PENTECH INTERNATIONAL INC, 10-K, 1999-12-28

PENTECH INTERNATIONAL INC
10-K, 1999-12-28
PENS, PENCILS & OTHER ARTISTS' MATERIALS

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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file No. 0-15374

PENTECH INTERNATIONAL INC.
(Exact name of registrant as specified in charter)

Delaware 23-2259391
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

195 Carter Drive, Edison, New Jersey 08817
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code (732) 287-6640

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share
(Title of Class)

Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to
such filing requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]

The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant on December 16, 1999, was approximately
$5,296,933 based on the average of the closing bid and asked quotations of
the registrant's Common Stock, par value $.01 share, as reported by NASDAQ on
December 16, 1999.

On December 16, 1999, there were outstanding 12,571,258 shares of the
registrant's Common Stock.

The Proxy Statement of the registrant to be filed on or before January
29, 2000 is incorporated herein by reference.

PART I

Item 1. BUSINESS.

(a) Pentech International Inc. (the "Company") was formed in
April 1984 to design and market writing and drawing instruments and
other stationery products. In November 1989, the Company formed a
wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"), to
manufacture certain of the Company's writing instruments. The
Company and its wholly-owned subsidiaries are collectively referred
to herein as the "Company."

(b) The Company primarily operates in one business segment:
the manufacture and marketing of pens, markers, pencils, other
writing instruments and activity kits, primarily to major mass
market retailers located in the United States, under the "Pentech"
name or licensed trademark brand. For financial information
relating to this business segment, please refer to the financial
statements contained elsewhere herein.

(c) The Company's product line consists of pens, markers,
pencils, activity products and miscellaneous products. These
products compete on the basis of special features, packaging
design, quality and price, or a combination of these
characteristics. The Company believes its reputation and ability
to develop innovative products and marketing programs for its
products, through the industry experience and marketing expertise
of its management, are principal success factors.

The Company has also had an ongoing program to secure select
license agreements with licensors of established trademarks to
utilize with certain of the Company's products. The Company views
its licenses as an important ingredient in offering a strong
product line with strong consumer appeal.

(i) The Company markets its product line on a direct basis as
well as through approximately 100 independent, nonexclusive, sales
representatives throughout the United States. Generally sales
initiated by the sales representatives are made directly to retail
chains including mass merchants, chain drug stores, grocery stores,
warehouse clubs, and office supply super stores. The Company also
has limited sales to the stationary, military and college store
markets and some sales through distributors and wholesalers.
Additionally, the Company sells its products in Canada, Europe,
Mexico and other selected countries, generally through a variety of
distribution arrangements.

The percentages of revenues contributed by the following
classes of products over the Company's last three fiscal years are
as follows:

Activity Miscellaneous
Pens Markers Pencils Products Products

FY 1997 27.8% 19.2% 33.4% 14.4% 5.2%
FY 1998 18.8% 26.5% 42.0% 11.7% 1.0%
FY 1999 13.6% 27.6% 45.3% 13.5% -

(ii) The Company conducts market research to stay abreast of
consumer trends and to gauge the demand for new writing instruments
and related products. Once the Company identifies a product for
marketplace introduction, it either selects a suitable overseas
manufacturer to manufacture the product or elects to manufacture
the product itself.

The Company's domestic pencil and marker manufacturing
facility, Sawdust, is presently being utilized by the Company to
manufacture a significant portion of the Company's writing
instruments. Sawdust's capacity (on a two shift basis) is
approximately $34,500,000 (wholesale value) of pencils, markers and
other writing instruments. During the Company's fiscal year ended
September 30, 1999 ("Fiscal 1999"), the Company manufactured
approximately $28,200,500 (wholesale value) of products at Sawdust,
which represents 81.7% of its current capacity and approximately
44.2% of the Company's current sales requirements. During its
fiscal year ended September 30, 1998 ("Fiscal 1998"), the Company
manufactured 42% of the wholesale value of the products it sold.

An important part of the product development process is
packaging. The Company leverages its unique packaging style to
reinforce its image as a marketer of modern, well-designed, high
quality, and reasonably priced writing instruments and children's
activity products.

(iii) The Company utilizes foreign manufacturers to supply a
large percentage of the products it sells. It acquires a majority
of its products from contract manufacturers located in Taiwan,
China, Korea, Italy, India and other foreign countries. Such
products are manufactured to the Company's order. The Company
generally acquires its imported products pursuant to purchase
orders, which typically provide for delivery within 60 to 90 days
after the order. The present policy is to establish with a
majority of its vendors payment terms ranging from 30 to 60 days
and finance the remainder pursuant to letters of credit.

To date, the Company has experienced limited supply shortages
with respect to these imported products. The Company has
occasionally incurred additional costs by shipping goods into its
warehouse via airfreight, as opposed to by ship when the
manufacturers did not timely deliver products or the Company
required faster delivery. The Company is unable to predict whether
it will experience similar or more severe product shortages in the
future. The Company has successfully developed alternative sources
of supply for virtually all of its important items to ensure timely
deliveries in the event of a disruption in deliveries due to a
dispute with any overseas manufacturer or any other reason. The
Company has achieved this through building Sawdust and developing
multiple sources in Taiwan, China, Korea, Italy, India and other
foreign countries. As a result, the loss of any one overseas
manufacturer would probably not create any long-term disruptions in
the Company's ability to ship its goods to its customers on a
timely basis. Management believes that it is not now dependent,
upon any one manufacturer for its product lines. It believes that
products of quality comparable to its present products could, if
necessary, be acquired from a variety of overseas manufacturers at
comparable rates.

The Company obtains raw materials for Sawdust from domestic
and foreign suppliers. It has not faced material supply shortages,
and it generally has multiple sources for most of its product
requirements. Due to a determination by the United States
International Trade Commission that certain Chinese manufacturers
of pencils were dumping these pencils in the United States, the
Company has been required to pay "Dumping Duties" to acquire
pencils from certain of its Chinese suppliers of pencils. The
Company has also been successful in developing additional sources
for its supply of certain of its pencils. In some instances, this
has resulted in increased costs to the Company for the wood for its
pencils. Recently, certain of the Company's Chinese suppliers of
pencils and related products have been the subject of a
redetermination which, in certain instances, increased the amount
of Dumping Duties the Company has or may be required to pay. The
Company has accrued for any additional duties which may arise from
this redetermination.

On September 26, 1999 the Company signed a letter of intent
with a Chinese manufacturer to establish a joint venture in
Shanghai China for the purpose of developing additional capability
to manufacture pencils and markers. The transaction is subject to
the manufacturer's ability to operate the Company's machinery and
produce comparable product, approval of the Company's bank, final
approval of the Company's Board of Directors, approval of the
Chinese government, and approval of the final documents.
Accordingly, there is no assurance that the transaction will be
completed, or what, if any, impact this will have on the Company's
current manufacturing operations.

As of the September 30, 1999 the Company has not recorded any
impact of this transaction given the uncertainty of its successful
completion, however, if the transaction is successful there is the
potential of some costs associated with closing down the Company's
domestic manufacturing facility.

(iv) The Company generally markets its products under the
individual product's name and either the Company's name or the
trademark of one of its licensors. In the event opportunities
present themselves which the Company determines are advantageous
for it to import certain products in bulk on a private label basis
(i.e., store brand), the Company may capitalize on such
opportunity. In such event, the Company may request an advance
deposit from the customer before effecting such transaction,
depending on the credit worthiness of the customer. This,
historically, has been a small portion of the Company's business.

The Company's marketing efforts include the development of
special promotions in connection with purchases of merchandise by
certain major chain stores. These promotions often feature
advertising allowances, free goods and free displays or permit the
sale of several of the Company's products at one favorable price.
The funding for these special promotions is substantially derived
from the revenues to be received from the sales themselves, and
generally the Company is not required to allocate a large portion
of its working capital to such efforts. The Company also has
designed point of purchase product displays which it offers to its
customers.

The Company has entered into license agreements with entities
such as Lucasfilm, Ltd. (Star Wars), The Walt Disney Company
(Mickey Mouse and Winnie the Pooh), the NBA (National Basketball
Association), the NHL (National Hockey League), the NFL (National
Football League), and Coca-Cola Company, using these trademark
names on the Company's products. In most situations, the licensor
requires an advance royalty, a royalty against net sales for
licensed products and a minimum royalty. Generally, the Company
satisfies the minimum royalty; occasionally it does not. When the
Company is unable to meet the minimum sales levels required under
a license, the Company must pay the minimum royalty and possibly
incur losses as a result thereof. The Company evaluates its
licenses carefully and attempts to minimize such losses. These
licenses have terms ranging from one to three years and are renewed
by mutual consent from both parties.

Except when the Company uses trademarks owned by others, the
Company follows a policy of registering with the U.S. Patent and
Trademark Office trademarks covering the names of items in its
product line and proposed names for new items. The Company has
been awarded trademarks in the past. There is no assurance that
any pending trademarks will be registered.

(v) The business of the Company has certain seasonal aspects.
Sales tend to increase during the months of May through August,
because retailers buy in anticipation of fall school opening, and
to decrease during the months of September through December. The
Company has been developing marketing programs to reduce the impact
of this seasonality.

(vi) The Company maintains a warehouse in North Brunswick,
NJ, for a portion of its inventory.

Generally, the Company does not require any of its customers
to post letters of credit or to advance any deposits on orders,
except in certain instances, depending upon the creditworthiness of
the customer, for special orders. The Company analyzes each
special order customer independently to determine whether any
deposits should be paid. The Company considers credit rating,
location, and amount of order, among other factors, to determine
whether a deposit is required. Normal credit terms are "net 30
days." The Company, in certain instances, follows the industry
practice of "School Dating," which is the shipment of products from
May through August, for which payment is not due until September or
October. The Company reviews its credit practices regularly and
currently attempts to insure 80% of its receivables through credit
insurance. In the past, the Company has experienced a limited
amount of bad debts from its customers, usually as a result of a
bankruptcy. In such a case the Company's policy has been to
liquidate its claims as promptly as reasonable under the
circumstances. This has been further ameliorated since the Company
obtained credit insurance. The Company believes it has sufficient
resources to manage its credit function.

(vii) The Company's primary customers include major mass
market retailers in the United States. In Fiscal 1999, one
customer accounted for 9% of the Company's revenues. While the
loss of this customer could have a material adverse impact upon the
Company in the short-term, the Company believes such impact would
be minimized in the long-term since the Company could either reduce
its expenses related to this customer or sell all or a portion of
these products to other customers.

Certain of the Company's customers include:

- Office Max - Walgreen Drug
- Walmart - Eckerd
- Target - Staples

The above list of customers does not include independent
distributors nor products the Company sells to the stationery,
military and college store markets.

The Company advertises in trade journals on a limited basis
and maintains display booths for use at trade shows. It owns
several booths that attractively display its line of products for
such trade shows. The Company has developed a website to
attractively display its products on the world wide web located at
"www.pentechintl.com." The Company has no current plans for any
other major advertising campaign, however it regularly investigates
additional advertising avenues.

The Company warrants its merchandise against manufacturing
defects. In the event of any such returns the Company evaluates
the problem and attempts to rectify the problem for the customer,
if possible. The Company believes it maintains adequate product
liability insurance.

(viii) As of December 16, 1999 and 1998, the Company's
backlog of firm written orders was approximately $1,600,000 in each
year. This backlog is comprised of the normal delay between
receipt and processing of orders and orders for delayed delivery.
All orders were delivered or are expected to be filled within the
applicable fiscal year.

(x) The industry in which the Company is engaged is highly
competitive. The Company competes with a large number of
companies, including such well-known companies as Bic Pen Company,
Papermate, RoseArt Industries, Inc. and Newell. Some of the
Company's competitors have far greater financial resources and
sales. The Company generally competes on the basis of the special
features of its products, quality, packaging design (which includes
the individual product's name and the Company's name and logo or
the trademark of one of the Company's licensors) and price.

(xiii) As of December 16, 1999, the Company had approximately
146 employees. The Company's sales are made primarily by
independent sales organizations which are compensated exclusively
on a commission basis with commissions ranging from two and one
half to seven percent. The Company does not anticipate a
substantial increase in the number of its employees in the near
future. The Company considers its relations with its employees to
be good. In December 1992, the production and maintenance
employees of the Company's wholly-owned subsidiary, Sawdust, voted
to join Local 478 of the International Brotherhood of Teamsters
(the "Union"). In the Company's fiscal year ended September 30,
1996 ("Fiscal 1996"), Sawdust renewed its labor agreement with the
Union for the benefit of these employees, which agreement expired
August 31, 1999. At present, the Union has agreed to work under
the terms and conditions of the expired contract until a new
contract is negotiated and a determination is made as to the impact
of the Company's investigation into moving a portion of its
manufacturing operations overseas.

(d) The Company exported approximately 6.3% of its sales,
primarily to customers in Canada, Europe and Mexico, during Fiscal
1999.

Item 2. PROPERTIES.

The Company's present executive offices are located at 195
Carter Drive, Edison, New Jersey 08817, where it occupies general
office, sales and warehouse space of approximately 40,500 square
feet pursuant to a five year lease expiring March 1, 2003.

The Company extended its lease for five years commencing June
1, 1995 (the "Sawdust Lease") for approximately 50,000 square feet
for Sawdust's premises. These premises are located at 44 National
Road, Edison, NJ 08817. The Sawdust Lease, which is triple net,
currently requires annual rental payment of $180,936 with yearly
increment additions in each subsequent year of the Sawdust Lease's
term. The Sawdust Lease contains an option to renew on terms
providing for moderate increases in rent for up to an additional
five years.

The Company entered into a five year lease for a warehouse at
1101 Corporate Road, North Brunswick, New Jersey (the "Warehouse
Lease") for approximately 130,000 square feet, which commenced on
September 1, 1995. The Warehouse Lease provides for annual base
rent of approximately $436,000 per year.

The Company entered into a year-to-year lease for a sales
office in Madison, Wisconsin (the "Madison Lease"). The Madison
Lease is for approximately 1,885 square feet and commenced May 1,
1997. The Madison Lease calls for annual rental of $24,318, which
increases by 3.5 percent each subsequent lease year until
termination.

The Company entered into a month-to-month lease for a studio
at 75 Broad Street, Red Bank, New Jersey for approximately 2,400
square feet which commenced on April 1, 1997. The Studio Lease
provides for monthly rent of $3,700.

Item 3. LEGAL PROCEEDINGS.

There are no legal proceedings to which the Company is a party
or known to be contemplated that are deemed material by the Company
at the present time, and the Company knows of no material legal
proceedings pending or threatened, or judgments entered, against
any director or officer of the Company in his capacity as such.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Not applicable.

<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

1999

1st Quarter 1 3/16 9/16
2nd Quarter 1 7/32 5/8
3rd Quarter 25/32 19/32
4th Quarter 1 15/32 3/4

1998

1st Quarter 3 1/16 2 1/2
2nd Quarter 2 31/32 1 1/8
3rd Quarter 2 1 1/8
4th Quarter 1 13/16 15/16

On December 16, 1999, the closing "bid" and "ask" prices for
the Common Stock were $11/16 and $25/32 respectively, as reported
by NASDAQ.

(b) On December 16, 1999, the number of shareholders of
record of the Common Stock was 430. The Company is aware that it
has a substantial number of additional shareholders who hold their
shares of Common Stock in "street name."

(c) The Company has not declared a cash dividend in the past
and is not permitted to do so without the consent of its lender.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Item 6. SELECTED FINANCIAL DATA.

The following summary of financial information should be read
in conjunction with the Financial Statements and notes thereto
included elsewhere in this Form 10-K.

STATEMENT OF OPERATIONS DATA

Fiscal Years Ended September 30,
1999 1998 1997 1996 1995
($ 000s omitted except per share amounts)

Net
sales $60,949 $57,485 $60,806 $61,679 $54,892

Net (loss)
income (334) (3,504) 600 (5,317) (1,059)

Basic and diluted
net (loss)
income
per share ($.03) ($.28) $.05 ($.51) ($.10)

Weighted
average
number
of shares
outstanding 12,570 12,537 12,297 10,497 10,661

Dividends - - - - -

<PAGE>
BALANCE SHEET DATA

September 30,

1999 1998 1997 1996 1995
($ 000s omitted)

Working
capital $11,971 $12,883 $15,452 $13,676 $16,928

Total
assets 36,094 41,583 42,503 48,189 44,518

Notes and
bankers'
acceptances
payable
(included
in current
liabil-
ities) 13,882 18,618 17,238 22,841 17,011

Long-
term
debt 1,500 2,000 2,300 2,300 -

Share-
holders'
equity 13,985 14,758 17,591 16,028 21,345

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Fiscal 1999 compared to Fiscal 1998

Net sales for Fiscal 1999 were $60,949,084 as compared to
$57,485,045 for Fiscal 1998, reflecting an increase of $3,464,039
or approximately 6%. This was the result of the success of the
Company's new licenses and further market penetration of the
Company's childrens activity product line.

In Fiscal 1999, the Company had income from operations of
$1,133,057 as compared to a loss from operations of $2,339,443 in
Fiscal 1998. The Company's gross profit of 31.9% in Fiscal 1999
increased from 28.1% in Fiscal 1998 largely in part to the
increased sales from its three new licenses, which have higher
gross profit margins. In addition, the Company made an investment
through aggressive pricing to gain shelf space for its children's
activity product line in the prior year.

The Company's selling, general and administrative ("SG&A")
expenses decreased during Fiscal 1999 to $18,286,990 from
$18,474,161 in Fiscal 1998, reflecting an decrease of $187,171.
SG&A as a percentage of sales also decreased to 30% from 32.1%.
This decrease was primarily related to the Company's cost reduction
program offset by the increase in royalty expenses associated with
the success of the Company's three new licenses. In addition, in
the prior year, the Company incurred higher promotional costs
associated with the launch of its activity product line.

During Fiscal 1999, the Company's average level of short-term
borrowings increased to $16,500,000 from $16,000,000 in Fiscal
1998. This was due to the increased loan balance at the beginning
of Fiscal 1999 resulting from the higher inventory levels. These
levels were reduced during the course of the year. The Company's
effective annual interest rate decreased from 8.4% to 8.0%. In
addition, interest incurred on the settlement note was lower from
the prior year as a result of quarterly principal payments. As a
result, the Company's interest expense decreased during Fiscal 1999
to $1,470,699 from $1,528,779.

During Fiscal 1999, the Company increased its valuation
allowance against all of its deferred tax assets from $2,614,202 to
$2,670,714 due to the uncertainty of the Company's ability to
utilize its federal and state net operating loss carryforwards.

As a result of the above, the Company recognized a net loss of
$333,609, or $.03 per share, in Fiscal 1999 as compared to a net
loss of $3,504,303, or $.28 per share, in Fiscal 1998.

Fiscal 1998 Compared to Fiscal 1997

Net sales for Fiscal 1998 were $57,485,045 as compared to
$60,806,386 for Fiscal 1997, reflecting a decrease of $3,321,341 or
approximately 5.5%. Sales from three of the Company's licensed
products were down from the previous year as were sales from
promotional and holiday programs. This was offset, in part, by the
success of the children's activity products as well as commodity
programs.

In Fiscal 1998, the Company had a loss from operations of
$2,339,443 as compared to income from operations of $2,155,227 in
Fiscal 1997. The Company's gross profit of 28.1% in Fiscal 1998
decreased from 34.3% in Fiscal 1997. The Company's gross profit
decreased principally due to the decline in licensed products which
historically are marketed at higher margins and, to a lesser
extent, to an inventory write-down and the impact of a large return
of promotional back-to-school products. The Company also made an
investment to gain shelf space for its activity product line
through aggressive pricing and various other promotions.

The Company's SG&A expenses increased during Fiscal 1998 to
$18,474,161 from $17,988,791 in Fiscal 1997, reflecting an increase
of $485,370. SG&A expenses as a percentage of sales also increased
from 29.6% to 32.1%. The increase was primarily related to higher
promotional costs associated with the Company's launch of its
activity product line to new retail stores. The Company incurred
higher bad debt expense as a result of bankruptcies of two
customers. The Company also incurred additional costs for the
development of products for two of its new licenses. Warehouse and
freight expenses also increased as a percentage of sales due to a
decline in the average order size as a result of increased sales to
the office superstores. Finally, the percentage of SG&A expenses
to revenues increased as a result of higher levels of fixed costs
incurred but there was lower sales volume.

In the second quarter of Fiscal 1998, the Company as part of
the settlement of a lawsuit, was awarded $965,000, net of legal
fees.

During Fiscal 1998, the Company's average level of short-term
borrowings remained unchanged from the prior year at approximately
$16,000,000. This was due to the sale of assets, related to the
cosmetic product line, plus the litigation settlement offset by an
increase in inventory levels and the operating loss. The Company's
effective annual interest rate decreased from 8.7% to 8.4%. In
addition, interest incurred on the settlement note was lower than
the prior year as a result of quarterly principal payments, which
began in January 1998. As a result, the Company's interest expense
decreased during Fiscal 1998 to $1,528,779 from $1,583,750.

During Fiscal 1998, the Company increased its valuation
allowance against its deferred tax assets from $965,565 to
$2,614,202. The increase of $1,648,637 was recorded due to the
uncertainty of the Company's ability to fully utilize federal and
state net operating loss carryforwards.

Based on the above, the Company recognized a net loss of
$3,504,303 in Fiscal 1998 as compared to net income of $600,014 in
Fiscal 1997.

(b) Liquidity and Capital Resources

Cash and cash equivalents decreased to $0 at September 30,
1999 from $759,349 at September 30, 1998. Accounts receivable
increased to $15,300,613 at September 30, 1999 from $14,327,195 at
September 30, 1998, primarily due to higher sales volume. The
Company believes that its allowance for doubtful accounts and its
accrual for returns and advertising allowances are adequate given
the Company's detailed review of its accounts receivable aging, its
review of subsequent cash receipts, its use of credit limits and
its on-going credit evaluation and account monitoring. In
addition, the Company has credit insurance on most of its major
accounts receivable. Inventory decreased to $15,415,326 at
September 30, 1999 from $20,015,241 the year before due to the
Company's inventory reduction program. The decrease to $3,154,383
for equipment at September 30, 1999 from $3,562,283 at September
30, 1998 primarily reflects a reduction in the rate of equipment
purchases. Notes payable at September 30, 1999 decreased to
$13,881,901 from $18,618,186 at September 30, 1998 due primarily to
the decreased inventory levels.

Net cash provided by operating activities for the Fiscal 1999
was $4,606,458 as compared to net cash used in operating activities
of $1,309,440 for Fiscal 1998. This increase was primarily due to
improved operating results, the reduction in inventory, and to a
lesser extent, the increase in accounts payable offset by the
increase in accounts receivable.

Cash used in investing activities during Fiscal 1999 of
$630,272 was higher than $9,643 in the prior year due to proceeds
from the sale of the cosmetic assets in the prior year.

The cash used in financing activities during Fiscal 1999 was
$4,735,535 as compared to cash provided by financing activities of
$1,429,620 in Fiscal 1998. The decrease in cash provided by
financing activities was primarily due to the decrease in notes
payable. As a result of these activities, cash and cash
equivalents decreased $759,349 during Fiscal 1999 as compared to an
increase of $110,537 during Fiscal 1998.

As a result of the above, the Company's working capital
decreased to $11,970,736 at September 30, 1999 from $12,882,941 at
September 30, 1998.

In January 1997, the Company entered into a three year
$30,000,000 revolving credit facility with BankAmerica Business
Credit, Inc. now known as Bank of America, N.A.("BABC") (the
"Credit Agreement"). The amount of drawings under the facility is
subject to limitations based upon eligible inventory and accounts
receivable as described in the Credit Agreement. The Credit
Agreement is collateralized by a security interest in substantially
all of the assets of the Company. In addition, in accordance with
the Credit Agreement, the Company has agreed, among other things,
to the maintenance of certain minimum amounts of tangible net worth
and minimum interest coverage ratios. In January 1999, the Company
and BABC entered into an agreement to amend the Credit Agreement.
This amendment, among other things, modified certain financial
covenants for Fiscal 1999, reduced the revolving credit facility to
$25,000,000, lowered the maximum inventory advance and allowed for
a seasonal over-advance.

In December 1999, the Company and BABC entered into an
agreement to renew the Credit Agreement for an additional three
years (the "Renewal"). The Renewal, among other things, waives
compliance with certain financial covenants violated at September
30, 1999, modifies the financial covenants for the next three
fiscal years, increases the maximum inventory advance and allows
for a seasonal over-advance.

The note issued in connection with the legal settlement
referred to above requires $100,000 quarterly principal payments
through April 1, 2004.

The Company continued several actions to increase its
liquidity during Fiscal 1999. It continued a policy of obtaining
30 to 60 days vendor credit to finance a majority of its purchases;
previously these purchases had been financed pursuant to letters of
credit. Actions were also taken to reduce the number of items held
in inventory as well as reduce its headcount.

As a result of the seasonal nature of the Company's business,
the Company's use of credit increases significantly in the months
of May, June, July and August as the Company finances its inventory
and receivables, and declines in September and October after
collection of the invoices from its Back-to-School sales.

The Company anticipates that its revolving credit line
provided by the Credit Agreement, together with anticipated cash
flow from operations, will be sufficient to provide liquidity on
both a short-term and long-term basis to finance current and future
operations.

With respect to the Year 2000 issue, all internal computer
equipment, manufacturing, distribution and business equipment are
Year 2000 compliant. The Company utilizes a third party software
package to run its internal operating and accounting systems and
purchased and installed the Year 2000 compliant version in December
1998. In addition, all telecommunications equipment and computer
applications are Year 2000 compliant. The Company has, therefore,
not developed any contingency plans relating to Year 2000 issues.
Year 2000 problems involving third parties may have a negative
impact on the Company's customers or suppliers, the general economy
or on the ability of businesses generally to receive essential
services (such as telecommunications, banking services, etc.). Any
such problem could have a material adverse effect on the Company's
business and financial condition. The Company has contacted its
major suppliers and customers in order to assess any third party
risk, the majority of which has stated that they are Year 2000
compliant, however, the Company is unable at this time to assess
the possible impact on its business of Year 2000 problems involving
any third party. The costs associated with becoming Year 2000
compliant were not material and, for the most part, were absorbed
in the Company's normal information technology budget. Although
the Company believes that its systems are Year 2000 compliant,
there can be no assurance that unanticipated Year 2000 problems
will not arise which, depending on the nature and magnitude of the
problem, could have a material adverse effect on the Company's
business and financial condition.

Statements which are not historical facts, including
statements about the Company's confidence and strategies and its
expectations about new and existing products, technologies and
opportunities, market and industry segment growth, demand and
acceptance of new and existing products are forward looking
statements that involve risks and uncertainties. These include,
but are not limited to, product demand and market acceptance risks;
the impact of competitive products and pricing; the results of
financing efforts; the loss of any significant customers of any
business; the effect of the Company's accounting policies; the
effects of economic conditions and trade, legal, social, and
economic risks, such as import, licensing, and trade restrictions;
the results of the Company's business plan and the impact on the
Company of its relationship with its lender.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

None.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

This information is contained on pages F-1 through F-25
hereof.

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

PART III

The information required by this section will be incorporated
by reference to the Proxy Statement of the Company to be filed with
the Securities and Exchange Commission on or before January 29,
2000.

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a) (1) Financial Statements
Page

Independent Auditors' Report............................ F-1

Consolidated Balance Sheets as of September 30, 1999 and
1998.................................................... F-2-3

Consolidated Statements of Operations for the
years ended September 30, 1999, 1998 and 1997 .......... F-4

Consolidated Statements of Shareholders' Equity for
the years ended September 30, 1999, 1998 and 1997....... F-5

Consolidated Statements of Cash Flows for the
years ended September 30, 1999, 1998, and 1997.......... F-6-7

Notes to Consolidated Financial Statements.............. F-8-25

(a) (2) Financial Statement Schedules

Schedule II - Valuation and Qualifying Accounts and
Reserves............................................... F-26

All other schedules are omitted because they are not applicable,
not required, or because the required information is included in the
financial statements or notes thereto.

(a) (3) Exhibits

3.1 The Company's Certificate of Incorporation, as amended,
incorporated by reference to Exhibit 3.1 to Registration
Statement No. 2-95102-NY of the Company ("Form S-18").

3.2 The Company's By-laws incorporated by reference to Exhibit
3.2 of Form S-18.

10.1 1989 Stock Option Plan incorporated by reference to Exhibit
4.2 to the Registration Statement No. 33-27009 on Form S-8.

10.2 1993 Stock Option Plan incorporated by reference
to Exhibit 4.1 to the Registration Statement No. 33-67802 on Form
S-8.

10.3 1995 Stock Option Plan is incorporated by reference to
Exhibit 4.1 to the Registration Statement No. 333-30595
filed on Form S-8.

10.4 Loan and Security Agreement dated as of January 13, 1997,
among the Company, Pentech Cosmetics, Inc., Sawdust Pencil
Co. and BankAmerica Business Credit, Inc. incorporated by
reference to Exhibit 10.7 of the Company's Form 10-K Annual
Report for its fiscal year ended September 30, 1996.

10.5 Waiver and First Amendment to Loan and Security Agreement
among the Company, Pentech Cosmetics, Inc., Sawdust Pencil
Co. and BankAmerica Business Credit, Inc. dated as of
January 11, 1999 incorporated by reference to Exhibit 10.5
of the Company's Form 10-K Annual Report for its fiscal
year ended September 30, 1998.

10.6 Waiver, Consent and Second Amendment to Loan and Security
Agreement by and among Bank of America, N.A., the Company,
Pentech Cosmetics and Sawdust Pencil Co. dated as of
December 20, 1999.

10.8 Subsidiaries of the Company.

23.1 Consent of Ernst & Young LLP dated December 28, 1999.

<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto
duly authorized.

PENTECH INTERNATIONAL INC.

December 27, 1999 By:s/David Melnick
David Melnick,
President and
Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, this Report has been signed below by the
following persons in the capacities and on the dates indicated.

s/Norman Melnick Chairman of the Board December 27, 1999
Norman Melnick of Directors

s/David Melnick President and Chief December 27, 1999
David Melnick Executive Officer and
Director (principal
operating officer)

s/John F. Kuypers Director December 27, 1999
John F. Kuypers

s/Richard S. Kalin Secretary and Director December 27, 1999
Richard S. Kalin

s/Roy L. Boe Director December 27, 1999
Roy L. Boe

s/Robert K. Semel Director December 27, 1999
Robert Semel

s/William Visone Executive Vice President- December 27, 1999
William Visone Strategic Planning
and Director (principal
financial officer)

REPORT OF INDEPENDENT AUDITORS

Board of Directors
Pentech International Inc.

We have audited the accompanying consolidated balance sheets of
Pentech International Inc. and subsidiaries as of September 30,
1999 and 1998 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 1999. Our audits
also included the financial statement schedule listed in the Index
at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and schedule
based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of Pentech International Inc. and subsidiaries
as of September 30, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the three years in
the period ended September 30, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in
all material respects the information set forth therein.

s/ERNST & YOUNG LLP
ERNST & YOUNG LLP

MetroPark, New Jersey
December 8, 1999, except
for Note 3(c), as to which the
date is December 20, 1999

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

Assets (Note 3)

September 30,
1999 1998

Current Assets:
Cash and cash equivalents $ - $ 759,349
Accounts receivable, net
of allowance for doubtful
accounts $35,654 and $128,814
in 1999 and 1998, respect-
ively) 15,300,613 14,327,195
Inventory (Note 2) 15,415,326 20,015,241
Income taxes receivable (Note 5) 300 448,087
Prepaid expenses and other 1,632,401 1,436,415
Available-for-Sale Security
(Notes 1 and 13) 181,400 621,875

Total current assets 32,530,040 37,608,162

Equipment:
Equipment and furniture 9,472,206 8,934,327
Less accumulated depreciation (6,317,823) (5,372,044)

3,154,383 3,562,283

Other assets:
Trademarks, net of
amortization of $762,388
and $666,766 in 1999 and
1998, respectively 236,301 239,530
Due from officer 173,512 173,512

409,813 413,042

$36,094,236 $41,583,487

See accompanying notes.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Balance Sheets

Liabilities and Shareholders' Equity

September 30,
1999 1998

Current liabilities:
Notes payable (Note 3) $13,881,901 $18,618,186
Accounts payable 3,322,094 2,455,073
Accrued expenses (Note 11) 3,055,309 3,351,962
Settlement note payable (Note 8) 300,000 300,000

Total current liabilities 20,559,304 24,725,221

Other liabilities:
Royalty payable, long-term (Note 8) 50,000 100,000
Settlement note payable,
long-term (Note 8) 1,500,000 2,000,000

1,550,000 2,100,000

Commitments and contingencies
(Note 6)
Shareholders' equity
(Notes 1 and 4):
Preferred stock, par value
$.10 per share; authorized
500,000 shares; issued
and outstanding, none - -
Common stock, par value $.01
per share; authorized 20,000,000
shares; issued and outstanding
12,571,258 and 12,570,258 in
1999 and 1998, respectively 125,713 125,703
Capital in excess of par 6,838,723 6,837,983
Retained earnings 6,839,096 7,172,705
Accumulated other comprehensive
income (Notes 1 and 13) 181,400 621,875

13,984,932 14,758,266

$36,094,236 $41,583,487

See accompanying notes.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Operations

Year ended September 30,
1999 1998 1997

Net sales (Note 9) $60,949,084 $57,485,045 $60,806,386
Cost of sales 41,529,037 41,350,327 39,975,368

Gross profit 19,420,047 16,134,718 20,831,018

Selling, general and
administrative expenses 18,286,990 18,474,161 17,988,791
Loss from cosmetics
operation (Note 7) - - 687,000

Income (loss) from
operations 1,133,057 (2,339,443) 2,155,227

Other (income) expense:
(Income) from
litigation (Note 14) (965,542) -
Interest expense 1,470,699 1,528,779 1,583,750
Interest income (4,033) (33,392) (9,660)

1,466,666 529,845 1,574,090

(Loss) income before
taxes (333,609) (2,869,288) 581,137

Income tax expense (benefit)
(Note 5) - 635,015 (18,877)

Net (loss) income $ (333,609) $(3,504,303) $ 600,014

Basic and diluted
(loss) earnings per common
share (Note 1) ($.03) ($.28) $.05

See accompanying notes.

Pentech International Inc. and Subsidiaries
<TABLE> Consolidated Statements of Shareholders' Equity
<CAPTION> Years ended September 30, 1999, 1998 and 1997

Common Stock Capital
Number of Shares in Accumulated
Excess Retained Comprehensive Other Comprehen-
Authorized Issued Amount of Par Earnings Income (loss) sive Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1996 20,000,000 10,496,758 104,968 5,845,781 10,076,994 -
Issuance of Common
Stock 2,007,500 20,075 943,362

Net income 600,014 $600,014

Balance, September
30, 1997 20,000,000 12,504,258 125,043 6,789,143 10,677,008 -

Comprehensive (loss):
Net loss (3,504,303) $(3,504,303)

Other comprehensive income:
Unrealized gain on
available-for-sale
security 621,875 621,875

Comprehensive (loss) $(2,882,428)
Issuance of Common Stock 66,000 660 48,840

Balance, September 30,
1998 20,000,000 12,570,258 125,703 6,837,983 7,172,705 621,875

Comprehensive (loss):
Net loss (333,609) $(333,609)

Other comprehensive (loss)
Unrealized loss on
available-for-sale
security (440,475) (440,475)

Comprehensive (loss) $(774,084)
Issuance of Common Stock 1,000 10 740

20,000,000 12,571,258 $125,713 $6,838,723 $ 6,839,096 $181,400
</TABLE>
See accompanying notes.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

Year ended September 30,
1999 1998 1997
Cash flows from operating
activities
Net (loss) income $ (333,609) $ (3,504,303) $ 600,014
Adjustments to reconcile
net (loss) income to net cash
(used in) provided by
operating activities:
Depreciation 945,779 942,432 982,702
Amortization 95,622 100,363 116,925
Provision for losses on
accounts receivable 95,753 134,974 15,401
Deferred income taxes - 635,015 290,099
Provision for loss from
cosmetics operation - - 687,000
Change in assets and
liabilities:
(Increase) decrease in
accounts receivable (1,069,171) 1,746,117 (1,771,187)
Decrease (increase) in
inventory 4,599,915 (1,957,743) (152,916)
(Increase) decrease in
prepaid expenses and other (195,986) 118,620 (605,228)
(Increase) in due from
officer - (32,000) (32,001)
(Decrease) in bankers'
acceptances payable - - (1,488,757)
Increase (decrease) in
accounts payable 867,021 1,121,468 (331,698)
(Decrease) in
accrued expenses (296,653) (88,742) (386,426)
(Decrease) in settlement
payables (550,000) (500,000) (1,000,000)
Change in income
taxes payable/
receivable 447,787 (25,641) 723,968

Net cash provided
by (used in)
operating activities 4,606,458 (1,309,440) (2,352,104)

See accompanying notes.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows (cont'd)

Year ended September 30,
1999 1998 1997

Cash flows from investing
activities
Sale of cosmetics assets - 758,426 -
Purchase of equipment and
furniture (537,879) (697,884) (793,006)
Increase in trademarks (92,393) (70,185) (118,891)

Net cash used in investing (630,272) (9,643) (911,897)
activities

Cash flows from financing
activities
Net (decrease) increase in
notes payable (4,736,285) 1,380,120 (4,114,432)
Proceeds from the issuance
of Common Stock 750 49,500 963,437

Net cash (used in)
provided by financing
activities (4,735,535) 1,429,620 (3,150,995)
Net (decrease) increase
in cash and cash equi-
valents (759,349) 110,537 (6,414,996)

Cash and cash equivalents,
beginning of year 759,349 648,812 7,063,808

Cash and cash equivalents,
end of year $ - $ 759,349 $ 648,812

Supplemental disclosures
of cash flow information
Non-cash investing activities:
(Decrease) increase in fair
value of available for
sale equity security $ (440,475) $ 621,875
Purchase of fixed assets by
capital lease - - $ 72,050
Cash paid during the
year for:
Interest $ 1,557,011 $1,454,840 1,773,920
Income taxes - - 30,931

See accompanying notes.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements
September 30, 1999

1. Summary of Significant Accounting Policies

Organization

Pentech International Inc. (the "Company") was formed in April
1984. A wholly-owned subsidiary, Sawdust Pencil Co. ("Sawdust"),
was formed in November 1989. The Company and its subsidiary are
engaged in the production, design, and marketing of writing and
drawing instruments. In October 1993, the Company formed another
wholly-owned subsidiary, Pentech Cosmetics, Inc., to manufacture
and distribute cosmetic pencils. During Fiscal 1997, the Company
decided to dispose of this product line. The Company primarily
operates in one business segment: the manufacture and marketing of
pens, markers, pencils, other writing instruments and activity
kits, primarily to major mass market retailers located in the
United States, under the "Pentech" name or licensed trademark
brand. The Company's fiscal year ends September 30.

Principles of Consolidation

The consolidated financial statements include the accounts of
the Company and its subsidiaries. All significant intercompany
balances and transactions have been eliminated.

Cash Equivalents

The Company considers all time deposits with a maturity of
three months or less to be cash equivalents.

Inventory and Cost of Sales

Inventory is stated at the lower of cost (first-in, first-out)
or market. Cost of sales for imported products includes the
invoice cost, duty, freight in, display and packaging costs. Cost
of domestically manufactured products includes raw materials,
labor, overhead and packaging costs.

Equipment and Depreciation

Equipment is stated at cost. Depreciation is provided by the
straight-line method over the estimated useful lives of the assets,
which range between five to ten years. Major improvements to
existing equipment are capitalized. Expenditures for maintenance
and repairs which do not extend the life of the assets are charged
to expense as incurred.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

1. Summary of Significant Accounting Policies (cont'd)

Trademarks

Costs related to trademarks are being amortized over a five
year period on a straight-line basis.

Revenue recognition

Revenue is recognized upon shipment of product to the
customer.

Fair Value of Financial Instruments

The fair value for cash and accounts receivable approximate
carrying amounts due to the short maturity of these instruments.
The fair value amounts for notes payable approximate carrying
amounts due to the variable interest rates.

Use of Estimates

The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.

(Loss) Earnings Per Share:

In February 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings Per Share, which was adopted by
the Company in December 1997. SFAS No. 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per
share, basic earning per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted
earnings per share. All earnings per share for all periods have
been presented and conform to the SFAS No. 128 requirements.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

1. Summary of Significant Accounting Policies (cont'd)

The following table sets forth the computation of basic and
diluted earnings per share:

YEAR ENDED SEPTEMBER 30,
1999 1998 1997

Numerator:
Net (loss) income $ (333,609) $(3,504,303) $ 600,014

Denominator:
Denominator for basic
earnings per share-
weighted average
shares 12,570,508 12,537,258 12,297,124

Effect of dilutive
securities:
Employee stock
options 0 0 194,043

Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions: 12,570,508 12,537,258 12,491,167

Basic and diluted
(loss) income
per share ($.03) ($.28) $.05

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

1. Summary of Significant Accounting Policies (cont'd)

Stock Based Compensation

Statement of Financial Accounting Standards No. 123,
"Accounting for Stock Based Compensation," encourages, but does not
require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has elected
to follow Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.

Other Recently Issued Accounting Standard

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133 "Accounting for
Derivative Instruments and Hedging Activities" which is effective
for years beginning after June 15, 2000. The Company has completed
its review of SFAS 133 and has concluded that the adoption of this
statement would not have any effect on the Company and its
reporting.

<PAGE>
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

2. Inventory

1999 1998

Raw materials $ 4,261,866 $ 6,634,833
Work-in-process 1,748,504 1,641,162
Finished goods 10,510,956 12,849,246
Allowance for slow-
moving items (1,106,000) (1,110,000)

$15,415,326 $20,015,241

3. Notes Payable

1999 1998

Revolving line of credit
interest payable monthly
at prime plus .5% (8.75% at
September 30, 1999 and 9%
at September 30, 1998) $ 1,881,901 $ 4,618,186

Revolving line of credit,
interest payable monthly at
libor plus 2.5% (ranging from
7.76% to 7.87% at September 30,
1999 and 7.813% to 8.188%
at September 30, 1998) 12,000,000 14,000,000

$13,881,901 $18,618,186

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

3. Notes Payable (cont'd)

(a) In January 1997, the Company entered into a three year
$30,000,000 Revolving Credit Agreement with BankAmerica Business
Credit, Inc. now known as Bank of America, N.A. ("BABC") (the
"Credit Agreement"). Borrowings under the Credit Agreement are
subject to limitations based upon eligible inventory and accounts
receivable as defined in the Credit Agreement. Amounts borrowed
under the Credit Agreement accrue interest, at the Company's
option, at either prime plus .5% or libor plus 2.5%.

The Credit Agreement is collateralized by a security interest
in substantially all of the assets of the Company. In connection
with the Credit Agreement, the Company has agreed, among other
things, to the maintenance of certain minimum amounts of tangible
net worth and interest coverage ratios and the Company cannot
declare a cash divided without the consent of BABC.

(b) In January 1999, the Company and BABC entered into an
agreement to amend the Credit Agreement. This amendment, among
other things, waived compliance with the violated covenants,
reduced the revolving credit facility to $25,000,000, modified the
financial covenants for Fiscal 1999, lowered the maximum inventory
advance and allowed for a seasonal over-advance.

(c) In December 1999, the Company and BABC entered into an
agreement to renew the Credit Agreement for an additional three
years (the "Renewal"). The Renewal, among other things, waives
compliance with certain financial covenants violated at September
30, 1999, modifies the financial covenants for the next three
fiscal years, increases the maximum inventory advance and allows
for a seasonal over-advance.

The weighted average annual interest rate during the periods
on the outstanding short-term borrowings was 8.0% and 8.4% for
fiscal years ended September 30, 1999 and 1998, respectively.

4. Shareholders' Equity

Stock Options

During Fiscal 1997, the Company granted options (outside of
the plans discussed herein) covering in the aggregate 20,000 shares
of common stock at an exercise price of $1.19 per share
(representing fair market value at date of grant). In addition,
options covering in the aggregate of 175,000 shares were canceled.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

4. Shareholders' Equity (cont'd)

Stock Option Plans

On January 5, 1989, the Company adopted a stock option plan
("1989 Plan"). The 1989 Plan provides for options and limited
stock appreciation rights ("Limited SARs") to be granted in tandem
to issue up to 600,000 shares of common stock. Limited SARs may
only be granted in conjunction with related options.

The exercise price of options granted may not be less than the
fair market value of the shares on the date of the grant (110% of
such fair market value for a holder of more than 10% of the
Company's voting securities), nor may options be exercised more
than ten years from date of grant (5 years for a holder of more
than 10% of the Company's voting securities). No SARs have been
granted. The 1989 Plan was terminated on January 5, 1999.
Outstanding options continue to be exercisable according to their
terms and remain subject to all the terms and conditions of the
1989 Plan, however no more grants can be issued.

On April 14, 1993, the Company adopted a Stock Option Plan
("1993 Plan"). The 1993 Plan provides for the issuance of
incentive and nonstatutory stock options to employees, consultants,
advisors and/or directors for a total up to 700,000 shares of
common stock. The exercise price of options granted may not be
less than the fair market value of the shares on the date of grant
(110% of such fair market value for a holder of more than 10% of
the Company's common stock), nor may options be exercised more than
five years from date of grant. The 1993 Plan will terminate on
January 4, 2003.

On May 9, 1995, the Company adopted a Stock Option Plan ("1995
Plan"). The 1995 Plan provides for the issuance of incentive and
nonstatutory stock options to employees, consultants, advisors
and/or directors for a total of up to 700,000 shares of Common
Stock. The determination of the exercise price of the options
granted under the 1995 Plan are the same as those of the 1993 Plan.
The 1995 Plan will terminate on January 4, 2005.

On November 26, 1996, the Board of Directors offered to cancel
and reissue certain options (at a reduced level) in the 1989 and
1993 Plans at the fair market value of the Company's Common Stock
on such date. Upon acceptance by the option holders, the vesting
period began one year from the date of the offer and the options
become exercisable ratably over a period of three years and expire
four years from the date of issuance.

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999

4. Shareholders' Equity (cont'd)

The table below presents option information for the 1989 Plan:

Year ended Year ended Year ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
Price range Shares Price range Shares Price Range Shares

Outstanding,
beginning of
year $0.75-2.875 270,600 $0.75 285,600 $3.125-7.875 351,000

Options granted 1.50-2.875 105,000 0.75 285,600

Canceled 0.75-2.875 (78,600) 0.75 (72,000) 3.125-7.875 (351,000)

Exercised 0.75 (48,000)

Outstanding,
end of year $0.75-2.875 192,000 $0.75-2.875 270,600 $0.75 285,600

Eligible for
exercise
currently $0.75-2.875 107,835 $0.75 51,200 - -

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

4. Shareholders' Equity (cont'd)

The table below presents option information for the 1993 Plan:

Year ended Year ended Year ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
Price range Shares Price range Shares Price Range Shares

Outstanding,
beginning of
year $0.75-5.50 310,500 $0.75-5.50 440,500 $3.125-6.125 647,500

Options
granted 0.75-1.25 155,600 - - 0.75 -0.875 385,500

Canceled 0.75-5.50 (125,500) 0.75-4.50 (112,000) 3.125-6.125 (592,500)

Exercised 0.75 (1,000) 0.75 ( 18,000)

Outstanding,
end of year $0.75-5.50 339,600 $0.75-5.50 310,500 $0.75 -5.50 440,500

Eligible for
exercise
currently $0.75-5.50 133,500 $0.75-5.50 96,000 $4.50 -5.50 43,000

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (cont'd)
September 30, 1999

4. Shareholders' Equity (cont'd)

The table below presents option information for the 1995 Plan:

Year Ended Year Ended Year Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997
Price range Shares Price range Shares Price range Shares

Outstanding,
beginning of
year $ 0.75-2.9375 75,002 $0.75-2.9375 123,000 $3.00 10,000

Options granted - - 1.625-1.688 9,500 0.75-2.9375 123,000

Canceled 0.75-1.4375 (8,500) 1.4375-2.9375 (57,498) 3.00 (10,000)

Exercised - - - - - -

Outstanding,
end of year $1.4375-2.9375 66,502 $ 0.75-2.9375 75,002 $0.75-2.9375 123,000

Eligible for
exercise
currently $1.4375-2.9375 49,002 $ 0.75-2.9375 29,750 $1.4375 12,000

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999

4. Shareholders' Equity (cont'd)

The Financial Accounting Standards Board has issued Financial
Accounting Standard No. 123 "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 took effect for transactions
entered into during the fiscal year beginning October 1, 1996; with
respect to disclosures required for entities that elect to continue
to measure compensation cost using prior permitted accounting
method, such disclosures must include the effects of all awards
granted in the fiscal year beginning October 1, 1995. The Company
has elected to follow Accounting Principles Board Opinion No. 25.
"Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options.
Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on
the date of grant, no compensation expense is recognized.

Pro forma information regarding net income and earnings per
share is required by Statement No. 123, and has been determined as
if the Company had accounted for its employee stock options under
the fair value method of that Statement. This fair value for these
options was estimated at the date of grant using a Black-Scholes
option pricing model with the following assumptions:

Risk-free interest rate 6.01%
Expected dividend yield 0%
Expected stock price volatility .605%
Expected life of options 2-6 years

The weighted average fair value of options granted during
Fiscal 1999 and Fiscal 1998 is $.68 and $.74 per share,
respectively.

The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options which have no
vesting restrictions and are fully transferable. In addition,
option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can mutually affect the
fair value estimate, in management's opinion, the existing models
do not necessarily provide a reliable single measure of the fair
value of its employee stock options. For purposes of pro forma
disclosures, the estimated fair value of the options is amortized
to expense over the options' vesting period. The Company's pro
forma information is as follows (in thousands except for earnings
per share amounts):

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999

4. Shareholders' Equity (cont'd)

Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1997

As reported Pro forma As reported Pro forma As reported Pro forma

Net (loss)
income ($334) ($404) ($3,504) ($3,594) $600 $491
(Loss) earn-
ings per
share ($.03) ($.03) ($ .28) ($ .29) $.05 $.04

<PAGE>
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998

5. Income Taxes

1999 1998 1997

Expense/(Benefit)

Federal:
Current $ - $ - $(309,276)
Deferred - 349,002 273,730
State:
Current - - 300
Deferred - 286,013 16,369

$ - $ 635,015 $ (18,877)

Reconciliations of the statutory federal income tax rate of
34% to the effective tax rates are as follows:

1999 1998 1997

Statutory tax rate (34.00%) (34.00%) 34.00%
State income taxes, net
of federal tax expense
(benefit) 9.88% (4.84%) 1.86
IRS audit adjustment 5.32
Permanent differences 10.04% 1.37%
Increase (decrease) in
valuation allowance 16.94% 57.46% (47.77%)
Other (2.86%) 2.14% (6.65%)

Effective tax rate - 22.13% (3.25%)

<PAGE>
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999
5. Income Taxes (cont'd)

Significant components of the Company's deferred tax assets and
liabilities as of September 30, 1999 and 1998 are as follows:

September 30,
1999 1998

Current deferred tax liability:
State taxes on deferred
federal items $ (51,957) $ (68,687)

Current deferred tax assets:
Bad debts 15,331 55,390
Inventory reserve 475,580 477,300
Reserve for returns and
allowances 267,018 303,528
Unicap 8,364 7,787

Total current deferred
tax assets 766,293 844,005
Valuation allowance on current
deferred tax assets (714,336) (775,318)

51,957 68,687

Net current deferred tax assets $ - $ -

Long-term deferred tax liabilities:
Depreciation $ (853,163) $ (932,290)

Long-term deferred tax assets:
Reserve for litigation 817,000 1,053,500
State net operating loss
carryforwards 552,210 535,598

Federal net operating loss carry-
forward 1,440,331 1,182,076

Total long-term deferred
tax assets 2,809,541 2,771,174
Valuation allowance on
long-term deferred
tax assets (1,956,378) (1,838,884)

853,163 932,290

Net long-term deferred tax
assets $ - $ -

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999

5. Income Taxes (cont'd)

The Company has generated state net operating loss
carryforwards of $6,135,663, which will expire in varying amounts
beginning on September 30, 2001. The Company has also generated a
federal net operating loss carry-forward of $4,206,218, which will
expire in varying amounts on September 30, 2013.

In 1997, approximately $277,000 of the valuation allowance was
recognized as a tax benefit. In 1998, the Company increased the
valuation allowance to $2,614,202 due to the uncertainty of its
ability to fully utilize the federal and state net operating loss
carry-forward. In 1999, there was a net increase in the valuation
allowance to $2,670,714. As in the prior year, in 1999 no tax
benefit was recognized due to the uncertainty of utilizing the net
loss carry-forwards.

6. Commitments and Contingencies
Letters of Credit

The Company was contingently liable for outstanding letters of
credit of $158,202 at September 30, 1999.

Leases

Rent expense for the years ended September 30, 1999, 1998 and
1997 amounted to $1,022,852, $1,056,934 and $1,024,491,
respectively.

In May 1990, the Company entered into a 60 month lease for
manufacturing space. The lease provides for all real estate taxes
and operating expenses to be paid by the Company and it contains
options to renew for two 60 month periods. The Company exercised
its first option and extended the lease for an additional 60 months
commencing in June 1995.

In March 1993, the Company entered into a 60 month lease for
office, warehouse and manufacturing space. The lease provides for
all real estate taxes and operating expenses to be paid by the
Company and it contains an option to renew for an additional 60
month period. In October 1997, the Company exercised its option to
renew.

In August 1995, the Company entered into a 60 month lease for
its 130,000 square foot distribution center. The lease provides
for all real estate taxes and operating expenses to be paid by the

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999

6. Commitments and Contingencies (cont'd)

Company and it contains two options to renew for two five year
periods.

Future minimum rental payments under operating leases are as
follows:

2000 744,932
2001 177,743
2002 141,375
2003 82,469

$1,146,519

Concentration of Labor

In December 1992, the production and maintenance employees of
the Company's wholly owned subsidiary, Sawdust, voted to join local
478 of the International Brotherhood of Teamsters (the "Union").
In the Company's fiscal year ended September 30, 1996 ("Fiscal
1996"), Sawdust renewed its labor agreement with the Union for the
benefit of these employees, which agreement expired August 31,
1999. The Union has agreed to work under the terms and conditions
of the expired contract until a new contract is negotiated and a
determination is made as to the impact of the Company's
investigation into moving a portion of its manufacturing facility
overseas. As of September 30, 1999, 47% of the Company's employees
were members of the Union. To date, the Company has maintained a
favorable relationship with the Union.

7. Loss from Cosmetics Operation:

During the second quarter of 1997, the Board of Directors
determined to discontinue its cosmetics operation and focus its
efforts primarily on its writing instruments business. The loss
from cosmetics operation reported in the second quarter of 1997
reflects the write-down of certain assets of this operation to
their estimated net realizable value (Note 13).

8. Paradise Settlement

In October 1987, the Company commenced an action against Leon
Hayduchok, All-Mark Corporation and Paradise Creations, Inc.,
(collectively, "Paradise") in the United States District Court for
the Southern District of New York which resulted in an adverse
multi-million dollar judgment against Pentech. In December 1996,
the parties to such litigation entered into a settlement agreement
providing, among other things, for Pentech to pay $500,000 at the
date of signing, deliver a $3,000,000 promissory note plus interest
at the rate of 7% per annum (the "Note") and enter into a five year

PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1999

8. Paradise Settlement (Cont'd)

non-exclusive license to sell such products for a 10% royalty, with
an aggregate minimum royalty of $500,000 (the "Paradise
Settlement"). The Company paid Paradise the $500,000 at the date
of signing in January 1997 and a required payment against the Note
of $400,000 in February 1997. In addition, the Note required
$100,000 quarterly principal payments commencing January 1, 1998.
Quarterly principal payments have been made through October, 1999.
The Company also has paid $300,000 against the minimum royalty.

9. Major Customer and Concentration of Credit Risk

For the years ended September 30, 1999, 1998 and 1997, the
Company had one customer who accounted for 9%, 12% and 13%,
respectively, of net sales. Concentration of credit risk with
respect to trade receivables is generally limited due to the
Company's use of credit limits, credit insurance and ongoing credit
evaluations and account monitoring procedures.

10. 401(k) Plan

The Company has a defined contribution 401(k) plan, covering
substantially all employees not covered under a collective
bargaining agreement. The plan provides employees an opportunity
to make pre-tax payroll contributions to the plan. The plan was
amended on April 1, 1996 to incorporate an employer discretionary
match of 1/3 of the first 6% of employee contributions. For the
years ended September 30, 1999, 1998, 1997 the Company contributed
$37,500, $32,558 and $36,273, respectively.

11. Accrued Expenses
September 30,
1999 1998

Accrued returns and advertising
rebates $2,038,410 $1,878,847
Accrued royalties 430,000 346,940
Other accrued expenses 586,899 1,126,175

$3,055,309 $3,351,962

12. Private Placement

In January 1997, the Company completed a private offering of
20 Units, each Unit consisting of 100,000 shares of Common Stock of
the Company for $50,000 per Unit (the "Private Offering"). The
Company received net proceeds of $963,000 from the Private
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998

12. Private Placement (Cont'd)

Offering. Officers and directors of the Company acquired 52.5% of
the Units sold in the Private Offering and participated on the same
terms as the other investors in the Private Offering. The terms of
the Private Offering were established by a Special Committee of the
Board of Directors who did not participate in the Private Offering.
The Company was required by its banks (at that time) to raise funds
in the Private Offering in order to fund the $500,000 payment
referred to in Note 8 and to enable the Company to fund its
requirements for capital expenditures.

13. Sale of Cosmetic Assets/Available-for-Sale Security

In November 1997, the Company entered into an agreement to
sell the fixed assets and inventory of its Cosmetics subsidiary to
an outside company, Fun Cosmetics Inc. ("Fun") (significantly owned
by a former employee) for its net book value of $758,000 plus
200,000 shares of Fun. In December 1997, $100,000 was received as
a down payment, $150,000 was received at closing and a note was
issued for approximately $508,000 bearing interest at a rate of 9%
per annum. The terms of the note provided that the principal be
reduced by $150,000 a month commencing February 1998, until paid.
This note was paid in full in March 1998. At the time of sale, the
Company assigned no value to the shares received since the
acquiring company was a start-up company with minimal assets and
was still seeking financing. Since November 1997, Fun has raised
additional equity and funding and has become a non-reporting
company whose shares are listed on the NASD Electronic Bulletin
Board. At September 30, 1999, the value of this stock (based on
quoted market prices) was $.907 a share. The Company has the right
to begin selling its shares in Fun. However, due to the
historically low level of trading activity, the number of shares
the Company owns and the fact that the shares are unregistered,
there is no assurance the Company will realize the current market
value.

14. Income from Lawsuit Settlement:

In June 1997, the Company commenced an action against Cooper
and Dunham LLP and Lewis H. Eslinger (collectively, "Defendants")
in the Supreme Court of the State of New York and County of New
York for legal malpractice, gross negligence, misrepresentation and
breach of contract in connection with the adverse, multi-million
dollar judgment resulting from a patent infringement case which the
defendants had been retained to pursue. On April 10, 1998, the
Company terminated this action and received a payment of
$1,250,000. All actions arising from the patent infringement case
have now been discontinued with prejudice.
PENTECH INTERNATIONAL INC. AND SUBSIDIARIES

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

Years Ended September 30, 1999, 1998 and 1997

Column A Column B Column C Column D Column E

Charged
to Costs
Balance at and Balance
Beginning Expenses/ End of
Description of Period Other Deductions(1) Period

Year ended September
30, 1999

Allowance for doubtful
accounts $ 128,814 $ 95,753 $188,913 $ 35,654

Allowance for slow
moving items $1,110,000 $ 213,000 $217,000 $1,106,000

Valuation allowance
for deferred taxes $2,614,202 $ 56,512 $ - $2,670,714

Year ended September
30, 1998
Allowance for doubtful
accounts $ 30,087 $ 134,974 $ 36,247 $ 128,814

Allowance for slow
moving items $1,210,000 $ 300,000 $400,000 $1,110,000

Valuation allowance
for deferred taxes $ 965,565 $1,648,637 - $2,614,202

Year ended September
30, 1997
Allowance for doubtful
accounts $ 402,513 $ 15,401 $387,827 $ 30,087

Allowance for slow
moving items $1,386,000 $ 400,000 $576,000 $1,210,000

Valuation allowance
for deferred taxes $1,243,191 $ 237,009 $514,635 $ 965,565

(1) Amount represents various accounts written off during the year, net
of recoveries.

EXHIBIT INDEX

Exhibit

10.6 Waiver, Consent and Second Amendment to Loan and
Security Agreement by and among Bank of America,
N.A., the Company, Pentech Cosmetics and Sawdust
Pencil Co. dated as of December 20, 1999.

21 Subsidiaries of the Company.

23.1 Consent of Ernst & Young LLP dated December 28, 1999.

27 Financial Data Schedule.

EXHIBIT 10.6
EXECUTION
WAIVER, CONSENT AND SECOND AMENDMENT
TO LOAN AND SECURITY AGREEMENT

WAIVER, CONSENT AND SECOND AMENDMENT (this "Waiver, Consent and
Amendment") dated as of December 20, 1999, by and among BANK OF AMERICA, N.A..,
a national bank organized under the laws of the United States, with offices
at 40 East 52nd Street, New York, New York 10022 (the "Bank"); 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, BankAmerica Business Credit, Inc., a Delaware corporation ("BABC"),
and the Borrowers entered into a Loan and Security Agreement dated as of
January 13, 1997 (as amended, restated, modified or supplemented from time
to time, the "Loan Agreement");

WHEREAS, the Bank is the successor to BABC;

WHEREAS, the Borrowers have been in non-compliance (the "Financial Covenant
Non-compliance") with the Minimum EBITDA and Adjusted Tangible Net Worth
covenants set forth in Sections 10.21 and 10.22 of the Loan Agreement for
and with respect to the fiscal quarter ending September 30, 1999;

WHEREAS, the Borrowers have requested that the Lender waive the Financial
Covenant Non-compliance;

WHEREAS, Pentech has entered into a joint venture agreement (the "China
Joint Venture Agreement") to establish a joint venture (the "China Joint
Venture") to establish a factory to manufacture markers, pencils and other
writing and drawing products in Shanghai, PRC, and Pentech desires, pursuant
to the China Joint Venture Agreement, to contribute (the "China Joint
Venture Contribution") to the China Joint Venture the Equipment described
on Schedule 1.1A hereto (the "China Joint Venture Equipment") free and clear
of the Lender's Lien thereon;

WHEREAS, the Borrowers have requested that the Lender consent to the China
Joint Venture Agreement and the China Joint Venture Contribution and agree
to release its Lien on the China Joint Venture Equipment contributed to the
China Joint Venture in connection therewith;

WHEREAS, the Borrowers have requested that the Lender agree to extend the
term of the Loan Agreement, to modify in certain respects certain of the
financial covenants set forth in the Loan Agreement and to modify the Loan
Agreement in certain other respects; and

WHEREAS, the Lender is willing to waive the Financial Covenant Non-compliance,
consent to the China Joint Venture Agreement and the China Joint Venture
Contribution and agree to release its Lien on the China Joint Venture
Equipment contributed to the China Joint Venture in connection therewith,
and to agree to such other modifications, on the condition that certain other
amendments be made to the Loan Agreement and otherwise on the terms and
conditions herein set forth.

NOW, THEREFORE, in consideration of the mutual covenants contained herein
and for other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto hereby agree as follows:

Section 1. Defined Terms. Terms defined in the Loan Agreement and not
otherwise defined herein shall have the meanings set forth in the Loan
Agreement.

Section 2. Waiver of Financial Covenant Non-compliance. The Lender hereby
waives compliance by the Borrowers with the Minimum EBITDA and Adjusted
Tangible Net Worth covenants set forth in Sections 10.21 and 10.22 of the
Loan Agreement solely for and with respect to the fiscal quarter ending
September 30, 1999; provided, however, that such waiver is subject to the
conditions set forth in Section 6 of this Waiver, Consent and Amendment.

Section 3. Consent to China Joint Venture. The Lender consents to the China
Joint Venture Agreement and the China Joint Venture Contribution and agrees
to release its Lien on the China Joint Venture Equipment contributed to the
China Joint Venture in connection therewith; provided, however,
that such consent is subject to the following conditions:

3.01. The net book value of the China Joint Venture Equipment contributed to
the China Joint Venture shall not exceed $1,500,000 in the aggregate;

3.02. Promptly after the making of the China Joint Venture Contribution (or any
portion thereof), Pentech shall, upon the Lender's request therefor, grant to
the Lender a first priority pledge of all of Pentechs right, title and
interest in and to the China Joint Venture, pursuant to such Loan
Documents as the Lender may require;

3.03. The Borrowers shall furnish to the Lender a copy of all agreements,
documents and other instruments executed and delivered in connection with the
China Joint Venture promptly (and in any event within thirty (30) days)
after the execution and delivery thereof; and

3.04. All other conditions set forth in Section 6 of this Waiver, Consent and
Amendment shall have been satisfied.

Section 4. Amendments to Loan Agreement. Subject to satisfaction of the
conditions precedent set forth in Section 6 of this Waiver, Consent and
Amendment, the Loan Agreement shall be amended in the following respects.

4.01. Effective as of the date hereof, the words "BANKAMERICA BUSINESS
CREDIT, INC., a Delaware corporation, with offices at 40 East 52nd Street,
New York, New York 10022 (the "Lender");" set forth in the Preamble to the
Loan Agreement shall be deleted, and the words "BANK OF AMERICA, N.A., a
national bank organized under the laws of the United States, with offices at 40
East 52nd Street, New York, New York 10022 (the "Lender");" shall be
substituted therefor.

4.02. Effective as of the date hereof, Section 1.1 of the Loan Agreement
shall be amended by restating the definitions of "Applicable Inventory Advance
Sublimit,"EBITDA," "LIBOR Margin," "Reference Rate Margin," "Stated
Termination Date" and "Tangible Net Worth" set forth therein in their
entirety as follows:

"Applicable Inventory Advance Sublimit" means the amount indicated
below for the corresponding periods:

Period Amount

Prior to January 3, 2000 $8,500,000
January 3-May 31, 2000 $9,000,000
At all times after May 31, 2000 $8,500,000

The $500,000 excess over $8,500,000 available during the January 3-May 31,
2000 period, as set forth above, is the "Inventory Advance Sublimit Seasonal
Increase."

"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;
provided, however, that there shall be excluded from the calculation of
EBITDA (x) gains and losses from the sale of China Joint Venture Equipment
to the China Joint Venture and (y) Sawdust Plant Wind Down Costs.

"LIBOR Margin" means, as determined at the beginning of an Interest
Period, 2.50% per annum, subject to adjustment pursuant to Section 3.1(d).

"Reference Rate Margin" means 0.50% per annum, subject to adjustment
pursuant to Section 3.1(d).

"Stated Termination Date" means January 13, 2003.

"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; provided, however, that there shall be excluded from the calculation
of Tangible Net Worth (x) gains and losses from the sale of China Joint
Venture Equipment to the China Joint Venture and (y) Sawdust Plant Wind Down
Costs.

4.03. Effective as of the date hereof, clause (d) of the definition of
"Eligible Inventory" set forth in Section 1.1 of the Loan Agreement shall be
deleted, and the following shall be substituted therefor:

(d) is not out-to-processors Inventory, foil, film, inks and dyes, 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

4.04. Effective as of the date hereof, the following definitions shall be
added to Section 1.1 of the Loan Agreement in the appropriate alphabetical
order:

"China Joint Venture" means the joint venture to establish a factory to
manufacture markers, pencils and other writing and drawing products in
Shanghai, PRC.

"China Joint Venture Equipment" means the Equipment described on
Schedule 1.1A to be contributed by Pentech to the China Joint Venture.

"Funded Debt Ratio" means the ratio of (a) the sum, determined as of the
last day of any fiscal quarter of the Borrowers ending on or after September
30, 2000, for the preceding four fiscal quarters, of the sum of (i) the average
daily outstanding amount of all Revolving Loans during such preceding four
fiscal quarter period, (ii) the average daily undrawn face amount of all
outstanding Letters of Credit during such preceding four fiscal quarter period
and (iii) the average daily face amount of all outstanding Bankers
Acceptances during such preceding four fiscal quarter period, to (b) the
cumulative EBITDA during such preceding four fiscal quarter period.

"Inventory Subline Fee" has the meaning specified in Section 3.7.

"Sawdust Plant Wind Down Costs" means the wind down costs paid or
incurred by the Borrowers in connection with the projected closing of the
Sawdust plant facility located in Edison, New Jersey.

4.05. Effective as of the date hereof, the definition of "Performance Pricing
Period" set forth in Section 1.1 of the Loan Agreement shall be deleted in
its entirety.

4.06. Effective as of the date hereof, the references to the amount
"$10,000,000" set forth in Sections 2.3(a) and 2.5(a) of the Loan Agreement
shall be deleted, and the amount "$6,000,000" shall be substituted therefor
in each such section.

4.07. Effective as of the date hereof, Section 3.1 of the Loan Agreement shall
be amended by adding a new subsection (d) thereto, which new subsection
shall read in its entirety as follows:

(d) Step-Down/Step-Up Pricing Adjustments. In the event that the
Financial Statements for any fiscal quarter of the Borrowers ending on or after
December 31, 2000, other than the fourth fiscal quarter of any Fiscal Year
delivered pursuant to Section 8.2(b) or the Financial Statements for any for
any Fiscal Year of the Borrowers ending on or after September 30, 2000,
delivered pursuant to Section 8.2(a) demonstrate compliance as of the date
of such Financial Statements, and for the preceding four fiscal quarters,
with "Level 1," "Level 2," "Level 3," "Level 4" or "Level 5" of the Funded Debt
Ratio test set forth in Schedule 3.1(d), then the Reference Rate Margin and the
LIBOR Margin with respect to interest payable to the Lender pursuant to
Sections 3.1(a) shall be adjusted to the applicable amounts set forth in
said Schedule 3.1(d) (in each case subject to Section 3.1(b) and the last
sentence of this Section 3.1(d)). Each such adjustment shall take effect
(if at all) as of the latest date the applicable Financial Statements
described in the immediately preceding sentence were required to be
delivered under Section 8.2(a) or (b), as the case may be, and shall remain in
effect until the latest date delivery of Financial Statements were required
to be delivered pursuant to Section 8.2(a) or (b), as the case may be, that
demonstrate either compliance with a higher "Level" of the Funded Debt Ratio
test set forth in said Schedule 3.1(d) or the failure to maintain compliance
with the "Level" of the Funded Debt Ratio test achieved as of the end of the
immediately prior fiscal quarter, and for the preceding four fiscal quarters,
whereupon (subject to Section 3.1(b) and the last sentence of this Section
3.1(d)) such amount shall be decreased or increased, as the case may be, to
the applicable amounts set forth in said Schedule 3.1(d). Notwithstanding
the foregoing, no decrease in pricing pursuant to this Section 3.1(d) shall
be made after the occurrence and during the continuance of an Event of Default.

4.08. Effective as of the date hereof, the Loan Agreement shall be amended
by adding a new Section 3.7 thereto, which new section shall read in its
entirety as follows:

3.7 Inventory Subline Fee. For each calendar month during the
period from January 3 through May 31, 2000 in which the Inventory Advance
Sublimit Seasonal Increase shall be used, during any five (5) or more Business
Days (whether or not such Business Days are consecutive) within such calendar
month such and in whole or in part, the Borrowers shall pay to the Lender a fee
(the "Inventory Subline Fee") in the amount of $10,000 in arrears, on the
last day of such month.

4.09. Effective as of the date hereof, a new sentence shall be added to
Section 7.7 of the Loan Agreement immediately after the second sentence of
such section and shall read as follows:

The Borrowers shall also obtain, on or before January 31, 2000, and thereafter
maintain key employee insurance upon the life of David Melnick in an aggregate
amount of not less than $1,500,000, which insurance shall be under a policy or
policies and by an issuer or insurers acceptable to the Lender and shall be
assigned to the Lender on forms satisfactory to the Lender, and the Borrowers
shall deliver to the Lender such policy or policies of key-employee insurance,
satisfactorily assigned to the Lender, on or before January 31, 2000.

4.10. Effective as of the date hereof, clause (A) of Section 8.2(e)(i) of
the Loan Agreement shall be deleted, and the following shall be substituted
therefor:
(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 Funded Debt Ratio for the purposes of Section 3.1(d).

4.11. Effective as of October 1, 1999, Section 10.19 of the Loan Agreement
shall be amended to read in its entirety as follows:

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 $1,000,000 during any Fiscal Year.

4.12. Effective as of October 1, 1999, Section 10.21 of the Loan Agreement
shall be amended to read in its entirety as follows:

10.21 Minimum EBITDA. The Borrowers will maintain a cumulative
EBITDA, as determined at the end of each fiscal quarter set forth below, for
the preceding fiscal quarter in the case of the fiscal quarter ending
December 31, 1999, for the preceding two fiscal quarters in the case of the
fiscal quarter ending March 31, 2000, for the preceding three fiscal
quarters in the case of the fiscal quarter ending June 30, 2000, and the
preceding four fiscal quarters in the case of the fiscal quarter ending
September 30, 2000 and each fiscal quarter ending thereafter, of not less
than the amounts indicated below:

Fiscal Quarter Ending Amount
December 31, 1999 ($500,000)
March 31, 2000 ($750,000)
June 30, 2000 $1,500,000
September 30, 2000 $2,300,000
December 31, 2000 $2,300,000
March 31, 2001 $2,300,000
June 30, 2001 $2,300,000
September 30, 2001 $2,800,000
December 31, 2001 $2,800,000
March 31, 2002 $2,800,000
June 30, 2002 $2,800,000
September 30, 2002 and each
fiscal quarter thereafter $3,300,000

4.13. Effective as of October 1, 1999, Section 10.22 of the Loan Agreement
shall be amended to read in its entirety as follows:

10.22 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, 1999 $13,000,000
March 31, 2000 $12,000,000
June 30, 2000 $13,500,000
September 30, 2000 $13,000,000
December 31, 2000 $12,500,000
March 31, 2001 $12,500,000
June 30, 2001 $13,500,000
September 30, 2001 $14,000,000
December 31, 2001 $14,500,000
March 31, 2002 $14,500,000
June 30, 2002 $15,500,000
September 30, 2002 and each
fiscal quarter thereafter $15,500,000

4.14. Effective as of the date hereof, a new Section 10.25 shall be added to
the Loan Agreement and shall read as follows:

10.25 Maximum Sawdust Plant Wind Down Costs. The Borrowers
shall not permit the Sawdust Plant Wind Down Costs to exceed $800,000 in the
aggregate.

4.15. Effective as of the date hereof, the second sentence of Section 14 of
the Loan Agreement shall be amended to read in its entirety as follows:
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 Section6.4, (i) one (1.0%) of the Total
Facility if such termination is made on or prior to the fourth Anniversary
Date; and (ii) one-half percent (0.50%) of the Total Facility if such
termination is made after the fourth Anniversary Date but on or
prior to the fifth Anniversary Date; and (iii) zero percent (0%) if such
termination is made after the fifth Anniversary Date.

4.16. Effective as of the date hereof, the addresses for notice to the
Lender and the Borrowers set forth in Section 15.8 of the Loan Agreement
shall be deleted, and the following shall be substituted therefor:
If to the Lender: Bank of America Business Credit
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, N.A.
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: Clifford Chance Rogers & Wells LLP
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: David Melnick,
President
Telephone No.: 732/287-6640
Telecopier No.: 732/287-3127

with a copy to: Kalin & Associates, P.C.
One Penn Plaza
Suite 1425
250 West 34th Street
New York, NY 10119
Attention: Richard S. Kalin, Esq.
Telephone No.: 212/239-8900
Telecopier No.: 212/239-8401

4.17. Effective as of the date hereof, new Schedules 1.1A and 3.1(d) shall
be added to the Loan Agreement in the form of Schedules 1.1A and 3.1(d),
respectively annexed to this Waiver,Consent and Amendment.

Section 5. Waiver, Consent and Amendment Fee. In order to induce the Lender
to enter into this Waiver, Consent and Amendment, the Borrowers jointly and
severally shall pay to the Lenders, simultaneously with the effectiveness of
this Waiver, Consent and Amendment, a waiver, consent and amendment fee
(the "Waiver, Consent and Amendment Fee") in the amount of $125,000.
The Waiver, Consent and Amendment Fee shall be deemed fully earned upon the
effectiveness of this Waiver, Consent and Amendment and shall be
non-refundable when paid.

Section 6. Conditions to Effectiveness. This Waiver, Consent and Amendment
shall be effective as of the date first above written upon the satisfaction
of the following conditions:

6.01. The Lender shall have received counterparts of this Waiver, Consent and
Amendment executed by the Borrowers;

6.02. The Lender shall have received such other certificates, representations,
instruments and other documents as the Lender may require, in form and
substance satisfactory to the Lender;

6.03. The Lender shall have received payment of the Waiver, Consent and
Amendment Fee; and

6.04. The Borrowers shall have paid, or reimbursed the Lender for, all fees and
expenses (including the fees and disbursements of Rogers & Wells LLP)
incurred by the Lender in connection with this Waiver, Consent and Amendment
and billed to such date.

Section 7. Representations and Warranties. The Borrowers hereby each
represent and warrant to the Lender that (i) the execution, delivery and
performance of this Waiver, Consent and Amendment by each of the Borrowers
are within their respective corporate powers and have been duly
authorized by all necessary corporate action; (ii) no consent, approval,
authorization of, or declaration or filing with, any Public Authority, and
no consent of any other Person, is required in connection with the
execution, delivery and performance of this Waiver, Consent and Amendment,
except for those already duly obtained; (iii) this Waiver, Consent and
Amendment has been duly executed by each of the Borrowers and constitutes
the legal, valid and binding obligation of each of the Borrowers, enforceable
against them in accordance with its terms; (iv) the execution, delivery and
performance by each of the Borrowers of this Waiver, Consent and Amendment
does 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 the Loan Agreement and the other Loan Documents)
by reason of the terms of (a) any contract, mortgage, lease, agreement, or
instrument to which such Borrower or such Subsidiary is a party or which is
binding upon it, (b) any Requirement of Law applicable to such Borrower or
such Subsidiary, or (c) the Certificate or Articles of Incorporation or
By-Laws of such Borrower or such Subsidiary; (v) after giving effect to this
Waiver, Consent and Amendment, the representations and warranties contained in
the Loan Agreement and in each other document or instrument delivered by
Borrower are true and correct in all material respects as though made on and
as of the date hereof, except to the extent that such representations and
warranties expressly relate solely to an earlier date (in which case such
representations and warranties were true and accurate on and as of such
earlier date); and (vi) after giving effect to this Waiver, Consent
and Amendment, there exists no Default or Event of Default.

Section 8. Reference to and Effect on Loan Documents.

8.01. On and after the date hereof, each reference in the Loan Agreement to
"this Agreement," "hereunder," "hereof," "herein" or words of like import, and
each reference in the other Loan Documents to the Loan Agreement, shall mean
and be a reference to the Loan Agreement as amended hereby.

8.02. Except as specifically amended above, all of the terms of the Loan
Agreement shall remain unchanged and in full force and effect.

8.03. The execution, delivery and effectiveness of this Waiver, Consent and
Amendment shall not operate as a waiver of any right, power or remedy of any
Lender or the Agent under the Loan Agreement or any of the other Loan
Documents, nor constitute a waiver of any provision of the
Loan Agreement or any of the other Loan Documents.

Section 9. Execution in Counterparts. This Waiver, Consent and Amendment
may be executed in any number of counterparts and by different parties hereto
in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together
shall constitute one and the same instrument.

Section 10. Governing Law. This Waiver, Consent and Amendment shall be
governed by, and shall be construed and enforced in accordance with, the
laws of the State of New York.

Section 11. Headings. Section headings in this Waiver, Consent and Amendment
are included herein for convenience of reference only and shall not constitute
a part of this Waiver, Consent and Amendment or be given any substantive
effect.

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]

IN WITNESS WHEREOF, this Waiver, Consent and Amendment has been duly
executed as of the date first above written.

PENTECH INTERNATIONAL, INC.
By: s/
Title: President& CEO

PENTECH COSMETICS, INC.
By: s/
Title: President & CEO

SAWDUST PENCIL CO.
By: s/
Title: President & CEO

BANK OF AMERICA, N.A.
By: s/
Title: SVP

EXHIBIT 21

Subsidiaries of Pentech International Inc.

Jurisdiction of
Name Incorporation

Sawdust Pencil Co. Delaware

Pentech Cosmetics, Inc. Delaware

EXHIBIT 23.1

Consent of Independent Auditors

We consent to the incorporation by reference in (i) the
Registration Statement (Form S-8 No. 33-67802) dated August 23,
1993 pertaining to the 1993 Stock Option Plan of Pentech
International Inc. ("Pentech") and (ii) the Registration Statement
(Form S-8, No. 333-30595) dated July 2, 1997 pertaining to the 1995
Stock Option Plan of Pentech, of our report dated December 8, 1999
(except for Note 3(c) as to which the date is December 20, 1999)
with respect to the consolidated financial statements and schedule
of Pentech included in this Annual Report (Form
10-K) for the year ended September 30, 1999.

ERNST & YOUNG LLP

By:s/Ernst & Young LLP

MetroPark, New Jersey
December 28, 1999

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