the Obligations.
15.7 Fees and Expenses. The Borrowers shall pay to the
Lender on demand all costs and expenses that the Lender pays or
incurs in connection with the negotiation, preparation,
consummation, administration, enforcement, and termination of
this Agreement and the other Loan Documents, including, without
limitation: (a) reasonable attorneys' and paralegals' fees and
disbursements of counsel to the Lender (including, without
limitation, a reasonable estimate of the allocable cost of in-
house counsel and staff); (b) costs and expenses including
attorneys' and paralegals' fees and disbursements (including,
without limitation, a reasonable estimate of the allocable cost
of in-house counsel and staff) for any amendment, supplement,
waiver, consent, or subsequent closing in connection with the
Loan Documents and the transactions contemplated thereby; (c)
costs and expenses of lien searches; (d) Taxes, fees and other
charges for filing financing statements and continuations, and
other actions to perfect, protect, and continue the Security
Interest; (e) sums paid or incurred to pay any amount or take any
action required of any Borrower under the Loan Documents that
such Borrower fails to pay or take; (f) costs of appraisals,
inspections, and verifications of the Collateral, including,
without limitation, travel, lodging, and meals together with an
allocated charge of $750 per day for each auditor employed by the
Lender for inspections of the Collateral and the Borrowers'
operations; (g) costs and expenses of forwarding loan proceeds,
collecting checks and other items of payment, and establishing
and maintaining Payment Accounts and lock boxes; (h) all amounts
that the Borrowers are required to pay in connection with any
Letter of Credit; (i) costs and expenses of preserving and
protecting the Collateral; and (j) costs and expenses including
attorneys' and paralegals' fees and disbursements (including,
without limitation, a reasonable estimate of the allocable cost
of in-house counsel and staff) paid or incurred to obtain payment
of the Obligations, enforce the Security Interest, sell or
otherwise realize upon the Collateral, and otherwise enforce the
provisions of the Loan Documents, or to defend any claims made or
threatened against the Lender arising out of the transactions
contemplated hereby (including without limitation, preparations
for and consultations concerning any such matters). The
foregoing shall not be construed to limit any other provisions of
the Loan Documents regarding costs and expenses to be paid by the
Borrowers. All of the foregoing costs and expenses shall be
charged to the Borrowers' loan account as Revolving Loans.
15.8 Notices. Except as otherwise provided herein, all
notices, demands and requests that any party is required or
elects to give to any other shall be in writing, or by a telecom-
munications device capable of creating a written record, and any
such notice shall become effective (a) upon personal delivery
thereof, including, but not limited to, delivery by overnight
mail and courier service, (b) five (5) days after it shall have
been mailed by United States mail, first class, certified or
registered, with postage prepaid, or (c) in the case of notice by
such a telecommunications device, when properly transmitted, in
each case addressed to the party to be notified as follows:
If to the Lender: BankAmerica Business Credit, Inc.
40 East 52nd Street
New York, NY 10022
Attention: Division Manager
Telephone No.: 212/836-5241
Telecopier No.: 212/836-5167
with a copy to: Bank of America
335 Madison Avenue
New York, NY 10017
Attention: Jerry M. Saccone, Esq.
Telephone No.: 212/503-7230
Telecopier No.: 212/503-7255
with a copy to: Rogers & Wells
200 Park Avenue
New York, NY 10166
Attention: Alan M. Christenfeld, Esq.
Telephone No.: 212/878-8000
Telecopier No.: 212/878-8375
If to any Borrower: Pentech International, Inc.
195 Carter Drive
Edison, NJ 08817
Attention: John W. Linster,
President
Telephone No.: 908/287-6640
Telecopier No.: 908/287-3127
with a copy to: Kalin & Banner
757 Third Avenue
New York, NY 10017
Attention: Richard S. Kalin, Esq.
Telephone No.: 212/888-9010
Telecopier No.: 212/759-3234
or to such other address as each party may designate for itself
by like notice.
15.9 Indemnification. EACH BORROWER HEREBY AGREES TO
INDEMNIFY, DEFEND AND HOLD THE LENDER, ITS AFFILIATES, AND EACH
OF THEIR RESPECTIVE DIRECTORS, OFFICERS, AGENTS, EMPLOYEES AND
COUNSEL, HARMLESS FROM AND AGAINST ANY AND ALL LOSSES, CLAIMS,
DAMAGES, LIABILITIES, DEFICIENCIES, JUDGMENTS, PENALTIES OR
EXPENSES IMPOSED ON, INCURRED BY OR ASSERTED AGAINST ANY OF THEM,
WHETHER DIRECT, INDIRECT OR CONSEQUENTIAL ARISING OUT OF OR BY
REASON OF ANY LITIGATION, INVESTIGATIONS, CLAIMS, OR PROCEEDINGS
(WHETHER BASED ON ANY FEDERAL, STATE OR LOCAL LAWS OR OTHER
STATUTES OR REGULATIONS, INCLUDING, WITHOUT LIMITATION,
SECURITIES, ENVIRONMENTAL, OR COMMERCIAL LAWS AND REGULATIONS,
UNDER COMMON LAW OR AT EQUITY, OR ON CONTRACT OR OTHERWISE)
COMMENCED OR THREATENED, WHICH ARISE OUT OF OR ARE IN ANY WAY
BASED UPON THE NEGOTIATION, PREPARATION, EXECUTION, DELIVERY,
ENFORCEMENT, PERFORMANCE OR ADMINISTRATION OF THIS AGREEMENT, ANY
OTHER LOAN DOCUMENT, OR ANY UNDERTAKING OR PROCEEDING RELATED TO
ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY OR ANY ACT, OMISSION
TO ACT, EVENT OR TRANSACTION RELATED OR ATTENDANT THERETO,
INCLUDING, WITHOUT LIMITATION, AMOUNTS PAID IN SETTLEMENT, COURT
COSTS, AND THE FEES AND EXPENSES OF COUNSEL REASONABLY INCURRED
IN CONNECTION WITH ANY SUCH LITIGATION, INVESTIGATION, CLAIM OR
PROCEEDING AND FURTHER INCLUDING, WITHOUT LIMITATIONS, ALL
LOSSES, DAMAGES (INCLUDING CONSEQUENTIAL DAMAGES), EXPENSES OR
LIABILITIES SUSTAINED BY THE LENDER IN CONNECTION WITH ANY
ENVIRONMENTAL INSPECTION, MONITORING, SAMPLING, OR CLEANUP OF THE
ENCUMBERED REAL ESTATE REQUIRED OR MANDATED BY ANY ENVIRONMENTAL
LAW; PROVIDED, HOWEVER, THAT BORROWER SHALL NOT INDEMNIFY LENDER,
ITS DIRECTORS, OFFICERS, AGENTS, EMPLOYEES AND COUNSEL FROM SUCH
DAMAGES RESULTING FROM THEIR GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT. Without limiting the foregoing, if, by reason of any
suit or proceeding of any kind, nature, or description against
any Borrower, or by any Borrower or any other party against
Lender, which in Lender's sole discretion makes it advisable for
Lender to seek counsel for protection and preservation of its
liens and security assets, or to defend its own interest, such
expenses and counsel fees shall be allowed to Lender. To the
extent that the undertaking to indemnify, pay and hold harmless
set forth in this Section 15.9 may be unenforceable because it is
violative of any law or public policy, each Borrower shall
contribute the maximum portion which it is permitted to pay and
satisfy under applicable law, to the payment and satisfaction of
all indemnified matters incurred by Lender. The foregoing
indemnity shall survive the payment of the Obligations and the
termination of this Agreement. All of the foregoing costs and
expenses shall be part of the Obligations and secured by the
Collateral.
15.10 Waiver of Notices. Unless otherwise expressly
provided herein, each Borrower waives presentment, protest and
notice of demand or dishonor and protest as to any instrument, as
well as any and all other notices to which it might otherwise be
entitled. No notice to or demand on any Borrower which the
Lender may elect to give shall entitle such Borrower to any or
further notice or demand in the same, similar or other
circumstances.
15.11 Binding Effect; Assignment. The provisions of
this Agreement shall be binding upon and inure to the benefit of
the respective representatives, successors and assigns of the
parties hereto; provided, however, that no interest herein may be
assigned by any Borrower without the prior written consent of the
Lender. The rights and benefits of the Lender hereunder shall,
if the Lender so agrees, inure to any party acquiring any
interest in the Obligations or any part thereof.
15.12 Modification. This Agreement is intended by each
Borrower and the Lender to be the final, complete, and exclusive
expression of the agreement among them. This Agreement
supersedes any and all prior oral or written agreements relating
to the subject matter hereof and may not be contradicted by
evidence of prior, contemporaneous or subsequent oral agreements
of the parties. There are no oral agreements between the
parties. No modification, rescission, waiver, release, or
amendment of any provision of this Agreement shall be made,
except by a written agreement signed by all the Borrowers and a
duly authorized officer of the Lender.
15.13 Counterparts. This Agreement may be executed in
any number of counterparts, and by the Lender and each Borrower
in separate counterparts, each of which shall be an original, but
all of which shall together constitute one and the same
agreement.
15.14 Captions. The captions contained in this
Agreement are for convenience only, are without substantive
meaning and should not be construed to modify, enlarge, or
restrict any provision.
15.15 Right of Set-Off. Whenever an Event of Default
exists, the Lender is hereby authorized at any time and from time
to time, to the fullest extent permitted by law, to set off and
apply any and all deposits (general or special, time or demand,
provisional or final) at any time held and other indebtedness at
any time owing by the Lender or any affiliate of the Lender to or
for the credit or the account of any Borrower against any and all
of the Obligations, whether or not then due and payable. The
Lender agrees promptly to notify such Borrower after any such
set-off and application made by Lender, provided that the failure
to give such notice shall not affect the validity of such set-off
and application.
15.16 Participating Lender's Security Interests. The
Lender may, without notice to or consent by the Borrowers, grant
one or more participations in the Loans to Participating Lenders.
If a Participating Lender shall at any time with the Borrowers'
knowledge participate with the Lender in the Loans, each Borrower
hereby grants to such Participating Lender, and the Lender and
such Participating Lender shall have and are hereby given, a
continuing lien on and security interest in any money, securities
and other property of the Borrowers in the custody or possession
of the Participating Lender, including the right of setoff, to
the extent of the Participating Lender's participation in the
Obligations, and such Participating Lender shall be deemed to
have the same right of setoff to the extent of Participating
Lender's participation in the Obligations under this Agreement as
it would have if it were a direct lender.
15.17 Joint and Several Liability. The liability of
the Borrowers for all of the Obligations shall be joint and
several regardless of which Borrower actually receives loans or
other extensions of credit hereunder or the amount of such loans
received or the manner in which Lender accounts for such loans or
other extensions of credit or on its books and records. Each
Borrower's Obligations with respect to Revolving Loans made to it
or Letters of Credit issued for its account, and related fees,
costs and expenses, and each Borrower's Obligations arising as a
result of the joint and several liability of the Borrowers here-
under, with respect to Revolving Loans made to the other
Borrowers hereunder or Letters of Credit issued for the account
of the other Borrowers hereunder, together with the related fees,
costs and expenses, shall be separate and distinct obligations,
all of which are primary obligations of each Borrower.
Each Borrower's Obligations arising as a result of the
joint and several liability of the Borrowers hereunder with
respect to loans or other extensions of credit made to the other
Borrowers hereunder shall, to the fullest extent permitted by
law, be unconditional irrespective of (i) the validity of en-
forceability, avoidance or subordination of the Obligations of
the other Borrowers or of any promissory note or other document
evidencing all of any part of the Obligations of the other Bor-
rowers, (ii) the absence of any attempt to collect the Obliga-
tions from any of the other Borrowers, any other guarantor, or
any other security therefor, or the absence of any other action
to enforce the same, (iii) the waiver, consent, extension, for-
bearance or granting of any indulgence by the Lender with respect
to any provision of any instrument evidencing the Obligations of
the other Borrowers, or any part thereof, or any other agreement
now or hereafter executed by the other Borrowers and delivered to
the Lender, (iv) the failure by the Lender to take any steps to
perfect and maintain its security interest in, or to preserve its
rights to, any security or collateral for the Obligations of the
other Borrowers, (v) the Lenders' election, in any proceeding
instituted under the Bankruptcy Code, of the application of
Section 1111(b)(2) of the Bankruptcy Code, (vi) any borrowing or
grant of a security interest by the other Borrowers, as debtor-
in-possession under Section 364 of the Bankruptcy Code, (vii) the
disallowance of all or any portion of the Lender's claim(s) for
repayment of the Obligations of the other Borrowers under Section
502 of the Bankruptcy Code, or (viii) any other circumstance
which might constitute a legal or equitable discharge or defense
of a guarantor or of the other Borrowers.
Each Borrower hereby irrevocably agrees that it will
not bring any "claims" (as defined in Section 101(5) of the
Bankruptcy Code) against any other Borrower to which such
Borrower is or would at any time be otherwise entitled by virtue
of its obligations under this Agreement or under any of the Loan
Documents, including, without limitation, any right of
subrogation (whether contractual, under Section 509 of the
Bankruptcy Code or otherwise), reimbursement, contribution,
exoneration or other similar right against such other Borrowers,
until such time as all of the Obligations have been satisfied in
full and this Agreement shall have terminated in accordance with
its terms.
Upon any Event of Default, the Lender may, at its sole
election, proceed directly and at once, without notice, against
any Borrower to collect and recover the full amount, or any
portion of the Obligations, without first proceeding against any
other Borrower or any other Person, or against any security or
collateral for the Obligations. Each Borrower consents and
agrees that neither the Lender shall not be under any obligation
to marshall any assets in favor of such Borrower or against or in
payment of any or all of the Obligations.
<PAGE>
IN WITNESS WHEREOF, the parties have entered into this
Agreement on the date first above written.
PENTECH INTERNATIONAL, INC.
By: s/
Title: President
PENTECH COSMETICS, INC.
By: s/
Title: Vice President
SAWDUST PENCIL CO.
By: s/
Title: Vice President
BANKAMERICA BUSINESS CREDIT, INC.
By: s/
Title:
<PAGE>
List of Exhibits/Schedules
Exhibits
Exhibit A Permitted Liens
Exhibit B-1 Financial Statements
Exhibit B-2 Proforma Financial Statements
Exhibit B-3 Projections
Exhibit C Notice of Borrowing
Exhibit D Notice of Conversion/Continuation
Schedules
Schedule 1.1 Entities whose subsidiaries have
eligible Accounts with respect to
foreign sales
Schedule 7.3 Locations of Borrowers and Collateral
Schedule 7.13 License Agreements
Schedule 9.3-A States of incorporation of each Borrower
Schedule 9.3-B States in which each Borrower is
qualified to do business
Schedule 9.4 Prior Corporate Names of each Borrower
Schedule 9.5-A List of Subsidiaries and Affiliates
Schedule 9.5-B States of incorporation of each
Subsidiary and Affiliate
Schedule 9.5-C States in which each Subsidiary and
Affiliate is qualified to do business
Schedule 9.7-A Authorized and Outstanding Stock of each
of Pentech and its Subsidiaries
Schedule 9.7-B Beneficial and Record owners of the
authorized and Outstanding Stock of each
of Pentech (5% or more) and its
Subsidiaries
Schedule 9.13 Real Estate - Owned and Leased
Schedule 9.14 Proprietary Rights Collateral (patents,
trademarks, and copyrights)
Schedule 9.15 Trade Names of Borrowers
Schedule 9.18 Labor Disputes
Schedule 9.19 Environmental Laws
Schedule 10.17 New Subsidiaries
<PAGE>
EXHIBIT 10.8
November 15, 1996
Mr. John Linster
President
Pentech
Pentech International, Inc.
195 Carter Drive
Edison, New Jersey 08817
Re: License Agreement Dated July 1994
by and between Fisher-Price Inc.
and Pentech International Inc.
Dear David:
This letter sets forth the terms pursuant to which
Fisher-Price and Pentech International agree to terminate the
above referenced License Agreement (the "Agreement"). The
Agreement has a term of three years, with one partial and one
full contract year remaining.
Paragraph 3.2 of the Agreement states that the Minimum
Guaranteed Royalties for the 1996 and 1997 contract years are
$198,000 and $245,000 respectively. By agreement of the parties,
Fisher-Price will release Pentech from its obligation to pay the
1997 Minimum Guaranteed Royalties upon the receipt of payment by
Pentech of the balance due of $171,347.32 for the Minimum
Guaranteed Royalties for the 1996 contract year, such payment to
be received by Fisher-Price no later than November 20, 1996.
Upon receipt of the above-mentioned Minimum Guaranteed
Royalties, Fisher-Price will permit Pentech to sell off the
inventory outlined on attached Exhibit A for a six month period,
Pentech shall cease and desist from the sale, marketing and/or
distribution of any Licensed Products, as that term is defined in
the License Agreement. Pentech shall immediately cease and
desist from the manufacture of any such Licensed Products.
Pending Pentech's satisfaction of the terms set forth
in this letter agreement and the subsequent exchange of mutual
releases, as set forth below, Fisher-Price reserves the right to
bring an action to enforce the Agreement or this letter
agreement, at its option, in the event that Pentech fails to
comply with any term herein. Pentech agrees to pay any and all
reasonable attorneys' fees and costs associated with such an
action.
Subject to the preceding paragraph, upon execution of
this letter agreement, and payment by Pentech of $171,347.32, the
parties' respective rights and obligations under the licensing
Agreement between Fisher-Price and Pentech are terminated. The
parties further agree to exchange mutual releases upon receipt by
Fisher-Price of written assurance from Pentech that it has
complied with the terms of this letter agreement, such mutual
releases to provide that neither party shall bring an action
against the other party for breach of this Agreement.
Fisher-Price shall have the right to license the
Licensed Products covered by the Agreement to third parties
effective upon the execution of this letter by a duly authorized
officer of Pentech.
Please execute the two originals enclosed and return
one to Fisher-Price, evidencing Pentech's consent to the terms
set forth in this letter.
Sincerely,
Al Hellinger
Manager, Licensing
Agreed and accepted
this 18th day of November, 1996
John W. Linster
Print Name
s/John W. Linster
Signature
President
Print Title
cc: David Melnick
Edward Powderly
Liza Tommaney
<PAGE>
EXHIBIT 10.9
AGREEMENT
This Agreement is made and entered into as of December 27th,
1996 by and between Pentel Kabushiki Kaisha, d/b/a Pentel Co.,
Ltd., a Japanese corporation ("Pentel") and Pentech
International, Inc., a Pennsylvania corporation ("Pentech").
WHEREAS, Pentel is the owner of the trademark PENTEL and of
U.S. Trademark Registration Nos. 786,427 registered March 9, 1965
and 1,058,796 registered February 8, 1977 for said mark for
writing instruments and other products;
WHEREAS, Pentech is the owner of the trademark PENTECH with
stylized "E", as depicted in its U.S. Trademark Registration No.
1,315,743 registered January 22, 1985 for pens and markers;
WHEREAS, Pentel has filed a petition for cancellation under
Cancellation No. 16,058 seeking to cancel Pentech's U.S.
Registration no. 1,315,743, which cancellation proceeding is
currently pending between the parties in the U.S. Patent and
Trademark Office; and
WHEREAS, the parties are desirous of amicably settling the
aforementioned cancellation proceeding.
NOW THEREFORE, in consideration of the mutual covenants and
agreements herein contained, it is agreed as follows:
1. Pentel consents to Pentech's use and registration
in the United States of the trademark PENTECH as shown in
Registration No. 1,315,743, but Pentel does not consent to
Pentech's use or registration in the United States of the term
PENTECH in any lettering style or format which is different from
that shown in Registration No. 1,315,743.
2. Pentech agrees to not seek or acquire registration
in the United States of any trademark which includes or comprises
the term PENTECH unless said term has stylized letter "E" as
shown in Registration No. 1,315,743.
3. The parties agree to file a stipulation of
withdrawal of the petition for cancellation in Cancellation No.
16,058 (in the form shown in attached Exhibit A) promptly upon
execution of this Agreement.
4. This Agreement shall be binding on the parties,
their assigns and successors in interest, and this Agreement
shall not be used or asserted by either party against the other
party in any proceeding in any country except the United States.
<PAGE>
IN WITNESS THEREOF, the parties have caused this
Agreement to be executed as of the date first hereinabove
written.
WITNESS Pentel Kabushiki Kaisha,
d/b/a Pentel Co., Ltd.
s/Joru Sasagawa By: s/Hiroshi Asabe
Hiroshi ASABE, President
WITNESS Pentech International, Inc.
Patrizia E. DeBari
s/Patrizia E. DeBari By: s/John W. Linster
John W. LINSTER, President
<PAGE>
EXHIBIT A
IN THE UNITED STATES PATENT AND TRADEMARK OFFICE
BEFORE THE TRADEMARK TRIAL AND APPEAL BOARD
- -----------------------------X
Pentel Kabushiki Kaisha,
d.b.a. Pentel Co., Ltd.
Petitioner, Cancellation No. 16,058
v.
Pentech International Inc.,
Respondent.
- ----------------------------X
STIPULATION OF WITHDRAWAL OF PETITION FOR CANCELLATION
WHEREAS, the parties hereto have agreed that the
dispute between them should be amicably settled; and
WHEREAS, the parties have come to an agreement relative
to the terms of such settlement;
NOW THEREFORE, it is stipulated by and between the
parties hereto that the Petition for Cancellation is withdrawn
and that the cancellation shall be dismissed without prejudice to
either party.
Respectfully submitted,
ADAMS & WILKS
Attorneys for Petitioner
Dated: By:
Bruce L. Adams
50 Broadway - 31st Floor
New York, New York 10004
(212) 809-3700
COOPER & DUNHAM
Attorneys for Respondent
By:
Robert B.G. Horowitz
1185 Avenue of the Americas
23rd Floor
New York, New York 10036
(212) 278-0400
<PAGE>
EXHIBIT 10.10
SUBSCRIPTION AGREEMENT
PENTECH INTERNATIONAL, INC.
195 Carter Road
Edison, NJ 08817
Dear Sirs:
The undersigned (the "Investor") hereby tenders his
subscription for and offers to acquire units (the "Units"),
each Unit consisting of 100,000 shares of Common Stock (the
"Common Stock") of Pentech International, Inc. (the "Company").
This subscription is tendered in connection with a private
offering of a minimum of ten Units (the "Minimum Offer") up to a
maximum of 20 Units (the "Maximum Offer") pursuant to a
Confidential Private Offering Memorandum dated December 10, 1996
(the "Memorandum"). If the Minimum Offer is not reached on or
before December 31, 1996, unless extended at the option of the
Company to January 31, 1997, this offering will terminate and the
Company will return the money to the Investor without interest
thereon or deduction therefrom and cancel this subscription. All
funds will be held in escrow until the Minimum Offer is
completed.
1. Subscription Payment. As payment for this
subscription, simultaneously with the execution hereof, the
Investor is either (i) delivering herewith a check payable to the
order of Richard S. Kalin, as escrow agent, or (ii) transferring
funds by wire pursuant to the instructions of Richard S. Kalin,
as escrow agent, in the amount of $50,000 per Unit being
subscribed for. Mr. Kalin shall hold such funds in escrow until
the Minimum Offer is subscribed for. In the event the Minimum
Offer is not completed on or before December 31, 1996 (which may
be extended until January 31, 1997 at the sole option of the
Company), this amount shall be returned to the investor without
interest thereon or deduction therefrom.
2. Representations of the Investor. The Investor,
recognizing that the Company will be relying on the information
and on the representations set forth herein, hereby represents,
warrants and agrees as follows:
(a) The Investor understands that the offer and sale of the
Units is being made by means of this Subscription Agreement,
and is aware of the high degree of risk associated with an
investment in the Units.
(b) The Investor is a person who is able to bear economic
risks including a loss of an investment in the Units.
(c) The Investor is purchasing the shares of Common Stock
contained in the Units issued pursuant to this Subscription
Agreement (the "Shares") for his own account for investment,
and not with a view to or for sale in connection with the
distribution of the Shares nor with any present intention of
selling or otherwise disposing of all or any part of the
Shares; provided, however, the Investor shall have the right
to transfer the securities to third parties pursuant to an
exemption from registration under the Securities Act of 1933
(the "Act"). In connection with any such future transfer,
the Company will accept an acceptable opinion of counsel to
the Investor as to the existence of any exemption. The
Investor hereby acknowledges his understanding that the
Shares are not being registered under the Act or any state
securities laws, on the ground that the issuance and sale of
the Units to the Investor is exempt under the Act and
relevant state securities laws, as a small offering and not
involving a public offering. The Investor agrees not to
sell the Shares unless they are subsequently registered or
an exemption from such registration is available.
The Investor further acknowledges his understanding that the
Company's reliance on such exemptions are, in part, based
upon the foregoing representations, warranties, and
agreements by the Investor and that the statutory basis for
such exemptions would not be present, if notwithstanding
such representations, warranties and agreements, the
undersigned were acquiring the Units for resale on the
occurrence or non-occurrence of some predetermined event.
In order to induce the Company to issue and sell the Units
subscribed for hereby to the Investor, it is agreed that the
Company will have no obligation to recognize the ownership,
beneficial or otherwise, of such Units by anyone but the
Investor, except as set forth herein.
(d) All information contained in this Subscription
Agreement and in the Confidential Purchaser Questionnaire
being simultaneously provided to the Investor, is correct
and complete. Any material change occurring in either this
Subscription Agreement or in the Confidential Purchaser
Questionnaire prior to acceptance of this subscription shall
be promptly reported to the Company. The Investor, in
connection with his investment in the Company, has
sufficient knowledge and experience in matters relating to
business and financial matters in general and he is capable
of evaluating the merits and risks of an investment in the
Company and of making an informed investment decision.
(e) The address set forth in this Subscription Agreement is
his true and correct primary residence, and he has no
present intention of becoming a resident of any other state
or jurisdiction.
(f) The Investor acknowledges and is aware that, except as
set forth herein, the Investor will not transfer or assign
this subscription, the Units or any interest therein; if and
to the extent this subscription is accepted, the assignment
and transferability of the Units subscribed for by the
Investor will be governed by this Subscription Agreement and
all applicable laws.
(g) The Investor acknowledges and is aware that this
subscription is voidable by the Investor within three days
after the first tender of consideration is made by the
Investor to the Company, an agent of the Company or an
escrow agent. Subsequent to this three day period, the
Investor is not entitled to cancel, terminate or revoke this
subscription, and any agreements of the Investor in
connection herewith shall survive the death or disability of
the Investor.
(h) The Investor has been given access to full and fair
disclosure of all material information concerning the
Company. The Investor has also been given the opportunity to
ask questions of, and receive answers from, management of
the Company regarding the terms and conditions of this
Agreement, and the transactions contemplated thereby, as
well as the affairs of the Company and related matters.
The Investor may have access to whatever additional
information concerning the Company, its financial condition,
business, prospects, management, capitalization, and other
similar matters, that the Investor or his purchaser
representative, if any, desires, provided that the Company
can acquire such information without unreasonable effort or
expense.
(i) The Investor has received and carefully reviewed the
Memorandum, and except for the Memorandum, the Investor has
not been furnished with any other materials or literature
relating to the offer and sale of the Units.
(j) The Investor has had the opportunity to obtain
additional information necessary to verify the accuracy of
the information referred to in subparagraphs (h) and (i)
hereof.
3. Indemnification. The Investor hereby agrees to
indemnify and hold harmless the Company, its respective officers,
directors, shareholders, employees, agents and attorneys of each
such entity against any and all losses, claims, demands,
liabilities and expenses (including reasonable legal or other
expenses incurred by each such person in connection with
defending or investigating any such claims or liabilities,
whether or not resulting in any liability to such person) to
which any such indemnified party may become subject under the
Act, under any other statute, at common law or otherwise, insofar
as such losses, claims, demands, liabilities and expenses (a)
arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in this
Subscription Agreement or (b) arise out of or are based upon any
breach of any representation, warranty or agreement contained
herein.
4. Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements contained herein
shall survive the delivery of, and payment for, the Units.
5. Acceptance of Subscription. The Company may accept
this Subscription Agreement at any time for the Units subscribed
for by executing a copy hereof as provided and notifying the
Investor. The Investor understands that the Company may, in its
sole discretion, reject this subscription or may accept only a
portion of this subscription.
<PAGE>
SIGNATURE PAGE
IN WITNESS WHEREOF, the undersigned has executed this
Subscription Agreement this _____ day of __________, 199____.
Organization Signature: Individual Signature:
Print Name of Subscriber
By: Signature (s)
Print Name and Title of Print Name (s)
Person Signing
Print Name (s)
Number of Units Subscribed for:
(Please print information
below
exactly as you wish it to
appear
in the records of the Company)
Name and capacity in which Social Security Number of
Social Security Number of Individual or other
Taxpayer
Individual or other Taxpayer I.D. Number
I.D. Number subscription is
made -- see below for
particular requirements
Address: Address for notices if
different:
Number and Street Number and Street
City State Zip Code City State Zip Code
<PAGE>
Please indicate form of ownership:
TENANTS-IN-COMMON JOINT TENANTS WITH RIGHT OF
(Both Parties must sign SURVIVORSHIP
above) (Both Parties must sign above)
ACCEPTANCE OF SUBSCRIPTION
PENTECH INTERNATIONAL, INC.
The foregoing subscription is hereby accepted by Pentech
International, Inc. this ________ day of _________________ for
__________ Units.
By:
Name:
Title:
<PAGE>
EXHIBIT 10.11
REGISTRATION RIGHTS AGREEMENT
AGREEMENT, dated as of the day of ,
1996, between the person whose name and address appear on the
signature page attached hereto (individually a "Holder" or
collectively with the holders of the other units issued in the
offering, as defined below, the "Holders") and Pentech
International, Inc., a Delaware corporation having its principal
place of business at 195 Carter Drive, Edison, NJ 08817 (the
"Company").
WHEREAS, simultaneously with the execution and delivery
of this Agreement, the Holders are purchasing from the Company an
aggregate of up to 20 Units (the "Units"), each unit consisting
of 100,000 shares of Common Stock of the Company, par value $.01
per share (the "Common Stock") and
WHEREAS, the Company desires to grant to the Holder the
registration rights set forth herein with respect to the shares
of Common Stock issued in connection with the Offering (the
"Registrable Securities").
NOW, THEREFORE, the parties hereto mutually agree as
follows:
1. Registration. Subject to the terms set forth
below, upon the request of the Holders of 20% or more of the
Registrable Securities at any time after December 31, 1997, the
Company shall prepare and file a registration statement (the
"Registration Statement") with the Securities and Exchange
Commission, to include all of the Registrable Securities in the
Registration Statement. Within ten (10) days of receipt of a
proper request for registration pursuant hereto, the Company
shall notify all of the other Holders who shall have ten (10)
days from such notice to notify the Company of their desire to
include their Registrable Securities in such registration. The
Company will be required to maintain the effectiveness of the
Registration Statement until the earlier of (i) the date that all
of the Registrable Securities have been sold, or (ii) the date
all of the holders thereof receive an opinion of counsel to the
Company that all of the Registrable Securities may be freely
traded without registration under the Securities Act of 1933, as
amended (the "Act"). In the event the Company is engaged in a
material event or a proposed underwriter of an underwritten
public offering of the Company's securities indicates that filing
such a Registration Statement at such time is undesirable, then
the Company shall have the right to delay the filing of such
Registration Statement for 180 days.
2. Additional Terms. The following provisions shall
be applicable to the Registration Statement filed pursuant to
Paragraph 1 of this Agreement:
(a) The Company will use its best efforts to
cause the Registration Statement covering Registrable Securities
to become effective as promptly as possible and, if any stop
order shall be issued by the Securities and Exchange Commission
in connection therewith, to use its reasonable efforts to obtain
the removal of such order. Following the effective date of such
Registration Statement, the Company shall, upon the request of
the Holder forthwith supply such reasonable number of copies of
the Registration Statement, preliminary prospectus and prospectus
meeting the requirements of the Act, and other documents
necessary or incidental to the Offering, as shall be reasonably
requested by the Holder to permit the Holder to make a public
distribution of his or her Registrable Securities. The Company
will use its reasonable efforts to qualify the Registrable
Securities for sale in such states as the Holder of Registrable
Securities shall reasonably request, provided that no such
qualification will be required in any jurisdiction where, solely
as a result thereof, the Company would be subject to service of
general process or to taxation or qualification as a foreign
corporation doing business in such jurisdiction. The obligations
of the Company hereunder with respect to the Holder's Registrable
Securities are expressly conditioned on the Holder's furnishing
to the Company such appropriate information concerning the
Holder, the Holder's Registrable Securities and the terms of the
Holder's offering of such Registrable Securities as the Company
may reasonably request.
(b) The Company shall bear the entire cost and
expense of any registration of the Registrable Securities;
provided, however, that the Holder shall be solely responsible
for the fees of any counsel retained by him or her in connection
with such registration and any transfer taxes or underwriting
discounts or commissions applicable to the Registrable Securities
sold by him or her pursuant thereto.
(c) The Company shall indemnify and hold harmless
the Holder and each underwriter, within the meaning of the Act,
who may purchase from or sell for the Holder, any Registrable
Securities, from and against any and all losses, claims, damages
and liabilities caused by any untrue statement of a material fact
contained in the Registration Statement, any other registration
statement filed by the Company under the Act, any post-effective
amendment to such registration statements, or any prospectus
included therein required to be filed or furnished by reason of
this Agreement or caused by any omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except
insofar as such losses, claims, damages or liabilities are caused
by any such untrue statement or alleged untrue statement or
omission or alleged omission based upon information furnished or
required to be furnished in writing to the Company by the Holder
or underwriter expressly for use therein; which indemnification
shall include each person, if any, who controls any such
underwriter within the meaning of the Act and each officer,
director, employee and agent of such underwriter; provided,
however, that the Company shall not be obligated to so indemnify
the Holder or any such underwriter or other person referred to
above unless the Holder or underwriter or other person, as the
case may be, shall at the same time indemnify the Company, its
directors, each officer signing the Registration Statement and
each person, if any, who controls the Company within the meaning
of the Act, from and against any and all losses, claims, damages
and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in the Registration
Statement, any registration statement or any prospectus required
to be filed or furnished by reason of this Agreement or caused by
any omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, insofar as such losses, claims, damages or
liabilities are caused by any untrue statement or alleged untrue
statement or omission based upon information furnished in writing
to the Company by the Holder or underwriter expressly for use
therein.
(d) If for any reason the indemnification
provided for in the preceding subparagraph is held by a court of
competent jurisdiction to be unavailable to an indemnified party
with respect to therein, then the indemnifying party, in lieu of
indemnifying such indemnified party thereunder, shall contribute
to the amount paid or payable by the indemnified party as a
result of such loss, claim, damage or liability in such
proportion as is appropriate to reflect not only the relative
benefits received by the indemnified party and the indemnifying
party, but also the relative fault of the indemnified party and
the indemnifying party, as well as any other relevant equitable
considerations.
(e) Neither the filing of a Registration
Statement by the Company pursuant to this Agreement nor the
making of any request for prospectuses by the Holder shall impose
upon the Holder any obligation to sell his or her Registrable
Securities.
(f) The Holder, upon receipt of notice from the
Company that an event has occurred which requires a post-
effective amendment to the registration statement or a supplement
to the prospectus included therein, shall promptly discontinue
the sale of his or her Registrable Securities until the Holder
receives a copy of a supplemented or amended prospectus from the
Company, which the Company shall provide as soon as practicable
after such notice.
3. Governing Law.
(a) The Registrable Securities are being
delivered in New York. This Agreement shall be deemed to have
been made and delivered in the State of New York and shall be
governed as to validity, interpretation, construction, effect and
in all other respects by the internal laws of the State of New
York.
(b) The Company and the Holder (a) agree that any
legal suit, action or proceeding arising out of or relating to
this Agreement, or any other Agreement entered into pursuant to
the Offering shall be instituted exclusively in New York State
Supreme Court, County of New York, or in the United States
District Court for the Southern District of New York, (b) waives
any objection which the Company or such Holder may have now or
hereafter to the venue of such suit, action or proceeding, and
(c) irrevocably consents to the jurisdiction of the New York
State Supreme Court, County of New York and the United States
District Court for the Southern District of New York in any such
suit, action or proceeding. The Company and the Holder further
agree to accept and acknowledge service of any and all process
which may be served in any such suit, action or proceeding in the
New York State Supreme Court, County of New York or in the United
States District Court for the Southern District of New York and
agrees that service of process upon the Company or the Holder
mailed by certified mail to the Company's or, as the case may be,
the Holder's address shall be deemed in every respect effective
service of process upon the Company or the Holder, as the case
may be, in any suit, action or proceeding.
4. Amendment. This Agreement may only be amended by a
written instrument executed by the Company and the Holder.
5. Entire Agreement. This Agreement constitutes the
entire agreement of the parties hereto with respect to the
subject matter hereof, and supersedes all prior agreements and
understandings of the parties, oral and written, with respect to
the subject matter hereof.
6. Execution in Counterparts. This Agreement may be
executed in one or more counterparts, each of which shall be
deemed an original, but all of which together shall constitute
one and the same document.
7. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be deemed
duly given when delivered by hand or mailed by registered or
certified mail, postage prepaid, return receipt requested, as
follows:
If to the Holder, to his or her address set forth on
the signature page of this Agreement.
If to the Company, to the address set forth on the
first page of this Agreement.
8. Binding Effect; Benefits. The Holder may not
assign his or her rights hereunder. This Agreement shall inure
to the benefit of, and be binding upon, the parties hereto and
their respective heirs, legal representatives, successors and
permitted assigns, including, without limitation, the permitted
transferee of the Registrable Securities. Nothing herein
contained, express or implied, is intended to confer upon any
person other than the parties hereto and their respective heirs,
legal representatives, successors and such permitted assigns, any
rights or remedies under or by reason of this Agreement.
9. Headings. The headings contained herein are for
the sole purpose of convenience of reference, and shall not in
any way limit or affect the meaning or interpretation of any of
the terms or provisions of this Agreement.
10. Severability. Any provision of this Agreement
which is held by a court of competent jurisdiction to be
prohibited or unenforceable in any jurisdiction(s) shall be, as
to such jurisdiction(s), ineffective to the extent of such
prohibition or unenforceability without invalidating the
remaining provisions of this Agreement or affecting the validity
or enforceability of such provision in any other jurisdiction.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed and
delivered by the parties hereto as of the date first above
written.
PENTECH INTERNATIONAL, INC.
By:
Name: John W. Linster
Title: President
HOLDER:
Signature(s)
Print Name
Address:
<PAGE>
EXHIBIT 21
Subsidiaries of Pentech International, Inc.
Jurisdiction of
Name Incorporation
Sawdust Pencil Co. Delaware
Pentech Cosmetics, Inc. Delaware
<PAGE>
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in (i) the
Registration Statement (Form S-8 No. 33-27009) dated February 28,
1989 pertaining to the 1989 Stock Option Plan of Pentech
International, Inc. 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
January 13, 1997 with respect to the consolidated financial
statements and schedule of Pentech International, Inc. included
in this Annual Report (Form 10-K) for the year ended September
30, 1996.
ERNST & YOUNG LLP
By: /s/ Ernst & Young LLP
MetroPark, New Jersey
January 13, 1997
WPDOCS\DATA\PTK\10K96
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<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 7,063,808
<SECURITIES> 0
<RECEIVABLES> 14,537,500
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<INVENTORY> 18,728,008
<CURRENT-ASSETS> 43,137,466
<PP&E> 8,030,387
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0
0
<COMMON> 104,968
<OTHER-SE> 15,922,775
<TOTAL-LIABILITY-AND-EQUITY> 48,189,381
<SALES> 61,679,499
<TOTAL-REVENUES> 61,679,499
<CGS> 43,030,412
<TOTAL-COSTS> 19,521,690
<OTHER-EXPENSES> 5,842,758
<LOSS-PROVISION> 6,714,361
<INTEREST-EXPENSE> 1,447,499
<INCOME-PRETAX> (5,317,408)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,317,408)
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