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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file No. 0-15374
PENTECH INTERNATIONAL INC.
(Exact Name of Registrant as Specified in Charter)
Delaware
23-2259391
(State or other jurisdiction of (I.R.S.
Employer
Incorporation or Organization)
Identification Number)
195 Carter Drive, Edison, New Jersey 08817
(Address of principal executive offices (Zip
Code)
Registrant's telephone number, including area code (732)
287-6640
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (i) has filed
all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the
registrant was required to file such reports) and (ii) has been
subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to
Item 405 of Regulation S-K is not contained herein, and will not
be
contained, to the best of registrant's knowledge, in definitive
proxy or
information statements incorporated by reference in Part III of
this
Form 10-K or any amendment to this Form 10-K [X]
The aggregate market value of the shares of Common Stock
held by non-
affiliates of the registrant on December 21, 1998, was
approximately
$7,408,269 based on the average of the bid and asked quotations
of the
registrant's Common Stock, par value $.01 share, as reported by
NASDAQ on
December 21, 1998.
On December 21, 1998, there were outstanding 12,570,258
shares of the
registrant's Common Stock.
The Proxy Statement of the registrant to be filed on or
before January
29, 1999 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 stationery, 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 1996 21.1% 21.7% 36.4% 16.0% 4.8%
FY 1997 27.8% 19.2% 33.4% 14.4% 5.2%
FY 1998 18.8% 26.5% 42.0% 11.7% 1.0%
(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, 1998 ("Fiscal 1998"), the Company manufactured
approximately $23,926,000 wholesale value of products at Sawdust,
which represents 69% of its current capacity and approximately
42%
of the Company's current sales requirements. During its fiscal
year ended September 30, 1997 ("Fiscal 1997"), the Company
manufactured 39% 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. Prior to fiscal 1997, the Company financed a
large percentage of its purchases pursuant to letters of credit.
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 manufacturers of
Chinese 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 developing additional sources for its
supply
of certain of its pencils, which, to date, it has been successful
in doing. In some instances, this has resulted in increased
costs
to the Company for the wood for its pencils. Recently, certain
of
the Company's Chinese suppliers of pencils and related products
have been the subject of a redetermination which, in certain
instances, increased the amount of Dumping Duties the Company has
or may be required to pay. The Company has accrued for any
additional duties which may arise from this redetermination.
(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 segment of the Company's business.
The Company's marketing efforts include the development of
special promotions in connection with purchases of merchandise by
certain major chain stores. These promotions often feature
advertising allowances, free goods and free displays or permit
the
sale of several of the Company's products at one favorable price.
The funding for these special promotions is substantially derived
from the revenues to be received from the sales themselves, and
generally the Company is not required to allocate 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. In such
a case, the Company must pay the minimum royalty and possibly
incur
losses as a result thereof. The Company evaluates its licenses
carefully and attempts to minimize such losses. These licenses
have terms ranging from one to three years and are renewed by
mutual consent from both parties.
Except when the Company uses trademarks owned by others, the
Company follows a policy of registering with the U.S. Patent and
Trademark Office trademarks covering the names of items in its
product line and proposed names for new items. The Company has
been awarded trademarks in the past. There is no assurance that
any pending trademarks will be registered.
(v) The business of the Company has certain seasonal
aspects.
Sales tend to increase during the months of May through August,
because retailers buy in anticipation of fall school opening, and
to decrease during the months of September through December. The
Company has been developing marketing programs to reduce this
seasonality.
(vi) The Company maintains a warehouse in North Brunswick,
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 functions.
(vii) The Company's primary customers include major mass
market retailers in the United States. In Fiscal 1998, one
customer accounted for 12% 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 no current plans for any other
major advertising campaign, however it is investigating
additional
advertising avenues.
The Company warrants its merchandise against manufacturing
defects. In the event of any such returns the Company evaluates
the problem and attempts to rectify the problem for the customer,
if possible. The Company believes it maintains adequate product
liability insurance.
(viii) As of December 16, 1998 and December 11, 1997, the
Company's backlog of firm written orders was approximately
$1,600,000 and $2,100,000, respectively. This backlog is
comprised
of the normal delay between receipt and processing of orders and
orders for delayed delivery. All orders were delivered or are
expected to be filled within the applicable fiscal year.
(x) The industry in which the Company is engaged is highly
competitive. The Company competes with a large number of
companies, including such well-known companies as Bic Pen
Company,
Papermate, 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 November 30, 1998, the Company had
approximately
208 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 expires
August 31, 1999.
(d) The Company exported approximately 5.8% of its sales,
primarily to customers in Canada, Europe and Mexico, during
Fiscal
1998.
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, with an unaffiliated party,
expiring March 1, 2003.
The Company extended its lease for five years commencing
June
1, 1995 (the "Sawdust Lease") with an unaffiliated company for
approximately 50,000 square feet for Sawdust's premises. These
premises are located at 44 National Road, Edison, New Jersey
08817.
The Sawdust Lease, which is triple net, currently requires annual
rental payment of $179,256 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") with an unaffiliated company for approximately 130,000
square feet, which commenced on September 1, 1995. The Warehouse
Lease provides for annual base rent of approximately $436,000 per
year.
The Company entered into a year-to-year lease for a sales
office in Madison, Wisconsin (the "Madison Lease"). The Madison
Lease, which is with an unaffiliated party, is for approximately
1,885 square feet and commenced May 1, 1997. The Madison Lease
calls for annual rental of $28,321, 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 with an unaffiliated
company for approximately 2,400 square feet which commenced on
April 1, 1997. The Studio Lease provides for monthly rent of
$3,600.
Item 3. LEGAL PROCEEDINGS.
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.
There are no other legal proceedings to which the Company is
a party or known to be contemplated that are deemed material by
the
Company at the present time, and the Company knows of no material
legal proceedings pending or threatened, or judgments entered,
against any director or officer of the Company in his capacity as
such.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS.
Not applicable.
<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
1997
1st Quarter 1 3/16 21/32
2nd Quarter 1 3/4 1 1/16
3rd Quarter 2 7/16 1 3/8
4th Quarter 3 1/16 2 5/16
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 24, 1998, the closing "bid" and "ask" prices for
the Common Stock were $.78125 and $.8125 respectively, as
reported
by NASDAQ.
(b) On December 22, 1998, the number of shareholders of
record of the Common Stock was 449. The Company is aware that it
has a substantial number of additional shareholders who hold
their
shares of Common Stock in "street name."
(c) The Company has not declared a cash dividend in the
past
and is not permitted to do so without the consent of its lender.
See Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Item 6. SELECTED FINANCIAL DATA
The following summary of financial information should be
read
in conjunction with the Financial Statements and notes thereto
included elsewhere in this Form 10-K.
STATEMENT OF OPERATIONS DATA
Fiscal Years Ended September 30,
-------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($ 000s omitted except per share amounts)
Net
sales $ 57,485 $ 60,806 $ 61,679 $ 54,892 $ 62,136
Net (loss)
income (3,504) 600 (5,317) (1,059) 4,701
Basic and diluted
net (loss)
income
per share ($.28) $.05 ($.51) ($.10) $.40
Weighted
average
number
of shares
outstanding 12,537 12,297 10,497 10,661 11,855
Dividends - - - - -
BALANCE SHEET DATA
September 30,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
($ 000s omitted)
Working
capital $ 12,883 $ 15,452 $ 13,676 $ 16,928 $ 21,451
Total
assets 41,583 42,503 48,189 44,518 42,558
Notes and
bankers'
acceptances
payable
(included
in current
liabil-
ities) 18,618 17,238 22,841 17,011 11,023
Long-
term
debt 2,000 2,300 2,300 - -
Share-
holders'
equity 14,758 17,591 16,028 21,345 26,479
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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 licensee products
which
historically offer higher margins and to a lesser extent to an
inventory write-down and the effect 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 selling, general and administrative ("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 interest rate decreased from 8.7% to 8.4%. In
addition,
interest incurred on the settlement note from the patent
infringement lawsuit 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.
Fiscal 1997 Compared to Fiscal 1996
Net sales for Fiscal 1997 were $60,806,386 as compared to
$61,679,499 for Fiscal 1996, reflecting a decrease of $873,113 or
approximately 1.4%. Sales of the Company's children's activity
and licensed products lines grew, but this was offset by declines
in sales in some of its older product lines which the Company had
been deemphasizing. The Company increased its sales through the
office superstore channel which were offset by some softness with
its traditional mass merchandiser channel.
In Fiscal 1997, the Company had income from operations of
$2,155,227 as compared to a loss from operations of $872,603 in
Fiscal 1996. The Company's gross profit of 34.3% in Fiscal 1997
increased from 30.2% in Fiscal 1996. The Company's gross profit
increased primarily due to improved product mix featuring less
slower moving items, improved manufacturing costs, improved
profitability of its cosmetic line (now discontinued) and higher
gross profit on its licensed items.
The Company's SG&A expenses decreased during Fiscal 1997 to
$17,988,791 from $19,521,690 in Fiscal 1996, reflecting a
decrease
of $1,532,899. SG&A as a percentage of sales also decreased from
31.7% to 29.6%. This decrease was primarily related to certain
non-recurring expenses from the prior year including higher legal
and consulting fees due to litigation during that year, a
bankruptcy of a customer, higher warehouse costs due to
relocation
costs of its distribution center and certain relocation costs of
key new hires. Offsetting these decreases were higher royalty
fees
for sales of licensed products and higher software costs used for
the Company's computer operating system.
In the second quarter of Fiscal 1997, the Company recorded a
$687,000 write-down of its cosmetic line to its net realizable
value. This was due to the Company's decision to dispose of this
product line and focus on its core stationery line of products.
As
discussed in a subsequent section, the Company reached an
agreement
to sell this line of business in November 1997.
During Fiscal 1997, the Company decreased its short-term
borrowings to an average level of $16,080,000 from $18,507,000 in
Fiscal 1996. This decrease was due to the decrease in the
Company's inventory levels as well as to improved profitability.
Offsetting the decline in average borrowings was an increase in
interest annual rates under the terms of the Company's new
financing arrangement which began in January of 1997. The
Company's effective annual interest rate increased from 7.8% to
8.7%. In addition, the Company incurred higher interest costs
due
to interest on the settlement note payable resulting from
settlement of the patent infringement case. As a result, the
Company's interest expense increased during Fiscal 1997 to
$1,583,750 from $1,447,499.
During Fiscal 1997, the Company reduced its valuation
allowance against its deferred tax assets $277,626 from
$1,243,191
to $965,565 resulting in a net benefit from income taxes.
Based on the above, the Company recognized net income of
$600,014 in Fiscal 1997 as compared to a net loss of $5,317,408
in
Fiscal 1996.
(b) Liquidity and Capital Resources
Cash and cash equivalents increased to $759,349 at September
30, 1998 from $648,812 at September 30, 1997. Accounts
receivable
decreased to $14,327,195 at September 30, 1998 from $16,293,286
at
September 30, 1997, primarily due to lower fourth quarter sales
volume and stronger collection efforts. The Company believes
that
its allowance for doubtful accounts and its accrual for returns
and
advertising allowances are adequate given the Company's detailed
review of its accounts receivable aging, its review of subsequent
cash receipts, its use of credit limits and its on-going credit
evaluation and account monitoring. In addition, the Company has
credit insurance on most of its major accounts receivable.
Inventory increased to $20,015,241 at September 30, 1998 from
$18,480,924 the year before. This was due to lower than
forecasted
sales volume and the Company's decision to stock higher levels of
certain commodity products. The decrease to $3,562,283 for
equipment at September 30, 1998 from $3,963,831 at September 30,
1997 primarily reflects the sale of the fixed assets related to
the
Company's cosmetics product line. Notes payable at September 30,
1998 were $18,618,186 as compared to $17,238,066 at September 30,
1997. This was primarily due to the increased inventory levels
and
funding of the operating loss.
Net cash used in operating activities for the Fiscal 1998
was
$1,309,440 as compared to $2,352,104 for Fiscal 1997. This
change
was primarily due to the operating loss, and to a lesser extent,
the decrease in accounts receivable and the increase in accounts
payable offset by the increase in inventory.
Cash used in investing activities during Fiscal 1998 of
$9,643
was lower than $911,897 in the prior year due to the decrease in
fixed asset additions and the sale of the cosmetic assets.
The cash provided by financing activities during Fiscal 1998
was $1,429,620 as compared to cash used in financing activities
of
$3,150,995 in Fiscal 1997. The increase in cash provided by
financing activities was primarily due to the increase in notes
payable. As a result of these activities, cash and cash
equivalents increased $110,537 during Fiscal 1998 as compared to
a
decrease of $6,414,996 during Fiscal 1997.
The Company's working capital decreased to $12,882,941 at
September 30, 1998 from $15,452,308 at September 30, 1997. This
decrease was primarily due to the net loss incurred during Fiscal
1998.
In January 1997, the Company entered into a three year
$30,000,000 revolving credit facility with BankAmerica Business
Credit, Inc. ("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. The Company was in violation of its tangible
net
worth and interest coverage covenants at March 31, 1998, June 30,
1998 and September 30, 1998, but such violations were waived by
BABC. In January 1999, the Company and BABC entered into an
agreement to amend the original loan agreement (the "Amendment").
This amendment, among other things, reduced the revolving credit
facility to $25,000,000, modified the financial covenants for
Fiscal 1999 to allow the Company to be in compliance based upon
the
Company's operating plan, lowered the maximum inventory advance
and
allowed 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 1998. It established 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. It continues to reduce the number of items held in
inventory and has taken steps to reduce its headcount.
In the second quarter of Fiscal 1997, the Board of Directors
voted to dispose of its cosmetics product line and to focus its
efforts primarily on its writing instruments business. The main
reason for this decision was to better utilize the Company's cash
flow towards its writing instruments business. In November
1997,
the Company reached an agreement to sell the fixed assets and
inventory of its cosmetics product line to Fun Cosmetics, Inc.
("Fun") (a company significantly owned by a former employee) for
its net book value of $758,000. This amount was paid during
Fiscal
1998. The Company also received 200,000 shares of Common Stock
of
Fun.
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. The Company believes these resources are sufficient
to
support its operating expenses.
With respect to the Year 2000 issue, the Company is in the
process of ensuring that all internal computer equipment,
manufacturing, distribution and business equipment will be Year
2000 compliant. Upon completion of that review, the Company will
make a full assessment of the risk associated with the Year 2000
issue and determine whether the consequences will have a material
effect on the Company's business. In addition, if necessary,
upon
completion of the assessment, the Company will develop a
contingency plan. The Company utilizes a third party software
package to run its internal operating and accounting systems and
has purchased the Year 2000 compliant version of this software
and
was placed in operation in December 1998. In addition, all
telecommunications equipment and computer applications are Year
2000 compliant. The Company is also contacting its vendors and
customers in order to asses any third party risk. The Company
does
not expect the costs associated with becoming Year 2000 compliant
to be material and believes that it will be absorbed, for the
most
part, in its normal information technology budget.
(c) Safe Harbor Statement
Statements which are not historical facts, including
statements about the Company's confidence and strategies and its
expectations about new and existing products, technologies and
opportunities, market and industry segment growth, demand and
acceptance of new and existing products are forward looking
statements that involve risks and uncertainties. These include,
but are not limited to, product demand and market acceptance
risks;
the impact of competitive products and pricing; the results of
financing efforts; the loss of any significant customers of any
business; the effect of the Company's accounting policies; the
effects of economic conditions and trade, legal, social, and
economic risks, such as import, licensing, and trade
restrictions;
the results of the Company's business plan and the impact on the
Company of its relationship with its lender.
Item 8. FINANCIAL STATEMENTS.
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,
1999.
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, 1998 and
1997.................................................... F-2-3
Consolidated Statements of Operations for the
years ended September 30, 1998, 1997 and 1996 .......... F-4
Consolidated Statements of Shareholders' Equity for
the years ended September 30, 1998, 1997 and 1996....... F-5
Consolidated Statements of Cash Flows for the
years ended September 30, 1998, 1997, and 1996.......... F-6-7
Notes to Consolidated Financial Statements..............
F-8-27
(a) (2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts and
Reserves............................................... F-28
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 it 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.
10.6 Agreement for Sale and Purchase of Assets dated as of
November 1997, among the Company, Pentech Cosmetics,
Inc.,
Fun Cosmetics, Inc. and David Blau incorporated by
reference to Exhibit 10.11 of the Company's Form 10-K
Annual Report for its fiscal year ended September 30,
1997.
10.7 Settlement Agreement dated March, 1998 between the
Company,
Cooper & Dunham, L.L.P. and Lewis H. Esligner.
10.8 Subsidiaries of the Company.
11.0 Consent of Ernst & Young LLP dated January 11, 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.
January 12, 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 January 12, 1999
Norman Melnick of Directors
s/ David Melnick President and Chief January 12, 1999
David Melnick Executive Officer and
Director (principal
operating officer)
s/ John F. Kuypers Executive Vice President-
John F. Kuypers Sales and Director January 12, 1999
s/ Richard S. Kalin Secretary and Director January 12, 1999
Richard S. Kalin
s/ Roy L. Boe Director January 12, 1999
Roy L. Boe
s/ Robert K. Semel Director January 12, 1999
Robert Semel
s/ William Visone (principal accounting January 12, 1999
William Visone officer)
N:\ANNE\PTK\10K-98.10
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,
1998 and 1997 and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the
three years in the period ended September 30, 1998. 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, 1998 and 1997, and the consolidated results
of
its operations and its cash flows for each of the three years in
the period ended September 30, 1998, 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 21, 1998, except
for Notes 3 (b) and 13 as
to which the date is
January 11, 1999.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Assets (Note 3)
September 30,
1998 1997
---- ----
Current Assets:
Cash and cash equivalents $ 759,349 $ 648,812
Accounts receivable, net
of allowance for doubtful
accounts ($128,814 and $30,087
in 1998 and 1997, respect-
ively) 14,327,195 16,293,286
Inventory (Note 2) 20,015,241 18,480,924
Income taxes receivable (Note 5) 448,087 422,446
Deferred tax assets (Note 5) - 271,180
Prepaid expenses and other 1,436,415 1,648,035
Available-for-Sale Security
(Notes 1 and 13) 621,875 -
---------- ----------
Total current assets 37,608,162 37,764,683
---------- ----------
Equipment:
Equipment and furniture 8,934,327 8,895,443
Less accumulated depreciation (5,372,044)
(4,931,612)
---------- ----------
3,562,283 3,963,831
---------- ----------
Other assets:
Deferred tax assets, long term
(Note 5) - 363,835
Trademarks, net of
amortization 239,530 269,708
Due from officer 173,512 141,512
---------- ----------
413,042 775,055
---------- ----------
$41,583,487 $42,503,569
========== ==========
See accompanying notes.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
Liabilities and Shareholders' Equity
September 30,
1998 1997
----- ----
Current liabilities:
Notes payable (Note 3) $18,618,186 $17,238,066
Accounts payable 2,455,073 1,333,605
Accrued expenses (Note 11) 3,351,962 3,440,704
Settlement note payable (Note 8) 300,000 300,000
---------- ----------
Total current liabilities 24,725,221 22,312,375
---------- ----------
Other liabilities:
Royalty payable, long-term (Note 8) 100,000 300,000
Settlement note payable,
long-term (Note 8) 2,000,000 2,300,000
---------- ----------
2,100,000 2,600,000
---------- ----------
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
12,570,258 and 12,504,258 in
1998 and 1997, respectively 125,703 125,043
Capital in excess of par 6,837,983 6,789,143
Retained earnings 7,172,705 10,677,008
Unrealized gain on available-for-
sale security
(Notes 1 and 13) 621,875 -
---------- ----------
14,758,266 17,591,194
---------- ----------
$41,583,487 $42,503,569
========== ==========
See accompanying notes.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Year ended September 30,
1998 1997 1996
---- ---- ----
Net sales (Note 9) $57,485,045 $60,806,386 $61,679,499
Cost of sales 41,350,327 39,975,368 43,030,412
---------- ---------- ----------
Gross profit 16,134,718 20,831,018 18,649,087
Selling, general and
administrative expenses 18,474,161 17,988,791 19,521,690
Loss from cosmetics
operation (Note 7) - 687,000 -
---------- ---------- ----------
(Loss) income from
operations (2,339,443) 2,155,227 (872,603)
---------- ---------- ----------
Other (income) expense:
(Income) loss from
litigation (Note 14) (965,542) - 4,433,920
Interest expense 1,528,779 1,583,750 1,447,499
Interest income (33,392) (9,660) (39,661)
---------- ---------- ----------
529,845 1,574,090 5,841,758
---------- ---------- ----------
(Loss) income before
taxes (2,869,288) 581,137 (6,714,361)
Income tax expense (benefit)
(Note 5) 635,015 (18,877) (1,396,953)
---------- ---------- ----------
Net (loss) income $(3,504,303) $ 600,014 $ (5,317,408)
========== ========== ==========
Basic and diluted
(loss) earnings per common
share (Note 1) ($.28) $.05 ($.51)
========== ========== ==========
See accompanying notes.
Pentech International, Inc. and Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statements of Shareholders' Equity
Years ended September 30, 1998, 1997 and 1996
Common Stock
Capital Unrealized Gain
Number of Shares in on Available-
Excess Retained for-Sale
Authorized Issued Amount of Par Earnings Security
---------- ------ ------ ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, September
30, 1995 20,000,000 10,496,758 $104,968 $5,845,781 $15,394,402 $ -
Net loss (5,317,408)
---------- ---------- ------- --------- ---------- -------------
Balance, September
30, 1996 20,000,000 10,496,758 104,968 5,845,781 10,076,994 -
Issuance of Common
Stock 2,007,500 20,075 943,362
Net income 600,014
---------- ---------- ------- --------- ---------- -------------
Balance, September
30, 1997 20,000,000 12,504,258 125,043 6,789,143 10,677,008 -
Issuance of Common Stock 66,000 660 48,840
Net loss (3,504,303)
Unrealized gain on
available-for-sale
security 621,875
Balance, September 30, ---------- ---------- ------- --------- --------- ------------
1998 20,000,000 12,570,258 $125,703 $6,837,983 $ 7,172,705 $621,875
========== ========== ======= ========= ========= ============
See accompanying notes.
</TABLE>
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Year ended September 30,
1998 1997 1996
Cash flows from operating -------- -------- ---------
activities
Net (loss) income $ (3,504,303) $ 600,014 $(5,317,408)
Adjustments to reconcile
net (loss) income to net cash
(used in) provided by
operating activities:
Depreciation and amortiza-
tion 1,042,795 1,099,627 1,044,920
Provision for losses on
accounts receivable 134,974 15,401 401,620
Paradise Settlement - - 4,000,000
Deferred income taxes 635,015 290,099 (699,701)
Provision for loss from
cosmetics operation - 687,000 -
Change in assets and
liabilities:
Decrease (increase) in
accounts receivable 1,746,117 (1,771,187) (2,488,160)
(Increase) decrease in
inventory (1,957,743) (152,916) 4,116,474
Decrease (increase) in
prepaid expenses and other 118,620 (605,228) 184,622
(Increase) in due from
officer (32,000) (32,001)
-
(Decrease) in bankers'
acceptances payable - (1,488,757) (353,228)
Increase (decrease) in
accounts payable 1,121,468 (331,698) (789,706)
(Decrease) increase in
accrued expenses (88,742) (386,426) 713,405
(Decrease) in settlement
payables (500,000) (1,000,000) -
Change in income
taxes payable/
receivable (25,641) 723,968 676,627
-------- ---------- ---------
Net cash (used in) provided
by operating
activities (1,309,440) (2,352,104) 1,489,465
See accompanying notes.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (cont'd)
Year ended September 30,
1998 1997 1996
Cash flows from investing ---- ---- ----
activities
Sale of cosmetics assets 758,426 - -
Purchase of equipment and
furniture (697,884) (793,006) (488,176)
Increase in trademarks (70,185) (118,891) (120,876)
------- --------- ---------
Net cash used in investing (9,643) (911,897) (609,052)
activities
Cash flows from financing
activities
Net increase (decrease) in
notes payable 1,380,120 (4,114,432) 6,183,395
Proceeds from the issuance
of Common Stock 49,500 963,437
Net cash provided --------- --------- ----------
by (used in) financing
activities 1,429,620 (3,150,995) 6,183,395
Net increase (decrease) --------- --------- ---------
in cash and cash equi-
valents 110,537 (6,414,996) 7,063,808
Cash and cash equivalents,
beginning of year 648,812 7,063,808 0
Cash and cash equivalents, --------- --------- ---------
end of year $ 759,349 $ 648,812 $7,063,808
========= ========= =========
Supplemental disclosures
of cash flow information
Non-cash investing activities:
Increase in fair value
of available for
sale equity security $ 621,875
Purchase of fixed assets by
capital lease $ 72,050
Cash paid during the
year for:
Interest $1,454,840 1,773,920 $1,319,958
Income taxes - 30,931 140,000
See accompanying notes.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
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.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
1. Summary of Significant Accounting Policies (cont'd)
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.
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 where appropriate, restated to conform to the
SFAS No. 128 requirements.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
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,
1998 1997 1996
Numerator:
Net (loss) income $(3,504,303) $600,014 $(5,317,408)
========== ======= =========
Denominator:
Denominator for basic
earnings per share-
weighted average
shares 12,537,258 12,297,124 10,496,758
Effect of dilutive
securities:
Employee stock
options 0 194,043 0
---------- ---------- ----------
Denominator for diluted
earnings per share -
adjusted weighted
average shares and
assumed conversions: 12,537,258 12,491,167 10,496,758
========== ========== ==========
Basic and diluted
(loss) income
per share ($.28) $.05 ($.51)
========== ========== ==========
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
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.
Impact of Recently Issued Accounting Standards
In June 1997, the Financial Accounting Stands Board issued
Statement of Financial Accounting Standards No. 130 "Reporting
Comprehensive Income" ("SFAS No.130"), which is effective for
years
beginning after December 15, 1997. SFAS No. 130 establishes
standards
for reporting and display of comprehensive income and its
components
(revenues, expenses, gain, and losses) in a full set of general-
purpose financial statements. This Statement requires that all
items
that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other
financial statements. The Company will adopt the new
requirements in
Fiscal 1999. The adoption of this statement would have resulted
in
the Company reporting $621,875 of additional comprehensive income
to
its existing net loss of $3,504,303, resulting in a net
comprehensive
loss of $2,882,428 for the fiscal year ended September 30, 1998.
In June 1997, the Financial Accounting Standards Board
issued
Statement of Financial Accounting Standards No. 131 "Disclosures
about
Segments of an Enterprise and Related Information" which is
effective
for years beginning after December 15, 1997 and 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, 1998. The Company has completed its review of both SFAS
131
and SFAS 133 and has concluded that the adoption of these
statements
would not have any effect on the Company and its reporting.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
2. Inventory
1998 1997
Raw materials $ 6,634,833 $6,245,696
Work-in-process 1,641,162 1,579,274
Finished goods 12,849,246 11,865,954
Allowance for slow-
moving items (1,110,000) (1,210,000)
---------- ----------
$20,015,241 $18,480,924
========== ==========
3. Notes Payable
1998 1997
Revolving line of credit
interest payable monthly
at prime plus .5% (9% at
September 30, 1998 and 1997) $ 4,618,186 $ 4,238,066
Revolving line of credit,
interest payable monthly at
libor plus 2.5% (ranging from 7.813%
to 8.188% at September 30, 1998
and 8.128% at September 30, 1997) 14,000,000 13,000,000
---------- ----------
$18,618,186 $17,238,066
========== ==========
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
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. (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.
Borrowing
under the Credit Agreement accrues 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,
interest coverage ratios and cannot declare a cash divided
without the
consent of BankAmerica Business Credit, Inc. The Company was in
violation of its tangible net worth and interest rate coverage
covenants at March 31, 1998, June 30, 1998 and September 30,
1998.
(b) On January 11, 1999, the Company and BABC further
entered
into an agreement to amend the original loan agreement ("the
Amendment"). This amendment, among other things, waived
compliance
with the aforementioned violated covenants, reduced the revolving
credit facility to $25,000,000, modified the financial covenants
for
Fiscal 1999 to allow the Company to be in compliance based upon
the
current operating plan, lowered the maximum inventory advance and
allowed for a seasonal over-advance.
The weighted average interest rate during the periods on the
outstanding short-term borrowings was 8.4% and 8.7% for fiscal
years
ended September 30, 1998 and 1997, respectively.
4. Shareholders' Equity
Stock Options
During Fiscal 1997, the Company granted options (outside of
the
plans discussed herein) covering in the aggregate 20,000 shares
of
common stock at an exercise price of $1.19 per share
(representing
fair market value at date of grant). In addition, 175,000 shares
were
cancelled.
During Fiscal 1996, the Company granted options covering in
the
aggregate 175,000 shares of common stock at an exercise price of
$3.125 per share (representing fair market value at date of
grant).
During these periods, no options were exercised. At September 30,
1998, 195,000 options remain outstanding at prices ranging from
$1.19
to $3.125 per share, of which all are presently exercisable.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
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 will terminate on January 5, 1999.
On April 14, 1993, the Company adopted a Stock Option Plan
("1993
Plan"). The 1993 Plan provides for the issuance of incentive and
nonstatutory stock options to employees, consultants, advisors
and/or
directors for a total up to 700,000 shares of common stock. The
exercise price of options granted may not be less than the fair
market
value of the shares on the date of grant (110% of such fair
market
value for a holder of more than 10% of the Company's common
stock),
nor may options be exercised more than five years from date of
grant.
The 1993 Plan will terminate on January 4, 2003.
On May 9, 1995, the Company adopted a Stock Option Plan
("1995
Plan"). The 1995 Plan provides for the issuance of incentive and
nonstatutory stock options to employees, consultants, advisors
and/or
directors for a total of up to 700,000 shares of Common Stock.
The
determination of the exercise price of the options granted under
the
1995 Plan are the same as those of the 1993 Plan. The 1995 Plan
will
terminate on January 4, 2005.
On November 26, 1996, the Board of Directors offered to
cancel
and reissue certain options (at a reduced level) in the 1989 and
1993
Plans at the fair market value of the Company's Common Stock on
such
date. Upon acceptance by the option holders, the vesting period
began
one year from the date of the offer and the options become
exercisable
ratably over a period of three years and expire four years from
the
date of issuance.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1989
Plan:
<TABLE>
Year ended Year ended Year ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1996
Price range Shares Price range Shares Price range Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $0.75 285,600 $3.125-7.875 351,000 $4.00-$7.875 392,000
Options granted 1.50-2.875 105,000 0.75 285,600 3.125 180,000
Cancelled 0.75 (72,000) 3.125-7.875 (351,000) 4.00-6.50 (221,000)
Exercised 0.75 (48,000)
----------- ------- ----------- -------- ---------- -------
Outstanding,
end of year $0.75-2.875 270,600 0.75 285,600 $3.125-7.875 351,000
----------- ------- ----------- ------- ----------- -------
Eligible for
exercise
currently $0.75 51,200 - - $4.50-7.875 118,600
========== ======= =========== ======= ============ =======
</TABLE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1993 Plan:
<TABLE>
Year ended Year ended Year ended
Sept. 30, 1998 Sept. 30, 1997 Sept. 30, 1996
Price range Shares Price range Shares Price Range Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $0.75-5.50 440,500 $3.125-6.125 647,500 $4.50-6.125 668,750
Options
granted - - 0.75 -0.875 385,500 3.125 20,000
Cancelled 0.75-4.50 (112,000) 3.125-6.125 (592,500) 4.50-6.125 (41,250)
Exercised 0.75 ( 18,000)
--------- ------- ----------- ------- ----------- -------
Outstanding,
end of year $0.75-5.50 310,500 0.75 -5.50 440,500 $3.125-6.125 647,500
========= ======= =========== ======= =========== =======
Eligible for
exercise
currently $0.75-5.50 96,000 $4.50 -5.50 43,000 $4.50-6.125 301,500
========= ======= =========== ======= =========== =======
</TABLE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (cont'd)
September 30, 1998
4. Shareholders' Equity (cont'd)
The table below presents option information for the 1995 Plan:
<TABLE>
Year Ended Year Ended Year Ended
Sept. 30, 1998 Sept. 30,1997 Sept. 30, 1996
Price range Shares Price range Shares Price range Shares
----------- ------ ----------- ------ ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of
year $0.75-2.9375 123,000 $3.00 10,000 - -
Options granted 1.625-1.688 9,500 0.75-2.9375 123,000 $3.00 10,000
Cancelled 1.4375-2.9375 (57,498) 3.00 (10,000)
Exercised - - - - - -
------------- ------ ----------- ------- ----- ------
Outstanding,
end of year $ 0.75-2.9375 75,002 $0.75-2.9375 123,000 $3.00 10,000
============ ====== =========== ======= ===== ======
Eligible for
exercise
currently $ 0.75-2.9375 29,750 1.4375 12,000 - -
=========== ====== =========== ======= ===== ======
</TABLE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
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 4.34%
Expected dividend yield 0%
Expected stock price volatility .658%
Expected life of options 3-5 years
The weighted average fair value of options granted during
Fiscal 1998 and Fiscal 1997 is $.74 and $.78 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, 1998
4. Shareholders' Equity (cont'd)
Sept. 30, 1998 Sept. 30, 1997
As reported Pro forma As reported Pro forma
Net (loss) income ($3,504) ($3,594) $ 600 $ 491
(Loss) earnings
per share ($ .28) ($ .29) $ .05 $ .04
<PAGE>
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
5. Income Taxes
1998 1997 1996
---- ---- ----
Expense/(Benefit)
Federal:
Current $ - $(309,276) $ (697,252)
Deferred 349,002 273,730 (421,047)
State:
Current - 300 -
Deferred 286,013 16,369 (278,654)
------- ------- ---------
$ 635,015 $ (18,877) $(1,396,953)
======= ======= =========
Reconciliations of the statutory federal income tax rate of
34% to the effective tax rates are as follows:
1998 1997 1996
---- ---- ----
Statutory tax rate (34.00%) 34.00% (34.00%)
State income taxes, net
of federal tax (benefit)
expense (4.84%) 1.86 (6.00)
IRS audit adjustment 5.32
Permanent differences 1.37% 9.99
Increase (decrease) in
valuation allowance 57.46% (47.77%) 18.5%
Other 2.14% (6.65%) .7%
------ ----- -----
Effective tax rate 22.13% (3.25%) (20.80%)
====== ===== =====
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
5. Income Taxes (cont'd)
Significant components of the Company's deferred tax assets
and
liabilities as of September 30, 1998 and 1997 are as follows:
September 30,
1998 1997
---- ----
Current deferred tax liability:
State taxes on deferred
federal items $ (68,687) $ (149,823)
------ -------
Current deferred tax assets:
Bad debts 55,390 12,938
Inventory reserve 477,300 520,300
Reserve for returns and
allowances 303,528 313,042
Unicap 7,787 12,813
Cosmetics fixed asset reserve 123,410
------- -------
Total current deferred
tax assets 844,005 982,503
Valuation allowance on current
deferred tax assets (775,318) (561,500)
------- -------
68,687 421,003
------- -------
Net current deferred tax assets $ - $ 271,180
======= =======
Long-term deferred tax liabilities:
Depreciation $(932,290) $ (832,800)
------- -------
Long-term deferred tax assets:
Reserve for litigation 1,053,500 1,290,000
State net operating loss
carryforwards 535,598 310,700
Federal net operating loss carry-
forward 1,182,076 -
--------- ---------
Total long-term deferred
tax assets 2,771,174 1,600,700
Valuation allowance on
long-term deferred
tax assets (1,838,884) (404,065)
--------- --------
932,290 1,196,635
--------- ---------
Net long-term deferred tax
assets $ - $ 363,835
========= ========
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
5. Income Taxes (cont'd)
The Company has generated state net operating loss
carryforwards of $5,951,094, which will expire in varying amounts
beginning on September 30, 2001. The Company has also generated
a
federal net operating loss carry-forward of $3,476,694, which
will
expire on September 30, 2013.
In 1996, the Company recorded a valuation allowance of
$1,243,191 against deferred tax assets due to the uncertainty of
its ability to recognize a full tax benefit for future payments
against the litigation reserve and its ability to fully utilize
the
state net operating loss carry-forwards. 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.
6. Commitments and Contingencies
Letters of Credit
The Company was contingently liable for outstanding letters
of
credit of $53,520 at September 30, 1998.
Leases
Rent expense for the years ended September 30, 1998, 1997 and
1996 amounted to $1,056,934, $1,024,491 and $940,650
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
Company and it contains two options to renew for two five year
periods.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
6. Commitments and Contingencies (cont'd)
Future minimum rental payments under operating leases are as
follows:
1999 $785,364
2000 715,268
Thereafter 413,368
---------
$1,914,000
=========
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 expires August 31,
1999. As of September 30, 1998, 49% of the Company's employees
were members of the Union. 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 reflects
the write-down of certain assets of this operation to their
estimated net realizable value (Note 13).
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
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
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 were made in December 1997 and in
April, July and October 1998. The Company also has paid $200,000
against the minimum royalty.
9. Major Customer and Concentration of Credit Risk
For the years ended September 30, 1998, 1997 and 1996, the
Company had one customer who accounted for 12%, 13% and 11%,
respectively, of net sales. Concentration of credit risk with
respect to trade receivables is generally limited due to the
Company's use of credit limits, credit insurance and ongoing
credit
evaluations and account monitoring procedures.
10. 401(k) Plan
The Company adopted a defined contribution 401(k) plan
effective April 1, 1993, covering substantially all employees not
covered under a collective bargaining agreement. The plan
provides
employees an opportunity to make pre-tax payroll contributions to
the plan. 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, 1998, 1997,
1996
the Company contributed $32,558, $36,273 and $16,941,
respectively.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
11. Accrued Expenses
September 30,
1998 1997
---- ----
Accrued returns and advertising
rebates $ 1,878,847 $1,833,450
Accrued royalties 346,940 637,477
Other accrued expenses 1,126,175 969,777
--------- ---------
$ 3,351,962 $3,440,704
========= =========
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
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, 1998, the value of this stock (based on
quoted market prices) was $3.11 a share. The price as of January
11, 1999 was $4.125 a share. The Company has the right to begin
selling its shares in Fun in January 1999. 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.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Cont'd)
September 30, 1998
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.
15. Fourth Quarter Results (unaudited)
The results for the quarter ended September 30, 1998 was
impacted by several events including a write down of inventory, a
large return of promotional back to school products and, to a
lesser extent, foreign exchange losses from its Canadian and
European operations and the results of a sales and use tax audit.
The gross profit for the fourth quarter was also effected by
the decline in licensed products, including the effects from the
National Basketball Association lockout.
16. Impact of Year 2000 (unaudited)
With respect to the Year 2000 issue, the Company is in the
process of ensuring that all internal computer equipment,
manufacturing, distribution and business equipment will be Year
2000 compliant. Upon completion of that review, the Company will
make a full assessment of the risk associated with the Year 2000
issue and determine whether the consequences will have a material
effect on the Company's business. In addition, if necessary,
upon
completion of the assessment, the Company will develop a
contingency plan. The Company utilizes a third party software
package to run its internal operating and accounting systems and
has purchased the Year 2000 compliant version of this software
which was placed in operation in December 1998. In addition, all
telecommunications equipment and computer applications are Year
2000 compliant. The Company is also contacting its vendors and
customers in order to asses any third party risk. The Company
does
not expect the costs associated with becoming Year 2000 compliant
to be material and believes that it will be absorbed, for the
most
part, in its normal information technology budget.
PENTECH INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND
RESERVES
Years Ended September 30, 1998, 1997 and 1996
Column A Column B Column C Column D Column E
- -------- -------- -------- -------- --------
Charged
Balance at to Costs Balance
Beginning and End of
Description of Period Expenses Deductions(1) Period
Year ended September
30, 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
========= ========= ======= =========
Year ended September
30, 1996
Allowance for doubtful
accounts $ 70,314 $ 401,620 $ 69,421 $ 402,513
========= ========= ======= =========
Allowance for slow
moving items $1,386,000 - - $1,386,000
========= ========= ======= =========
Valuation allowance
for deferred taxes $ - $1,243,191 $ - $1,243,191
========= ========= ======= =========
(1) Amount represents various accounts written off during the
year, net
of recoveries.
<PAGE>
EXHIBIT INDEX
Exhibit 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.
Exhibit 10.7 Settlement Agreement dated March 1998 between the
Company, Cooper & Dunham, L.L.P. and Lewis H.
Eslinger.
Exhibit 21 Subsidiaries of the Company.
Exhibit 23.1 Consent of Ernst & Young LLP dated January 11,
1999.
EXHIBIT 10.5
EXECUTION
WAIVER AND FIRST AMENDMENT TO LOAN AND SECURITY AGREEMENT
WAIVER AND FIRST AMENDMENT (this Waiver and Amendment )
dated as of January
11, 1999, by and among BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation, with
offices at 40 East 52nd Street, New York, New York 10022 (the
Lender ); PENTECH
INTERNATIONAL, INC., a Delaware corporation with chief executive
offices at 195 Carter Drive,
Edison, New Jersey 08817 ( Pentech ); PENTECH COSMETICS, INC., a
Delaware corporation with
chief executive offices at 195 Carter Drive, Edison, New Jersey
08817 ( Cosmetics ); and SAWDUST
PENCIL CO., a Delaware corporation with chief executive offices
at 195 Carter Drive, Edison, New
Jersey 08817 ( Sawdust ) (Pentech, Cosmetics and Sawdust,
individually, a Borrower, and collectively,
the Borrowers ).
W I T N E S S E T H :
WHEREAS, the Lender and the Borrowers have 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 ); and
WHEREAS, the Borrowers have been in non-compliance (the
Financial Covenant Non-
compliance ) with the Minimum Interest Coverage Ratio and
Tangible Net Worth covenants set forth
in Sections 10.21 and 10.22 of the Loan Agreement for the fiscal
quarter ending September 30, 1998 and
during the period from October 1, 1998 through December 30, 1998;
and
WHEREAS, the Borrowers have requested that the Lender waive
the Financial Covenant Non-
compliance; and
WHEREAS, the Borrowers have requested that the Lender agree
to provide new seasonal
overadvances, modify in certain respects certain of the financial
covenants set forth in the Loan
Agreement, provide a bankers acceptance subfacility and modify
the Loan Agreement in certain other
respects; and
WHEREAS, the Lender is willing to waive the Financial
Covenant Non-compliance 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 provisions of Section 10.21
and 10.22 of the Loan Agreement
solely for and with respect to the fiscal quarter ending
September 30, 1998 and the period from October
1, 1998 through December 30, 1998; provided, however, that such
waiver is subject to the conditions
set forth in Section 5 of this Waiver and Amendment.
SECTION 3. Amendments to Loan Agreement. Effective as
of December 31, 1998, the Loan
Agreement shall be amended in the following respects.
3.1 Section 1.1 of the Loan Agreement is hereby
amended by adding the
following new definitions thereto, in appropriate
alphabetical order:
Applicable Inventory Advance Sublimit means the
amount indicated below
for the corresponding periods:
Period Amount
Prior to January 15, 1999 $12,000,000
January 15-May 31, 1999 $10,500,000
June 1-June 30, 1999 $10,000,000
July 1-July 31, 1999 $ 9,500,000
August 1-August 31, 1999 $ 9,000,000
At all times after August 31, 1999 $ 8,500,000
Banker s Acceptance means a banker s acceptance
issued or caused to be issued
for the account of any Borrower pursuant to Section 2.5
to the beneficiary of a Letter
of Credit upon such beneficiary s compliance with all
of the conditions required to
draw upon such Letter of Credit.
Banker s Acceptance Fee has the meaning
specified in Section 3.6.
3.2 Section 1.1 of the Loan Agreement is hereby
amended by restating the
definitions of Aggregate Availability, Aggregate Maximum
Revolver Amount, Allowable
Seasonable Overadvance, Availability, Loans, Maximum
Revolver Amount,
Overadvance Repayment Date, Seasonal Overadvance and
Seasonal Overadvance Limit
set forth therein in their entirety as follows:
Aggregate Availability means, at any time of
determination, (a) the Aggregate
Maximum Revolver Amount minus (b) the sum of (i) the
unpaid principal balance of
Revolving Loans outstanding to all Borrowers, (ii) the
aggregate undrawn face amount
of all outstanding Letters of Credit which the Lender
has caused to be issued or
obtained for the account of all Borrowers, and (iii)
the aggregate face amount of all
outstanding Banker s Acceptances which the Lender has
caused to be issued or obtained
for the account of all Borrowers.
Aggregate Maximum Revolver Amount means at any
time, for all Borrowers,
the lesser of:
(a) The amount of the Total Facility,
or
(b) The sum of
(i) up to eighty percent (80%) of the Net
Amount of Eligible
Accounts of all Borrowers;
the lesser of
a) the Applicable Inventory Advance
Sublimit; or
the sum of:
(i) up to 65% of all Eligible
Inventory of all Borrowers
not covered by any outstanding
Merchandise Letter of Credit;
and (ii) up to 60% of all Eligible
Inventory of all Borrowers
covered by any outstanding Merchandise
Letter of Credit; and
(iii) Allowable Seasonal Overadvances
available at such time;
provided, however, that the aggregate amount of all
Loans outstanding at any one such
time to all Borrowers shall not exceed an amount equal
to the respective percentages
indicated below of the Net Amount of Eligible Accounts
of all Borrowers for the
corresponding periods:
Period Percentage
At all times before February 1999 80%
February 1999 85%
March 1999 90%
April 1999 90%
May 1999 85%
At all times after May 1999 80%
plus 65% of all Eligible Inventory of all Borrowers not
covered by any outstanding
Merchandise Letter of Credit plus 60% of all Eligible
Inventory of all Borrowers
covered by any outstanding Merchandise Letter of
Credit; and provided further,
however, that at all times the Aggregate Maximum
Revolver Amount shall be reduced
(without duplication) by the sum of:
(A) reserves for accrued interest on the
Revolving Loans;
(B) the Environmental Compliance Reserve;
(C) the ACH Settlement Risk Reserve;
(D) the Royalty Reserve; and
(E) all other reserves which the Lender in its
reasonable discretion deems
necessary or desirable to maintain with respect to any
Borrower s account, including,
without limitation, any amounts which the Lender may be
obligated to pay in the
future for the account of any Borrower.
The Lender agrees to give the Borrowers at least three
Business Day s notice prior to
reducing any of the advance rates set forth above, but
the failure to give such notice
shall not affect the Lender s right to make such
reduction or the validity thereof.
Allowable Seasonal Overadvance means, at any
time during the months of
February through May, 1999, and prior to the
Overadvance Repayment Date, the
Seasonal Overadvance Limit.
Availability means, at any time of
determination, with respect to any
Borrower, (a) the Maximum Revolver Amount for such
Borrower at such time minus
(b) the sum of (i) the unpaid principal balance of
Revolving Loans outstanding to such
Borrower at such time, (ii) the aggregate undrawn face
amount of all outstanding
Letters of Credit which the Lender has caused to be
issued or obtained for such
Borrower s account at such time and (iii) the aggregate
face amount of all outstanding
Banker s Acceptances which the Lender has caused to be
issued or obtained for such
Borrower s account at such time.
Loans means, collectively, all loans and
advances provided for in Section 2
(including the aggregate face amounts of all letters of
credit and banker s acceptances
caused hereunder to be issued by the Lender and any
outstanding Seasonal
Overadvances).
Maximum Revolver Amount means at any time, for
any Borrower, the lesser
of:
(a) The amount of the Total Facility,
or
(b) The sum of
(i) up to eighty percent (80%) of the Net
Amount of Eligible
Accounts of such Borrower;
the lesser of
a) the Applicable Inventory Advance
Sublimit; or
the sum of:
(i) up to 65% of such Borrower s
Eligible Inventory not
covered by any outstanding Merchandise
Letter of Credit; and
(ii) up to 60% of such Borrower s
Eligible Inventory covered by
any outstanding Merchandise Letter of
Credit; and
(iii) Allowable Seasonal Overadvances
available at such time;
provided, however, that the aggregate amount of all
Loans outstanding at any one such
time to such Borrower shall not exceed an amount equal
to the respective percentages
indicated below of the Net Amount of Eligible Accounts
of such Borrower for the
corresponding periods:
Period Percentage
At all times before February 1999 80%
February 1999 85%
March 1999 90%
April 1999 90%
May 1999 85%
At all times after May 1999 80%
plus 65% of such Borrower s Eligible Inventory not
covered by any outstanding
Merchandise Letter of Credit plus 60% of such Borrower
s Eligible Inventory covered
by any outstanding Merchandise Letter of Credit; and
provided further, however, that
at all times the Maximum Revolver Amount shall be
reduced (without duplication) by
the sum of:
(A) reserves for accrued interest on the
Revolving Loans;
(B) the Environmental Compliance Reserve;
(C) the ACH Settlement Risk Reserve;
(D) the Royalty Reserve; and
(E) all other reserves which the Lender in its
reasonable discretion deems
necessary or desirable to maintain with respect to any
Borrower s account, including,
without limitation, any amounts which the Lender may be
obligated to pay in the
future for the account of any Borrower.
The Lender agrees to give the Borrowers at least three
Business Day s notice prior to
reducing any of the advance rates set forth above, but
the failure to give such notice
shall not affect the Lender s right to make such
reduction or the validity thereof.
Overadvance Repayment Date means May 31, 1999.
Seasonal Overadvance means special advances to
be made available to the
Borrowers in each of the months of February through May
1999, up to the Seasonal
Overadvance Limit.
Seasonal Overadvance Limit means $750,000.
3.3 The last sentence of the definition of the term
Obligations set forth in
Section 1.1 of the Loan Agreement is hereby amended to read
in its entirety as follows:
Obligations includes, without limitation, (a) all
debts, liabilities, and obligations now
or hereafter owing from Borrower to Lender under or in
connection with the Letters
of Credit, (b) all debts, liabilities, and obligations
now or hereafter owing from
Borrower to Lender under or in connection with the
Banker s Acceptances, and (c) all
debts, liabilities and obligations now or hereafter
owing from the Borrower to the
Lender arising from or related to ACH Transactions.
3.4 Clause (c)(ii) of the definition of the term
Performance Pricing Period
is hereby amended in its entirety to read as follows:
(ii) after taking into account the Revolving Loans and
the Letters of Credit and
Banker s Acceptances issued or to be issued at each
such time and
3.5 The caption to Article 2 of the Loan Agreement is
hereby amended to read in
its entirety as follows:
2 LOANS, LETTERS OF CREDIT AND BANKER S
ACCEPTANCES.
3.6 Section 2.1 of the Loan Agreement is hereby
amended to read in its entirety as
follows:
2.1 Total Facility Subject to all of the terms and
conditions of this Agreement,
the Lender shall make available a total credit facility
of up to $25,000,000 (the Total
Facility ) for Borrower s use from time to time during
the term of this Agreement.
The Total Facility shall be comprised of a revolving
line of credit up to the limits, for
each Borrower, of such Borrower s Maximum Revolver
Amount, and for all Borrowers,
of the Aggregate Maximum Revolver Amount, consisting of
revolving loans, seasonal
overadvances, letters of credit and banker s
acceptances as described in Sections 2.2, 2.3
and 2.5.
3.7 Clause (i) of Section 2.3(a) of the Loan Agreement
is hereby amended to read
in its entirety as follows:
(i) the maximum face amount of the requested Letter of
Credit, plus the aggregate
undrawn face amount of all outstanding Letters of
Credit, plus the aggregate face
amount of all outstanding Banker s Acceptances, would
exceed $10,000,000;
3.8 Clause (1) of Section 2.3(d) of the Loan Agreement
is hereby amended to read
in its entirety as follows:
(1) Payment of Letter of Credit Obligations. Each
Borrower agrees to reimburse
the issuer for any draw (other than the unreimbursed
amount of drawings under Letters
of Credit with respect to which Banker s Acceptances
have been issued at such time)
under any Letter of Credit immediately upon demand, and
to pay the issuer of the
Letter of Credit the amount of all other obligations
and other amounts payable to such
issuer under or in connection with any Letter of Credit
immediately when due,
irrespective of any claim, setoff, defense or other
right which such Borrower may have
at any time against such issuer or any other Person.
3.9 Subsection (g) of Section 2.3 of the Loan
Agreement is hereby deleted in its
entirety.
3.10 The Loan Agreement is hereby amended by adding a
new Section 2.5 thereto,
which new section shall read in its entirety as follows:
2.5 Banker s Acceptances.
(a) Subject to the terms and conditions of this
Agreement, the Lender shall,
upon Pentech s request on behalf of a Borrower, from
time to time, cause Banker s
Acceptances to be issued for such Borrower s account.
The Lender will not cause any
Banker s Acceptance to be issued if: (i) the face
amount of the requested Banker s
Acceptance, plus the aggregate face amount of all
outstanding Banker s Acceptances,
would exceed $4,000,000; (ii) the face amount of the
requested Banker s Acceptance,
plus the aggregate undrawn face amount of all
outstanding Letters of Credit, plus the
aggregate face amount of all outstanding Banker s
Acceptances, would exceed
$10,000,000; (iii) the face amount of the requested
Banker s Acceptance, and all
commissions, fees, and charges due from the Borrowers
to Lender in connection with
the issuance thereof, would cause such Borrower s
Availability or the Aggregate
Availability of all Borrowers to be exceeded at such
time; or (iv) the draft to which
such Banker s Acceptance relates has a maturity later
than 90 days after the date of
issuance thereof. All payments made and expenses
incurred by the Lender pursuant to
or in connection with the Banker s Acceptances will be
charged to the Borrowers loan
account as Revolving Loans.
(b) Other Conditions. In addition to being
subject to the satisfaction of the
applicable conditions precedent contained in Section
11, the obligation of the Lender
to cause any Banker s Acceptance to be issued is
subject to the following conditions
precedent having been satisfied in a manner
satisfactory to the Lender:
(1) Pentech, on behalf of the Borrower
requesting a Banker s
Acceptance, shall have delivered to the proposed
issuer of such Banker s
Acceptance, at such times and in such manner as
such proposed issuer may
prescribe, an application in form and substance
satisfactory to such proposed
issuer and the Lender for the issuance of the
Banker s Acceptance and such
other documents as may be required pursuant to the
terms thereof, and the
form and terms of the proposed Banker s Acceptance
shall be satisfactory to the
Lender and such proposed issuer;
(2) As of the date of issuance, no order of
any court, arbitrator or
Public Authority shall purport by its terms to
enjoin or restrain money center
banks generally from issuing banker s acceptances
of the type and in the
amount of the proposed Banker s Acceptance, and no
law, rule or regulation
applicable to money center banks generally and no
request or directive
(whether or not having the force of law) from any
Public Authority with
jurisdiction over money center banks generally
shall prohibit, or request that
the proposed issuer of such Banker s Acceptance
refrain from, the issuance of
banker s acceptances generally or the issuance of
such Banker s Acceptance; and
(3) Prior to the issuance of a Banker s
Acceptance, the beneficiary
of the Letter of Credit to which such Banker s
Acceptance shall relate, shall
have complied duly with all of the conditions
required to draw upon such
Letter of Credit.
(c) Payments Pursuant to Banker s Acceptances.
(1) Payment of Banker s Acceptance
Obligations. Each Borrower
agrees to reimburse the issuer for any draw or
payment under any Banker s
Acceptance immediately upon demand, and to pay the
issuer of the Banker s
Acceptance the amount of all other obligations and
other amounts payable to
such issuer under or in connection with any Banker
s Acceptance immediately
when due, irrespective of any claim, setoff,
defense or other right which such
Borrower may have at any time against such issuer
or any other Person.
(2) Revolving Loans to Satisfy Reimbursement
Obligations. In the
event that the issuer of any Banker s Acceptance
honors a draw or makes
payment under such Banker s Acceptance and the
relevant Borrower shall not
have repaid such amount to the issuer of such
Banker s Acceptance pursuant to
Section 2.5(c)(1), the Lender shall pay the issuer
and such amount when paid
shall constitute a Revolving Loan which shall be
deemed to have been requested
by such Borrower.
(d) Compensation for Banker s Acceptances.
(1) Banker s Acceptance Fee. Each Borrower
agrees to pay to the
Lender, with respect to each Banker s Acceptance,
the Banker s Acceptance Fee
specified in, and in accordance with the terms of,
Section 3.6.
(2) Issuer Fees and Charges. Each Borrower
shall pay to the issuer
of any Banker s Acceptance, or to the Lender, for
the account of the issuer of
any such Banker s Acceptance, solely for such
issuer s account, such fees and
other charges as are charged by such issuer for
banker s acceptances issued by
it, including, without limitation, its standard
fees for issuing, administering,
amending, renewing, paying and canceling banker s
acceptances and all other
fees associated with issuing or servicing banker s
acceptances, as and when
assessed.
(e) Indemnification; Exoneration; Power of
Attorney
(1) Indemnification. In addition to amounts
payable as elsewhere
provided in this Section 2.5, each Borrower hereby
agrees to protect,
indemnify, pay and save the Lender harmless from
and against any and all
claims, demands, liabilities, damages, losses,
costs, charges and expenses
(including reasonable attorneys fees) which the
Lender may incur or be subject
to as a consequence, direct or indirect, of the
issuance of any Banker s
Acceptance or the provision of any credit support
or enhancement in
connection therewith. The agreement in this
Section 2.5(e)(1) shall survive
payments of all Obligations and the termination of
this Agreement.
(2) Assumption of Risk by the Borrowers. As
between the
Borrowers and the Lender, the Borrowers assume all
risks of the acts and
omissions of, or misuse of any of the Banker s
Acceptances by, the respective
beneficiaries or holders of such Banker s
Acceptances. In furtherance and not
in limitation of the foregoing, the Lender shall
not be responsible for: (A) the
form, validity, sufficiency, accuracy, genuineness
or legal effect of any
document submitted by any Person in connection
with the application for and
issuance of and presentation of, or of drafts with
respect to, any of the Banker s
Acceptances, even if it should prove to be in any
or all respects invalid,
insufficient, inaccurate, fraudulent or forged;
(B) the validity or sufficiency of
any instrument transferring or assigning or
purporting to transfer or assign any
Banker s Acceptance or the rights or benefits
thereunder or proceeds thereof,
in whole or in part, which may prove to be invalid
or ineffective for any
reason; (C) the failure of the beneficiary or
holder of any Banker s Acceptance
to comply duly with conditions required in order
to draw upon or receive
payment under such Banker s Acceptance; (D)
errors, omissions, interruptions,
or delays in transmission or delivery of any
messages, by mail, cable, telegraph,
telex or otherwise, whether or not they be in
cipher; (E) errors in
interpretation of technical terms; (F) any loss or
delay in the transmission or
otherwise of any document required in order make a
drawing or receive
payment under any Banker s Acceptance or of the
proceeds thereof; (G) the
misapplication by the beneficiary or holder of any
Banker s Acceptance of the
proceeds of any drawing or payment under such
Banker s Acceptance; or (H)
any consequences arising from causes beyond the
control of the Lender,
including, without limitation, any act or
omission, whether rightful or
wrongful, of any present or future de jure or de
facto Public Authority. None
of the foregoing shall affect, impair or prevent
the vesting of any rights or
powers of the Lender under this Section 2.5.
(3) Exoneration. In furtherance and
extension, and not in
limitation, of the specific provisions set forth
above, any action taken or
omitted by the Lender under or in connection with
any of the Banker s
Acceptances or any related certificates, if taken
or omitted in the absence of
gross negligence or willful misconduct, shall not
put the Lender under any
resulting liability to any Borrower or relieve any
Borrower of any of its
obligations hereunder to any such Person.
(4) Power of Attorney. In connection with
all Inventory financed
by Banker s Acceptances, each Borrower hereby
appoints the Lender, or the
Lender s designee, as its attorney, with full
power and authority: (a) to sign
and/or endorse such Borrower s name upon any
warehouse or other receipts;
(b) to sign such Borrower s name on bills of
lading and other negotiable and
non-negotiable documents; (c) to clear Inventory
through customs in the
Lender s or such Borrower s name, and to sign and
deliver to customs officials
powers of attorney in such Borrower s name for
such purpose; (d) to complete
in such Borrower s or the Lender s name, any
order, sale, or transaction, obtain
the necessary documents in connection therewith,
and collect the proceeds
thereof; and (e) to do such other acts and things
as are necessary in order to
enable the Lender to obtain possession of the
Inventory and to obtain payment
of the Obligations. Neither the Lender nor its
designee, as each Borrower s
attorney, will be liable for any acts or
omissions, nor for any error of judgment
or mistakes of fact or law. This power, being
coupled with an interest, is
irrevocable until all Obligations have been paid
and satisfied.
(5) Control of Inventory. In connection
with all Inventory
financed by Banker s Acceptances, each Borrower
will, at the Lender s request,
instruct all suppliers, carriers, forwarders,
warehouses or others receiving or
holding cash, checks, Inventory, documents or
instruments in which the Lender
holds a security interest to deliver them to the
Lender and/or subject to the
Lender s order, and if they shall come into any
Borrower s possession, to
deliver them, upon request, to the Lender in their
original form. Each
Borrower shall also, at the Lender s request,
designate the Lender as the
consignee on all bills of lading and other
negotiable and non-negotiable
documents.
3.11 The Loan Agreement is hereby amended by adding a
new Section 2.6 thereto,
which new section shall read in its entirety as follows:
2.6 Supporting Letter of Credit; Cash Collateral.
If, notwithstanding the
provisions of Sections 2.3, 2.5 and 14, any Letter of
Credit or Banker s Acceptance is
outstanding upon the termination of this Agreement,
then upon such termination the
Borrowers shall deposit with the Lender, at its
discretion, with respect to each Letter
of Credit and Banker s Acceptance then outstanding,
either (A) a standby letter of
credit (a Supporting Letter of Credit ) in form and
substance satisfactory to the
Lender, issued by an issuer satisfactory to the Lender
in an amount equal to the greatest
amount for which such Letter of Credit or Banker s
Acceptance may be drawn, under
which Supporting Letter of Credit the Lender is
entitled to draw amounts necessary to
reimburse the Lender for payments made by the Lender
under such Letter of Credit
or Banker s Acceptance or under any credit support or
enhancement provided through
the Lender with respect thereto, or (B) cash in amounts
necessary to reimburse the
Lender for payments made by the Lender under such
Letter of Credit or Banker s
Acceptance or under any credit support or enhancement
provided through the Lender.
Such Supporting Letter of Credit or deposit of cash
shall be held by the Lender, as
security for, and to provide for the payment of, the
aggregate undrawn amount of such
Letters of Credit and Banker s Acceptances remaining
outstanding.
3.12 Subsection (b) of Section 3.1 of the Loan
Agreement is hereby amended to read
in its entirety as follows:
(b) If any Event of Default occurs, then, from the
date such Event of Default
occurs until it is cured, or if not cured until all
Obligations are paid and performed in
full, the Borrowers will pay (A) interest (including
the margin applicable thereto) on
the unpaid principal balances of the Loans, (B) the
Letter of Credit Fee and (C) the
Banker s Acceptance Fee at a per annum rate two percent
(2%) greater than otherwise
specified herein for interest, the Letter of Credit Fee
and the Banker s Acceptance Fee.
3.13. The first sentence of subsection (c) of
Section 3.1 of the Loan Agreement is
hereby amended to read in its entirety as follows:
For every month during the term of this Agreement, the
Borrowers shall pay to the
Lender a fee (the Unused Line Fee ) in an amount equal
to three-eighths of one
percent (0.375%) per annum, multiplied by the average
daily amount by which the
Maximum Revolving Credit Line exceeds the sum of (i)
the average daily outstanding
amount of all Revolving Loans during such month, (ii)
the average daily undrawn face
amount of all outstanding Letters of Credit during such
month and (iii) the average
daily face amount of all outstanding Banker s
Acceptances during such month, with the
unpaid balance calculated for this purpose by applying
payments immediately upon
receipt.
3.14 The Loan Agreement is hereby amended by adding a
new Section 3.6 thereto,
which new section shall read in its entirety as follows:
3.6 Banker s Acceptance Fees. The Borrowers agree
to pay to the Lender,
for each Banker s Acceptance, a fee (the Banker s
Acceptance Fee ) equal to two
percent (2.00%) per annum of the face amount of each
Banker s Acceptance plus all out-
of-pocket costs, fees and expenses incurred by the
Lender in connection with the
application for, issuance of, or amendment to any
Banker s Acceptance, which costs,
fees and expenses could include a fronting fee
required to be paid by the Lender to
such issuer for the assumption of the settlement risk
in connection with the issuance
of such Banker s Acceptance and any charge associated
with the discount of such
Banker s Acceptance. The Banker s Acceptance Fee shall
be payable monthly in arrears
on the first day of each month following any month in
which a Banker s Acceptance
was issued and/or in which a Banker s Acceptance
remains outstanding. The Banker s
Acceptance Fee shall be computed on the basis of a year
of three hundred sixty (360)
days for the actual number of days elapsed.
3.15. The words or Banker s Acceptance or or
Banker s Acceptances are hereby
added immediately after the words Letter of Credit or
Letters of Credit, as the respective
cases may be, wherever set forth in the last sentence of
Section 9.25, in the preamble to Section
11.2, in clause (ii) of Section 13(a), in the penultimate
sentence of Section 14, and in Sections
15.7(h) and 15.17.
3.16 Sections 10.21 and 10.22 of the Loan Agreement are
hereby amended to read
in their 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, 1998, for
the preceding two fiscal quarters in the case of the
fiscal quarter ending March 31, 1999,
for the preceding three fiscal quarters in the case of
the fiscal quarter ending June 30,
1999, and the preceding four fiscal quarters in the
case of the fiscal quarter ending
September 30, 1999 and each fiscal quarter ending
thereafter, of not less than the
amounts indicated below:
Quarter Ending Amount
December 31, 1998 ($ 250,000)
March 31, 1999 ($ 500,000)
June 30, 1999 $2,400,000
September 30, 1999,
and each fiscal
quarter thereafter
$3,300,000
10.22 Adjusted Tangible Net Worth. The
Borrowers will have Tangible Net
Worth of not less than the following amounts at the end
of each of the following fiscal
quarters:
Fiscal Quarter Ending Amount
December 31, 1998 $14,000,000
March 31, 1999 $13,000,000
June 30, 1999 $14,000,000
September 30, 1999,
and each fiscal
quarter thereafter $14,537,000
SECTION 4. Waiver and Amendment Fee. In order to induce
the Lender to enter into this
Waiver and Amendment, the Borrowers jointly and severally shall
pay to the Lenders a waiver and
amendment fee (the Waiver and Amendment Fee ) in the amount of
$175,000. The Waiver and
Amendment Fee shall be deemed fully earned upon the effectiveness
of this Waiver and Amendment,
shall be non-refundable when paid and shall be payable as
follows:
4.1 $25,000 of the Waiver and Amendment Fee shall be
paid simultaneously with
the effectiveness of this Waiver and Amendment; and
4.2 the remaining $150,000 of the Waiver and Amendment
fee shall be due and
payable in six consecutive monthly installments in the
amount of $25,000 each, payable on the
last day of each month, commencing February 28, 1999;
provided, however, that the entire
unpaid amount of the Waiver and Amendment Fee shall be due
and payable immediately upon
the occurrence of an Event of Default or the termination of
the Loan Agreement for any
reason whatsoever.
SECTION 5. Conditions to Effectiveness. This Waiver and
Amendment shall be effective as
of the date first above written when the Lender shall have
received the following:
5.1 counterparts of this Waiver and Amendment executed
by the Borrowers;
5.2 such other certificates, representations,
instruments and other documents as the
Agent and the Majority Lenders may require, in form and
substance satisfactory to the Agent;
and
5.3 payment of the $25,000 portion of the Waiver and
Amendment Fee referred to
in Section 4.1 of this Waiver and Amendment.
SECTION 6. Representations and Warranties. The
Borrowers hereby each represent and
warrant to the Lender that (i) the execution, delivery and
performance of this Waiver 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 and Amendment,
except for those already duly
obtained; (iii) this Waiver 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 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
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 and Amendment,
there exists no Event of Default or condition which would result
in an Event of Default.
SECTION 7. Reference to and Effect on Loan Documents.
7.1 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.
7.2 Except as specifically amended above, all of the
terms of the Loan Agreement
shall remain unchanged and in full force and effect.
7.3 The execution, delivery and effectiveness of this
Waiver 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 8. Execution in Counterparts. This Waiver 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 9. Governing Law. This Waiver and Amendment
shall be governed by, and shall
be construed and enforced in accordance with, the laws of the
State of New York.
SECTION 10. Headings. Section headings in this Waiver
and Amendment are included
herein for convenience of reference only and shall not constitute
a part of this Waiver and Amendment
or be given any substantive effect.
IN WITNESS WHEREOF, this Waiver and Amendment has been duly
executed as of the date
first above written.
PENTECH INTERNATIONAL, INC.
By: ____________________________
Title:___________________________
PENTECH COSMETICS, INC.
By: ____________________________
Title:___________________________
SAWDUST PENCIL CO.
By: ____________________________
Title:___________________________
BANKAMERICA BUSINESS CREDIT, INC.
By: ____________________________
Louis Alexander,
Vice President
EXHIBIT 21
Subsidiaries of Pentech International, Inc.
Jurisdiction of
Name Incorporation
Sawdust Pencil Co. Delaware
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in (i) the
Registration Statement (Form S-8 No. 33-27009) dated February 28,
1989 pertaining to the 1989 Stock Option Plan of Pentech
International, Inc. ("Pentech"); (ii) the Registration Statement
(Form S-8 No. 33-67802) dated August 23, 1993 pertaining to the
1993 Stock Option Plan of Pentech and (iii) the Registration
Statement (Form S-8, No. 333-30595) dated July 2, 1997 pertaining
to the 1995 Stock Option Plan of Pentech, of our report dated
December 21, 1998 (except for Notes 3(b) and 13 as to which the
date is January 11, 1999) with respect to the consolidated
financial statements and schedule of Pentech International, Inc.
included in this Annual Report (Form 10-K) for the year ended
September 30, 1998.
ERNST & YOUNG LLP
By:/s/Ernst & Young LLP
MetroPark, New Jersey
January 11, 1999
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<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 759,349
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<RECEIVABLES> 14,456,009
<ALLOWANCES> (128,814)
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<CURRENT-ASSETS> 37,608,162
<PP&E> 8,934,327
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<CURRENT-LIABILITIES> 24,725,221
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0
0
<COMMON> 125,703
<OTHER-SE> 14,632,563
<TOTAL-LIABILITY-AND-EQUITY> 41,583,487
<SALES> 57,485,045
<TOTAL-REVENUES> 57,485,045
<CGS> 41,350,327
<TOTAL-COSTS> 41,350,327
<OTHER-EXPENSES> 17,475,227
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<INCOME-TAX> 635,015
<INCOME-CONTINUING> (3,504,303)
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EXHIBIT 10.7
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Agreement"), entered into
this
[ ] day of March, 1998 by and between PENTECH INTERNATIONAL,
INC.,
having an office at 195 Carter Drive, Edison, New Jersey 08817,
(hereinafter refereed to respectively as "Plaintiff"), on the one
hand, and COOPER & DUNHAM L.L.P., having an office at 1185 Avenue
of the Americas, New York, New York 10036 and LEWIS H. ESLINGER
(hereinafter refereed to respectively as "Defendants"), on the
other hand.
W I T N E S E T H
WHEREAS, Plaintiff commenced an action Defendants in the
Supreme Court of the State of New York, County of New York, Index
No. 1100222/97 ("Action"), asserting in its complaint
("Complaint"), dated June 4, 1997, various claims against
Defendants; and
WHEREAS, Defendants filed their verified answer ("Answer"),
dated July 25, 1997, denying any and all liability to Plaintiff
and
asserting affirmative defenses against Plaintiff; and
WHEREAS, the parties have conducted extensive discovery,
including, but not limited to, (i) review of transcripts,
documents
and other materials from related proceedings, and (ii)
depositions
and document discovery in the Action; and
WHEREAS, Plaintiff and Defendants have determined that it is
in their mutual interests to amicably resolve all disputes among
the parties and to settle the Action on the terms and conditions
set forth herein; and
WHEREAS, settlement negotiations have taken place between
Plaintiff and Defendants, through their respective attorneys, and
the terms of this of this Agreement have been reached through
arm's-length negotiations conducted by the said attorneys; and
WHEREAS, this Agreement compromises the matters set forth in
the Complaint and Answer which are disputed both as to validity
and
amount; and
NOW, THEREFORE, in consideration of the mutual promises and
obligations contained herein, it is agreed that each and every
claim and factual allegation embraced within the scope of the
Complaint and Answer, or which might have been alleged by reason
of
any matter or transaction referred to in the Complaint or Answer,
or which arises out of or under the facts and circumstances set
forth therein, shall be dismissed on the merits with prejudice
and
be settled and compromised upon the following terms and
conditions:
1. On behalf of Defendants, $1,250,000 U.S. Dollars shall
be
paid to Plaintiff. Such payment shall be made on or before April
3, 1998 by check made payable to Pentech International, Inc. and
Twomey, Hoppe & Gallanty LLP, as attorneys.
2. In consideration of the aforesaid payment and clearance
thereof, the promises and obligations contained herein, and other
good and value consideration:
(i) The Plaintiff and its respective affiliates,
subsidiaries, principals, partners, parent companies, directors,
officers, shareholders, attorneys, agents, employees, associates,
heirs, executors, administrators, successors, predecessors,
assigns, other representatives and any and all other related and
affiliated companies and individuals (hereinafter together
refereed
to as the "Plaintiff's Entities") shall release and discharge
Defendants and their respective affiliates, subsidiaries,
principals, partners, parent companies, directors, officers,
shareholders, attorneys, agents, employees, associates, heirs,
executors, administrators, successors, predecessors, assigns,
other
representatives, and all other related and affiliated companies
and
individuals (hereinafter together refereed to as "Defendants'
Entities") from all actions, causes of action, claims, suits,
debts, accounts, contracts, controversies, agreements, promises,
damages, disciplinary complaints, administrative remedies,
conflicts of interest and demands whatsoever, in law or equity,
which against the Defendants and Defendants' Entities the
Plaintiff
or Plaintiff's Entities ever had, now have or hereafter can,
shall
or may have for, upon or by reason of any matter, cause to thing
whatsoever from the beginning of the world to the day of the date
of this Agreement, except for the rights and obligations set
forth
in this Agreement, all pursuant to the general release in the
form
annexed hereto as Exhibits "A," which shall be duly executed by
the
Plaintiff;
(ii) The Defendants and the Defendants' Entities shall
release and discharge the Plaintiff and Plaintiffs' Entities from
all actions, cause of action, claims, suits, debts, accounts,
contracts, controversies, agreements, promises, damages,
disciplinary complaints, administrative remedies, conflicts of
interest and demands whatsoever, in law or equity, which against
the Plaintiff or Plaintiff's Entities, the Defendants or
Defendants' Entities ever had, now have or hereafter can, shall
or
may have for, upon or by reason of any matter, cause or thing
whatsoever from the beginning of the world to the day of the date
of this Agreement, except for the rights and obligations set
forth
in this Agreement, all pursuant to the general releases in the
forms annexed hereto as Exhibit "B," which shall be duly executed
by the Defendants;
(iii) A purpose and intent of this Agreement is to
preclude the Defendants and Defendants' Entities, on the one
hand,
and the Plaintiff and Plaintiff's Entities, on the other, and any
entities owned, controlled, or managed by them respectively, from
ever asserting a claim, complaint or lawsuit against the other
arising from any matter whatsoever up to the date of this
Agreement
once the payment is made and cleared pursuant to paragraph 1 of
this Agreement;
(iv) Plaintiff hereby agrees to indemnify and hold
harmless the Defendants and Defendants' Entities from any claim
interposed against Defendants and/or Defendants' Entities which
arises out of the legal services performed and provided by the
Defendants as set forth in the Complaint, and Plaintiff further
agrees to indemnify Defendants and Defendants' Entities by
reducing
the amount of any judgement obtained by Plaintiff against any
other
judgement defendant ("Judgement Defendant"), or by releasing or
giving a satisfaction for so much of such judgement, to the
extent
necessary to eliminate any such Judgement Defendant's right to
recover against Defendants and/or Defendants' Entities on any
claim
which arises out of the legal services performed and provided by
the Defendants as set forth in the Complaint; and
(v) Plaintiff hereby agrees that any settlement
agreement entered into by Plaintiff and/or Plaintiff's Entities
with any individual or entity having a pending, potential or
future
claim against Defendants and/or Defendants' Entities which arises
out of the legal services performed and provided by the
Defendants
as set forth in the Complaint shall contain a covenant and
agreement by such individual or entity not to enforce, sue for,
or
collect upon any such claim that such individual or entity may
have
against Defendants and/or Defendants' Entities.
3. This Agreement is not intended to be a resolution on
the
merits and is made solely to resolve the differences between the
parties and as a result of a business decision of the parties
made
in light of the expense and inconvenience of continuing to
litigate
the Action.
4. The parties hereto acknowledge that this Agreement is
not
intended to be, and shall not be, construed as an admission that
Defendants have breached any agreement, obligation, duty,
disciplinary rule, ethical consideration or contract relating to
or
owed to Plaintiff, or engaged in any wrongdoing or misconduct,
professional or otherwise, or incurred any liability of any kind.
5. Neither this Agreement nor any of its terms and
conditions, nor any negotiations or proceedings with respect to
the
subject matter of this Agreement shall be offered or received
into
evidence or be admissible in any trial or any proceeding
involving
Plaintiff, Defendants, or any other party or person, except for
the
purpose of obtaining enforcement of the Agreement.
6. The terms and conditions of this Agreement ant the
documents produced during the litigation of the Action are and
shall be deemed to be confidential, and shall not be disclosed to
any non-party by Plaintiff, Defendants or their respective
experts,
agents, or attorneys except (1) pursuant to subpoena or court
order; (2) to the extent that, in the opinion of counsel,
disclosure thereof is necessary to comply with applicable law
and/or the obligations of Plaintiff as a public company; (3) to
their accountants, auditors, and attorneys; or (4) to obtain
enforcement of the provisions of this Agreement. The Agreement
and
any related documents (except the Stipulation of Dismissal
referred
to in paragraph 12 below) shall not be filed with the court or,
if
filed, shall be filed under seal. If asked about the status of
the
action or the claims asserted therein, except as set forth above,
Plaintiff, Defendants and their respective attorneys and agents
agree to state only that the differences between the parties have
been resolved satisfactorily. In order to facilitate the purpose
of this paragraph and Plaintiff and Defendants and their
respective
attorneys agree to use their best efforts to return to the other
party all transcripts of depositions of party witnesses taken in
the Action in their possession and to return all documents in
their
respective possession, including copies made thereof, produced by
the other party in response to discovery requests during the
course
of the Action within forty-five (45) days after the execution of
this Agreement. Nothing in this Agreement shall prohibit any
party
from disclosing the fact of the settlement to any third party.
7. This Agreement contains the entire understanding and
agreement between the parties hereto and supersedes all prior
verbal and written communications between the parties and their
counsel with regard to the subject matter addressed herein; it is
not subject to any condition not provided for herein and there
are
no other collateral or oral agreements among the parties.
8. This Agreement may not be modified, terminated or
discharged orally; any agreement purporting to change the terms
hereof must be in writing, signed by each party hereto.
9. This Agreement shall be constructed in accordance with,
and governed by, the substantive laws of the State of New York,
without giving effect to conflicts of laws principles.
10. This Agreement 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
considered an original, and may be signed and delivered by
facsimile, and all of which together shall constitute one and the
same document.
11. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs,
successors, administrators, representatives, shareholders,
partners, employees, successors, executors and assigns.
12. Upon the execution and exchange of the Agreement and
the
delivery and clearance of the settlement payment set forth, the
attorneys for the parties hereto shall execute and file a
Stipulation of Dismissal of the Action with prejudice with the
Supreme Court of the State of New York, County of New York, and
the
Plaintiff and Defendants shall each be provided with the releases
specified in Paragraph 2(i) and 2(ii) hereof. Nothing in any of
said releases shall excuse any party from its obligations under
the
Agreement itself.
13. The parties hereto and the representatives signing on
behalf of each hereby warrant and represent that they are
authorized to enter into this Agreement, and bind the parties to
the Agreement. The relevant corporate resolutions or powers of
attorney evidencing this authority have been drafted and duly
executed and are incorporated herein by reference.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first set forth above.
PENTECH INTERNATIONAL, INC.
By: s/
COOPER & DUNHAM L.L.P.
By: s/
s/
N:\ANNE\PTK\SETTLE.AGR<PAGE>
