<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 8, 1997
REGISTRATION NO. 333-24519
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
PEN-TAB INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 2699 54-1833398
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
167 KELLEY DRIVE
FRONT ROYAL, VA 22630
TELEPHONE: (540) 622-2000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
----------------
WILLIAM LEARY
167 KELLEY DRIVE
FRONT ROYAL, VA 22630
TELEPHONE: (540) 622-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
LANCE C. BALK
KIRKLAND & ELLIS
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4675
TELEPHONE: (212) 446-4800
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 8, 1997
PROSPECTUS
PEN-TAB INDUSTRIES, INC.
OFFER TO EXCHANGE ITS SERIES B 10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING 10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON , 1997,
UNLESS EXTENDED.
Pen-Tab Industries, Inc., a Delaware corporation ("Pen-Tab"), hereby offers
(the "Exchange Offer"), upon the terms and conditions set forth in this
Prospectus (the "Prospectus") and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), to exchange $1,000 principal amount of its Series B
10 7/8% Senior Subordinated Notes due 2007 (the "Exchange Notes"), which will
have been registered under the Securities Act of 1933, as amended (the
"Securities Act") pursuant to a Registration Statement of which this prospectus
is a part, for each $1,000 principal amount of its outstanding 10 7/8% Senior
Subordinated Notes due 2007 (the "Notes"), of which $75,000,000 principal
amount is outstanding. The form and terms of the Exchange Notes are the same as
the form and term of the Notes (which they replace) except that the Exchange
Notes will bear a Series B designation and will have been registered under the
Securities Act and, therefore, will not bear legends restricting their transfer
and will not contain certain provisions relating to an increase in the interest
rate which were included in the terms of the Notes in certain circumstances
relating to the timing of the Exchange Offer. The Exchange Notes will evidence
the same debt as the Notes (which they replace) and will be issued under and be
entitled to the benefits of the Indenture dated February 1, 1997 between Pen-
Tab and United States Trust Company of New York (the "Indenture") governing the
Notes. See "The Exchange Offer" and "Description of Exchange Notes."
Pen-Tab has not issued, and does not have any current firm arrangements to
issue, any significant indebtedness to which the Exchange Notes would rank
senior or pari passu in right of payment. The Exchange Notes will be
subordinated in right of payment to all Senior Debt of Pen-Tab (including debt
under the Credit Agreement (as defined herein)). The aggregate amount of such
Senior Debt was $24.2 million at December 28, 1996.
Pen-Tab will accept for exchange any and all Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time, on , 1997, unless
extended by Pen-Tab in its sole discretion (the "Expiration Date").
Notwithstanding the foregoing, Pen-Tab will not extend the Expiration Date
beyond , 1997. Tenders of Notes may be withdrawn at any time prior to 5:00
p.m. on the Expiration Date. The Exchange Offer is subject to certain customary
conditions. The Notes were sold by Pen-Tab on January 30, 1997 to the Initial
Purchasers (as defined) in a transaction not registered under the Securities
Act in reliance upon an exemption under the Securities Act. The Initial
Purchasers subsequently placed the Notes with qualified institutional buyers in
reliance upon Rule 144A under the Securities Act and with a limited number of
institutional accredited investors that agreed to comply with certain transfer
restrictions and other conditions. Accordingly, the Notes may not be reoffered,
resold or otherwise transferred in the United States unless registered under
the Securities Act or unless an applicable exemption from the registration
requirements of the Securities Act is available. The Exchange Notes are being
offered hereunder in order to satisfy the obligations of Pen-Tab under the
Registration Rights Agreement (as defined) entered into by Pen-Tab in
connection with the offering of the Notes. See "The Exchange Offer."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, Pen-Tab believes the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by any holder thereof (other than any such holder
that is an "affiliate" of Pen-Tab within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's business and such holder
has no arrangement or understanding with any person to participate in the
distribution of such Exchange Notes. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer" and "The Exchange Offer--Resale of the Exchange
Notes." Each broker-dealer (a "Participating Broker-Dealer") that receives
Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a participating Broker-Dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with
resales of Exchange Notes received in exchange for Notes where such Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities. Pen-Tab has agreed that, for a period
of 180 days after the Expiration Date, it will make this Prospectus available
to any participating Broker-Dealer for use in connection with any such resale.
See "Plan of Distribution."
Holders of Notes not tendered and accepted in the Exchange Offer will
continue to hold such Notes and will be entitled to all the rights and benefits
and will be subject to the limitations applicable thereto under the Indenture
and with respect to transfer under the Securities Act. Pen-Tab will pay all the
expenses incurred by it incident to the Exchange Offer. See "The Exchange
Offer."
SEE "RISK FACTORS" ON PAGE 14 FOR A DESCRIPTION OF CERTAIN RISKS TO BE
CONSIDERED BY HOLDERS WHO TENDER THEIR NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE>
There has not previously been any public market for the Notes or the
Exchange Notes. Pen-Tab does not intend to list the Exchange Notes on any
securities exchange or to seek approval for quotation through any automated
quotation system. There can be no assurance that an active market for the
Exchange Notes will develop. See "Risk Factors--Absence of a Public Market
Could Adversely Affect the Value of Exchange Notes." Moreover, to the extent
that Notes are tendered and accepted in the Exchange Offer, the trading market
for untendered and tendered but unaccepted Notes could be adversely affected.
The Exchange Notes will be available initially only in book-entry form. Pen-
Tab expects that the Exchange Notes issued pursuant to this Exchange Offer
will be issued in the form of a Global Certificate (as defined), which will be
deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee. Beneficial interests in the Global Certificate representing the
Exchange Notes will be shown on, and transfers thereof to qualified
institutional buyers will be effected through, records maintained by the
Depositary and its participants. After the initial issuance of the Global
Certificate, Exchange Notes in certified form will be issued in exchange for
the Global Certificate only on the terms set forth in the Indenture. See
"Description of Exchange Notes--Book-Entry; Delivery and Form."
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Available Information.............. 2
Prospectus Summary................. 5
Risk Factors....................... 15
The Transactions................... 20
Use of Proceeds.................... 21
Capitalization..................... 22
Selected Historical Financial Data. 23
Pro Forma Unaudited Condensed Fi-
nancial Data...................... 25
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 30
Industry........................... 35
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business............................ 37
Management.......................... 44
Security Ownership.................. 46
Certain Transactions................ 47
Description of Credit Agreement..... 47
Description of Exchange Notes....... 49
The Exchange Offer.................. 72
Certain Federal Income Tax Consider-
ations............................. 81
Plan of Distribution................ 81
Legal Matters....................... 82
Experts............................. 82
Index to Financial Statements....... F-1
</TABLE>
AVAILABLE INFORMATION
Pen-Tab has filed with the Commission a Registration Statement on Form S-4
(the "Exchange Offer Registration Statement," which term shall encompass all
amendments, exhibits, annexes and schedules thereto) pursuant to the
Securities Act, and the rules and regulations promulgated thereunder, covering
the Exchange Notes being offered hereby. This Prospectus does not contain all
the information set forth in the Exchange Offer Registration Statement. For
further information with respect to Pen-Tab and the Exchange Offer, reference
is made to the Exchange Offer Registration Statement. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to are not necessarily complete. With respect to each such contract,
agreement or other document filed as an exhibit to the Exchange Offer
Registration Statement, reference is made to the exhibit for a more complete
description of the document or matter involved, and each such statement shall
be deemed qualified in its entirety by such reference. The Exchange Offer
Registration Statement, including the exhibits thereto, can be inspected and
copied at the public reference facilities maintained by the Commission at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at the Regional Offices
of the commission at 75 Park Place, New York, New York 10007 and at
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, at prescribed rates.
2
<PAGE>
Additionally, the Commission maintains a web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission, including
the Company.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, Pen-Tab will become subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith will be required to file periodic reports and other
information with the Commission. The obligation of Pen-Tab to file periodic
reports and other information with the Commission will be suspended if the
Exchange Notes are held of record by fewer than 300 holders as of the
beginning of any fiscal year of Pen-Tab other than the fiscal year in which
the Exchange Offer Registration Statement is declared effective. Pen-Tab will
nevertheless be required to continue to file reports with the Commission if
the Exchange Notes are listed on a national securities exchange. In the event
Pen-Tab ceases to be subject to the informational requirements of the Exchange
Act, Pen-Tab will be required under the Indenture to continue to file with the
Commission the annual and quarterly reports, information, documents or other
reports, including, without limitation, reports on Forms 10-K, 10-Q and 8-K,
which would be required pursuant to the informational requirements of the
Exchange Act. Under the Indenture, Pen-Tab shall file with the Trustee annual,
quarterly and other reports within fifteen days after it files such reports
with the Commission. Further, to the extent that annual, quarterly or other
financial reports are furnished by Pen-Tab to stockholders generally it will
mail such reports to holders of Exchange Notes. Pen-Tab will furnish annual
and quarterly financial reports to stockholders of Pen-Tab and will mail such
reports to holders of Exchange Notes pursuant to the Indenture, thus holders
of Exchange Notes will receive financial reports every quarter. Annual reports
delivered to the Trustee and the holders of Exchange Notes will contain
financial information that has been examined and reported upon, with an
opinion expressed by an independent public or certified public accountant.
Pen-Tab will also furnish such other reports as may be required by law.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
THIS PROSPECTUS INCLUDES CERTAIN "FORWARD-LOOKING STATEMENTS." ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACTS INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, CERTAIN STATEMENTS UNDER THE
"PROSPECTUS SUMMARY," "THE COMPANY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS" AND LOCATED
ELSEWHERE HEREIN REGARDING PEN-TAB'S FINANCIAL POSITION AND BUSINESS STRATEGY,
MAY CONSTITUTE FORWARD-LOOKING STATEMENTS. ALTHOUGH PEN-TAB BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
PEN-TAB'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION IN CONJUNCTION WITH THE FORWARD-
LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS AND UNDER "RISK FACTORS." ALL
SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO PEN-TAB
OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY
THE CAUTIONARY STATEMENTS.
3
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[THIS PAGE INTENTIONALLY LEFT BLANK]
4
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Market
data used throughout this Prospectus were obtained from internal company
surveys and industry publications. Industry publications generally state that
the information contained therein has been obtained from sources believed to be
reliable, but that the accuracy and completeness of such information is not
guaranteed. The Company has not independently verified this market data.
Similarly, internal company surveys, while believed by the Company to be
reliable, have not been verified by any independent sources. Unless the context
otherwise requires, references in this Prospectus to "Pen-Tab" refer to Pen-Tab
Industries, Inc. and references to the "Company" refer collectively to Pen-Tab
Industries, Inc., its sole shareholder Holdings and Pen-Tab Industries of
California, Inc. (which was merged in July 1996) after giving effect to the
Transactions (as defined). All references in this Prospectus to "fiscal year"
refer to the Company's fiscal year which ends on the Saturday closest to
December 31 of that calendar year. For example, fiscal 1993 refers to the year-
ended January 1, 1994.
THE COMPANY
The Company is a leading U.S. manufacturer of school, home and office supply
products. Pen-Tab's core products include binders, pads, filler paper, spiral
and coilless notebooks, planners, envelopes, school supplies and arts and
crafts products in hundreds of configurations. In 1992, the Company recognized
a previously unfulfilled demand for higher quality, upscale school and office-
related products. Pen-Tab pioneered a line of these higher price point, branded
products to serve the school and office product markets. Pen-Tab has developed
strong consumer recognition for its proprietary office styles and its upscale
school styles under the Pen-Tab(R) Pen-Tab Pro(R) and Expert(R) brand names.
These differentiated products provide both the Company and the retailer with
higher margins. Pen-Tab, through its Vinylweld division, is also a leading
supplier of vinyl packaging products designed primarily for audio and video
cassette tapes. For fiscal 1996, core products represented 59.9% of revenue,
differentiated products represented 30.3% of revenue and Vinylweld represented
9.8% of revenue. For fiscal 1996, school-related products represented 59.4% of
revenue, office-related products represented 30.8% of revenue and Vinylweld
represented 9.8% of revenue.
Pen-Tab's move into differentiated products is primarily responsible for the
Company's significant increases in sales and profitability. From 1993 to 1996,
the Company's sales have grown from $84.4 million to $106.4 million and
Adjusted EBITDA (as defined herein) has grown from $5.7 million to $17.9
million. During the same period, the Company's Adjusted EBITDA margin increased
from 6.7% to 16.8%. The Company's strategy is to grow through continued
internal design of new, differentiated product lines and possible strategic
acquisitions.
COMPETITIVE STRENGTHS
The combination of the Company's products, customers and proven track record
distinguishes it as a leading manufacturer and marketer of school, home and
office products in North America. The Company attributes this success and its
continued opportunities for growth and profitability to the following
competitive strengths:
. Market leader in differentiated, branded school, home and office
products. Pen-Tab is widely recognized as a market leader in
differentiated, branded school, home and office products. Pen-Tab has
pioneered a line of high-quality, functionally superior, higher price
point and margin, branded items to serve the school and office products
markets. Consumer demand for its proprietary products has been strong.
Demand for differentiated products has risen steadily since 1992 when
the Company first introduced them and the Company expects a significant
portion of its future growth to come from increased sales of
differentiated products.
5
<PAGE>
. Partnering reduces inventory risk. Pen-Tab's creative department has
strong design capabilities and together with senior sales and marketing
people has been successful in developing partnering relationships with
major customers. Senior sales management personally handle the Company's
largest accounts allowing the Company to design branded products in
concert with its major customers, tailoring high-quality, upscale
products to meet a mutual vision. The Company's differentiated, branded
school-related products are only mass-produced once they have been pre-
sponsored by a major customer.
. Strong brand name recognition. Through the manufacturing of high-quality
products for over 60 years, Pen-Tab has developed strong brand
recognition with consumers, retailers and distributors. The Company
focuses on building its brand name by internally designing new,
differentiated products and product formats and does not produce
products under license. This allows the Company to achieve higher
margins than would be achievable with core products without the
additional expense of licensing fees. Several trademarks, sub-brands and
proprietary styles, including Pen-Tab(R), Pen-Tab Pro(R) and Expert(R),
have been developed to service targeted market sectors. In an effort to
further enhance its brand equity and consumer and retailer loyalty, the
Company recently initiated a television advertising campaign on which it
spent $2.0 million during 1996.
. Modern, efficient and strategically located facilities. Over the past
six years, the Company has invested over $21 million in the latest
advances in plant and capital equipment. Management has expanded
manufacturing capacity in advance of customer demand. The Company has
available manufacturing capacity to support an additional $50 million to
$60 million in sales of paper products with no significant additional
capital expenditures. Management believes the Company's heavy investment
in technologically advanced high-speed equipment provides it with what
it believes to be one of the lowest manufacturing cost environments in
the school, home and office products industry. Moreover, with large
plants in or near the metropolitan areas of Los Angeles, Chicago and
Washington D.C., Pen-Tab is well positioned to serve the largest
national retailers and distributors in the United States.
. Long-standing customer base. Pen-Tab has cultivated long-term customer
relationships with well-capitalized, high-growth retailers and
distributors in the school, home and office products industry.
Management has identified the fastest growing distribution channels in
the Company's marketplaces and has focused the resources of the Company
on the key accounts in those channels. The Company's customers include
the nation's largest discount stores and mass merchandisers, wholesale
clubs, office supply superstores and contract stationers. These
customers are expected to benefit from the continuing consolidation of
retailers and distributors in the school and office products category.
. Leading edge information systems. Pen-Tab's newly installed state-of-
the-art network and MRP II software system manages the manufacturing,
accounting, distribution, inventory, sales and billing systems. The
system links all of the Company's locations to provide timely
information for management. The Company has also established electronic
data interchange programs with numerous customers.
. Experienced management team. Between them, Alan Hodes, President and
Chief Executive Officer of the Company, and Michael Greenberg, Executive
Vice President of the Company, have over 55 years with the Company. The
Company has supplemented its management ranks with a strong team of new
sales, marketing and design professionals within the past five years.
Management has profitably operated the Company under leveraged
conditions and has successfully integrated the operations of acquired
companies into the Company's existing business. Management will hold a
significant equity interest in the Company following the Transactions
and is committed to the long-term success of the Company.
6
<PAGE>
GROWTH STRATEGY
The school, home and office products industry is a growing, consolidating
industry in which the Company has a significant market position. According to
the U.S. Department of Education and LINK Resources Corp., enrollment in
elementary and secondary schools is expected to rise to an estimated 54.4
million by the year 2000 from 50.7 million in 1995. This growth in enrollment,
coupled with an increased demand for high-quality, functionally superior,
creatively designed school-related products, provides a large potential market
for upscale, differentiated products. The Company's strategy is to fulfil the
demand for upscale, differentiated products in the school, home and office
products markets, by pursuing the following:
. Focus on rapidly growing customers. The Company serves many of the
largest and best positioned customers in the school, home and office
products industry including mass merchandisers, warehouse clubs,
national office products superstores, and national contract stationers.
The Company's aggregate net sales to Price Costco, Target Stores and
Walmart accounted for approximately 26.2%, 13.4% and 11.4% of the
Company's net sales for 1994, respectively, approximately 23.0%, 15.3%
and 12.5% of the Company's net sales for 1995, respectively, and
aggregate net sales to Price Costco and Target Stores accounted for
approximately 21.8% and 15.6% of the Company's net sales for 1996,
respectively. Sales to the three largest companies in each of the
distribution channels identified above represent approximately 64.5% of
the Company's 1996 net sales. Anticipating further consolidation in the
school, home and office products industry, the Company expects that its
national scope and broad product line will be increasingly important in
meeting the needs of its customers. The Company will continue to target
those customers driving consolidation in the school, home and office
products industry.
. Continue to introduce differentiated products. Differentiated, higher
value-added, branded products give the Company a greater selection to
offer its customers and improve product line profitability for both the
Company and its customers. The Company plans to continue to distinguish
itself from other suppliers and improve profitability through product
innovation, differentiation and line extensions. The Company will
accomplish this by continued internal design of new, differentiated
product lines.
. Focus on partnering relationships. The Company will continue to utilize
and expand the integrated efforts of the creative department and senior
sales and marketing personnel to develop and foster partnering
relationships with major customers. Partnering should allow the Company
to continue designing branded products in concert with its major
customers while expanding production of upscale products that meet a
mutual vision.
. Broaden product distribution. The Company's market presence and
distribution strength position it to sell new or acquired product lines
across its distribution channels, including mass merchandisers, national
office products superstores, national contract stationers, and office
product wholesalers. In the future, Pen-Tab intends to strengthen its
position in the contract stationer market. Pen-Tab has recently
established a strong relationship with B.T. Office Products
International, Inc., one of the nation's largest contract stationers.
. Growth through acquisition. In addition to the growth the Company
expects to come from the development of new, differentiated products and
product lines and expanding sales of existing products and product
lines, the Company actively evaluates acquisition candidates. Future
strategic acquisitions may be undertaken to broaden the Company's
product lines, expand its manufacturing capacity, and strengthen its
presence within the various channels of distribution.
THE TRANSACTIONS
On February 4, 1997 the Company completed the offering of the Notes (the
"Offering") and the recapitalization (the "Recapitalization") whereby, among
other things, Citicorp Venture Capital, Ltd. and James Stevens each purchased
an equity stake in Holdings and Holdings redeemed a portion of the securities
held by Alan Hodes and Michael Greenberg (collectively the "Management
Shareholders"). The Offering and the Recapitalization are collectively referred
to herein as the "Transactions." See "The Transactions."
7
<PAGE>
THE NOTES OFFERING
NOTES................... The Notes were sold by the Company on January 30,
1997 to J.P. Morgan & Co. and Bear, Stearns & Co.
Inc. (the "Initial Purchasers") pursuant to a
Purchase Agreement dated January 30, 1997 (the
"Purchase Agreement"). The Initial Purchasers
subsequently resold the Notes to qualified
institutional buyers pursuant to Rule 144A under the
Securities Act and to a limited number of
institutional accredited investors that agreed to
comply with certain transfer restrictions and other
conditions.
REGISTRATION RIGHTS
AGREEMENT............... Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into a Registration
Rights Agreement dated February 1, 1997 (the
"Registration Rights Agreement"), which grants the
holder of the Notes certain exchange and registration
rights. The Exchange Offer is intended to satisfy
such exchange rights which terminate upon the
consummation of the Exchange Offer.
THE EXCHANGE OFFER
SECURITIES OFFERED...... $75,000,000 aggregate principal amount of Series B 10
7/8% Senior Subordinated Notes due 2007 (the
"Exchange Notes").
THE EXCHANGE OFFER...... $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of Notes.
As of the date hereof, $75,000,000 aggregate
principal amount of Notes are outstanding. The
Company will issue the Exchange Notes to holders on
or promptly after the Expiration Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Notes may be offered for resale, resold
and otherwise transferred by any holder thereof
(other than any such holder which is an "affiliate"
of the Company within the meaning of Rule 405 under
the Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such holder's
business and that such holder does not intend to
participate and has no arrangement or understanding
with any person to participate in the distribution of
such Exchange Notes.
Each Participating Broker-Dealer that receives
Exchange Notes for its own account pursuant to the
Exchange Offer must acknowledge that it will deliver
a prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection
with resales of Exchange Notes received in exchange
for Notes where such Notes were acquired by such
Participating Broker-Dealer as a result of market-
making activities or other trading activities. The
Company has
8
<PAGE>
agreed that, for a period of 180 days after the
Expiration Date, it will make this Prospectus
available to any Participating Broker-Dealer for use
in connection with any such resale. See "Plan of
Distribution."
Any holder who tenders in the Exchange Offer with the
intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes could not rely on the position of the staff of
the Commission enunciated in no-action letters and,
in the absence of an exemption therefrom, must comply
with the registration and prospectus delivery
requirements of the Securities Act in connection with
any resale transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company. See "The Exchange Offer--Resale of the
Exchange Notes."
EXPIRATION DATE......... 5:00 p.m., New York City time, on , 1997 unless
the Exchange Offer is extended, in which case the
term "Expiration Date" means the latest date and time
to which the Exchange Offer is extended.
ACCRUED INTEREST ON THE
EXCHANGE NOTES AND THE
NOTES................... Each Exchange Note will bear interest from its
issuance date. Holders of Notes that are accepted for
exchange will receive, in cash, accrued interest
thereon to, but not including, the issuance date of
the Exchange Notes. Such interest will be paid with
the first interest payment on the Exchange Notes.
Interest on the Notes accepted for exchange will
cease to accrue upon issuance of the Exchange Notes.
CONDITIONS TO THE
EXCHANGE OFFER.......... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer--Conditions."
PROCEDURES FOR
TENDERING NOTES......... Each holder of Notes wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, together with the
Notes and any other required documentation to the
Exchange Agent (as defined) at the address set forth
herein. By executing the Letter of Transmittal, each
holder will represent to the Company that, among
other things, the Exchange Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such
Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other
person has any arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes and that neither the holder nor any
such other person is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Company. See
"The Exchange Offer--Purpose and Effect of the
Exchange Offer" and "--Procedures for Tendering."
UNTENDERED NOTES........ Following the consummation of the Exchange Offer,
holders of Notes eligible to participate but who do
not tender their Notes will not have any further
exchange rights and such Notes will continue to be
subject to
9
<PAGE>
certain restrictions on transfer. Accordingly, the
liquidity of the market for such Notes could be
adversely affected.
CONSEQUENCES OF FAILURE
TO EXCHANGE............. The Notes that are not exchanged pursuant to the
Exchange Offer will remain restricted securities.
Accordingly, such Notes may be resold only (i) to the
Company, (ii) pursuant to Rule 144A or Rule 144 under
the Securities Act or pursuant to some other
exemption under the Securities Act, (iii) outside the
United States to a foreign person pursuant to the
requirements of Rule 904 under the Securities Act, or
(iv) pursuant to an effective registration statement
under the Securities Act. See "The Exchange Offer--
Consequences of Failure to Exchange."
SHELF REGISTRATION
STATEMENT............... If any holder of the Notes (other than any such
holder which is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act) is
not eligible under applicable securities laws to
participate in the Exchange Offer, and such holder
has provided information regarding such holder and
the distribution of such holder's Notes to the
Company for use therein, the Company has agreed to
register the Notes on a shelf registration statement
(the "Shelf Registration Statement") and use its best
efforts to cause it to be declared effective by the
Commission as promptly as practical on or after the
consummation of the Exchange Offer. The Company has
agreed to maintain the effectiveness of the Shelf
Registration Statement for, under certain
circumstances, a maximum of three years, to cover
resales of the Notes held by any such holders.
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS....... Any beneficial owner whose Notes are registered in
the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender
should contact such registered holder promptly and
instruct such registered holder to tender on such
beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such
owner must, prior to completing and executing the
Letter of Transmittal and delivering its Notes,
either make appropriate arrangements to register
ownership of the Notes in such owner's name or obtain
a properly completed bond power from the registered
holder. The transfer of registered ownership may take
considerable time. The Company will keep the Exchange
Offer open for not less than twenty days in order to
provide for the transfer of registered ownership.
GUARANTEED DELIVERY
PROCEDURES.............. Holders of Notes who wish to tender their Notes and
whose Notes are not immediately available or who
cannot deliver their Notes, the Letter of Transmittal
or any other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with the
procedures for book-entry transfer) prior to the
Expiration Date must tender their Notes according to
the guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS....... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
10
<PAGE>
ACCEPTANCE OF NOTES AND
DELIVERY OF EXCHANGE
NOTES................... The Company will accept for exchange any and all
Notes which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--Terms of the Exchange Offer."
USE OF PROCEEDS......... There will be no cash proceeds to the Company from
the exchange pursuant to the Exchange Offer.
EXCHANGE AGENT.......... United States Trust Company of New York
THE EXCHANGE NOTES
GENERAL................. The form and terms of the Exchange Notes are the same
as the form and terms of the Notes (which they
replace) except that (i) the Exchange Notes bear a
Series B designation, (ii) the Exchange Notes have
been registered under the Securities Act and,
therefore, will not bear legends restricting the
transfer thereof, and (iii) the holders of Exchange
Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the
provisions providing for an increase in the interest
rate on the Notes in certain circumstances relating
to the timing of the Exchange Offer, which rights
will terminate when the Exchange Offer is
consummated. See "The Exchange Offer--Purpose and
Effect of the Exchange Offer." The Exchange Notes
will evidence the same debt as the Notes and will be
entitled to the benefits of the Indenture. See
"Description of Exchange Notes." The Notes and the
Exchange Notes are referred to herein collectively as
the "Senior Subordinated Notes."
SECURITIES OFFERED...... $75,000,000 aggregate principal amount of Series B 10
7/8% Senior Subordinated Notes due 2007 of the
Company.
MATURITY DATE........... February 1, 2007.
INTEREST PAYMENT DATES.. February 1 and August 1, commencing August 1, 1997.
RANKING................. The Exchange Notes will constitute unsecured debt
obligations of the Company and will rank subordinate
in right of payment to all existing and future Senior
Debt including any Indebtedness under the Credit
Agreement. At December 28, 1996, after giving pro
forma effect to the Transactions, the aggregate
amount of indebtedness and other liabilities which
the Notes would have been subordinated to would have
been approximately $8.4 million. In addition, the
Company could have borrowed up to approximately $23
million under the terms of the Credit Agreement, all
of which would have constituted Senior Debt. See
"Description of Credit Agreement."
OPTIONAL REDEMPTION..... The Exchange Notes will be redeemable at the option
of Pen-Tab, in whole or in part, at any time on or
after February 1, 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to the
redemption date. In addition, prior to February 1,
2000, Pen-Tab may redeem up to 35% of the principal
amount of the Exchange Notes with
11
<PAGE>
the cash proceeds received by Pen-Tab from one or
more public offerings of its Capital Stock (other
than Disqualified Stock) at a redemption price of
110.875% of the principal amount thereof, plus
accrued and unpaid interest to the redemption date;
provided, however, that at least $65.0 million in
aggregate principal amount of the Exchange Notes
(including any Exchange Notes subsequently issued)
remains outstanding immediately after any such
redemption. See "Description of Exchange Notes--
Optional Redemption."
CHANGE OF CONTROL....... Upon a Change of Control, each holder of the Exchange
Notes may require the Company to repurchase such
holder's Exchange Notes, in whole or in part, at a
purchase price equal to 101% of the principal amount
thereof plus accrued and unpaid interest to the
purchase date. See "Description of Exchange Notes--
Change of Control." The Credit Agreement prohibits
the purchase of outstanding Exchange Notes prior to
repayment of the borrowings under the Credit
Agreement. There can be no assurance that upon a
Change of Control the Company will have sufficient
funds to repurchase any of the Exchange Notes. See
"Description of Credit Agreement."
MODIFICATION OF THE
INDENTURE............... The Company and the Trustee, with the consent of the
holders of a majority in aggregate principal amount
of the outstanding Senior Subordinated Notes, may
amend the Indenture; provided, however, that consent
is required from the holder of each Senior
Subordinated Note affected thereby in instances such
as reductions in the amount or changes in the timing
of interest payments, reductions in the principal and
changes in the maturity, redemption or repurchase
dates of the Senior Subordinated Notes. See
"Description of Exchange Notes--Modification and
Waiver."
EVENTS OF DEFAULT....... An Event of Default occurs under the Indenture in
instances such as the failure to pay principal when
due, the failure to pay any interest within 30 days
of when due and payable, the failure to perform or
comply with various covenants under the Indenture or
the default under the terms of certain other
indebtedness of the Company. See "Description of
Exchange Notes--Events of Default."
CERTAIN COVENANTS....... The Indenture contains certain covenants that, among
other things, limits the ability of the Company to
incur additional Indebtedness, make certain
Restricted Payments and Investments, create Liens,
enter into certain transactions with Affiliates or
Related Persons or consummate certain merger,
consolidation or similar transactions. In addition,
in certain circumstances, the Company will be
required to offer to purchase Exchange Notes at 100%
of the principal amount thereof with the net proceeds
of certain asset sales. These covenants are subject
to a number of significant exceptions and
qualifications. See "Description of Exchange Notes."
For additional information regarding the Exchange Notes, see "Description of
Exchange Notes."
RISK FACTORS
Holders of the Notes should carefully consider the specific matters set forth
under "Risk Factors" as well as the other information and data included in this
Prospectus prior to tendering their Notes in the Exchange Offer.
12
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Set forth below are (i) summary historical financial data of Holdings, as
described below and (ii) adjusted pro forma financial data for Pen-Tab as of
and for the year ended December 28, 1996. The summary historical data of
Holdings represent (i) for fiscal 1994 and 1995, the combined historical
financial statements of Pen-Tab Industries, Inc., a New York corporation ("Pen-
Tab NY"), and its affiliated company Pen-Tab Industries of California, Inc. a
Delaware corporation ("Pen-Tab CA"), which were controlled under common
ownership; and (ii) for fiscal 1996, the financial statements of Pen-Tab
Industries, Inc., a Virginia corporation ("Pen-Tab VA") and the predecessor to
Holdings, after giving effect to the merger of Pen-Tab NY and Pen-Tab CA,
effective July 1, 1996. The summary historical financial data as of December
31, 1994, December 30, 1995 and for the fiscal years then ended were derived
from the audited Combined Financial Statements of Holdings. The summary
historical financial data as of December 28, 1996 and for the fiscal year then
ended were derived from the audited financial statements of Holdings.
The information contained in this table should be read in conjunction with
"Selected Historical Financial Data," "Pro Forma Unaudited Condensed Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the audited Financial Statements and accompanying notes
thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PEN-TAB
PEN-TAB HOLDINGS, INC. INDUSTRIES, INC.
(FORMERLY PEN-TAB VA) ADJUSTED
FISCAL YEAR PRO FORMA (A)
-------------------------- FISCAL YEAR
1994 1995 1996 1996
------- ------- -------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales......................... $90,472 $96,808 $106,365 $106,365
Cost of goods sold (b)............ 70,581 74,305 74,781 74,781
Gross profit...................... 19,891 22,503 31,584 31,584
Selling, general and administra-
tive expenses.................... 13,346 13,204 16,024 16,024
Relocation expenses (c)........... -- 1,906 -- --
Interest expense, net............. 2,410 2,883 2,346 8,913
Other income, net................. (3) (55) (4) (4)
Income before income taxes........ 4,138 4,565 13,218 6,651
Income tax provision
(benefit) (d).................... 825 (343) (191) 2,494
Net income........................ $ 3,313 $ 4,908 $ 13,409 $ 4,157
OTHER FINANCIAL DATA
Pro forma income tax provision
(d).............................. $ 1,783 $ 1,948 $ 4,956 $ --
Pro forma net income (d).......... 2,355 2,617 8,262 --
Net cash provided by operating ac-
tivities......................... 5,576 10,926 13,356 4,104
Net cash used in financing activi-
ties............................. 4,163 2,291 13,191 --
Adjusted EBITDA (e)............... 8,865 11,865 17,916 17,916
Adjusted EBITDA margin (e)........ 9.8% 12.3% 16.8% 16.8%
Depreciation and amortization..... 2,317 2,760 2,352 2,352
Capital expenditures.............. $ 1,371 $ 9,322 $ 890 $ 890
RATIOS
Ratio of earnings to fixed charges
(f).............................. 2.4x 2.4x 5.8x 1.7x
Ratio of Adjusted EBITDA to inter-
est expense...................... 2.0x
Ratio of long term debt to Ad-
justed EBITDA.................... 4.7x
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
PEN-TAB HOLDINGS, INC.
-------------------------- PEN-TAB INDUSTRIES, INC.
AS OF ADJUSTED PRO FORMA AS OF
DEC. 31, DEC. 30, DEC. 28, DEC. 28,
1994 1995 1996 1996 (A)
-------- -------- -------- ------------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets............... $41,711 $43,805 $43,504 $ 63,035
Long-term debt (including
current portion).......... 26,890 28,000 24,210 83,428
Stockholders' equity (defi-
cit)...................... $ 8,770 $11,044 $15,052 $(26,978)
</TABLE>
- --------
(a) Amounts represent the pro forma statement of income data, balance sheet
data and other financial data of Pen-Tab after giving effect to the
Transactions in the manner described under "Pro Forma Unaudited Condensed
Financial Data."
(b) The Company determines inventory cost using the last-in, first-out method
(LIFO).
(c) Represents expenses relating to the relocation of the Company's
headquarters and its east coast manufacturing facilities from New York to
Virginia. See Notes to audited Financial Statements appearing elsewhere in
this Prospectus. Relocation expenses include depreciation expense of $249.
(d) Pen-Tab NY was taxed as a "C" corporation under the Internal Revenue Code
during fiscal 1994, and accordingly was subject to federal and New York
state income taxes. For fiscal 1995 and 1996, the shareholders of Pen-Tab
NY elected to be treated as an "S" corporation for federal income tax
purposes under which income, losses, deductions and credits were allocated
to and reported by the Pen-Tab NY's shareholders based on their respective
ownership interests. Accordingly, no provision for income taxes was
required for such periods, except for New York state income taxes.
The shareholders of Pen-Tab CA elected to be taxed as an "S" corporation
for all periods presented. Accordingly, no tax provision for federal or
state income taxes was required for Pen-Tab during such periods, except for
a 1 1/2% California state tax imposed on "S" corporations.
Pro forma income tax provision and pro forma net income information are
presented for Pen-Tab Holdings for fiscal 1994, 1995 and 1996 as if the
Company had been subject to federal and state income taxes based on the tax
laws in effect during the respective periods. See Notes to audited
Financial Statements of Holdings included elsewhere in this Prospectus.
(e) Adjusted EBITDA is defined as net income before interest, income taxes,
depreciation and amortization and certain nonrecurring expenses. EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. However, Adjusted EBITDA
should not be considered in isolation as a substitute for net income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. In
addition, this measure of Adjusted EBITDA may not be comparable to similar
measures reported by other companies.
Historical and pro forma Adjusted EBITDA amounts for fiscal 1995 has been
adjusted for non-depreciation relocation expenses of $1,657, related to the
relocation of the Company's east coast manufacturing facilities from New
York to Virginia. Adjusted EBITDA margin is calculated as the ratio of
Adjusted EBITDA to net sales for the period. Funds depicted by adjusted
EBITDA are not available for management's discretionary use due to
functional requirements to conserve funds primarily for capital replacement
and expansion, and debt service requirements.
(f) For purposes of the ratio of earnings to fixed charges, (i) earnings are
calculated as the Company's earnings before income taxes and fixed charges
and (ii) fixed charges include interest on all indebtedness, amortization
of deferred financing costs and one-third of operating lease expense.
14
<PAGE>
RISK FACTORS
In addition to the other information and data included in this Prospectus,
the following factors should be considered carefully prior to making an
investment in the Exchange Notes offered hereby.
SUBSTANTIAL LEVERAGE
The Company incurred significant debt in connection with the Transactions.
As of December 28, 1996, after giving pro forma effect to the Transactions,
the Company would have had outstanding indebtedness of $83.4 million and would
have commenced operations with an outstanding stockholders' deficit of $27.0
million. In addition, the Company could have borrowed up to approximately $23
million under the terms of the Credit Agreement, all of which would have
constituted Senior Debt. For fiscal 1996, after giving pro forma effect to the
Transactions, the Company's ratio of earnings to fixed charges would have been
1.7 to 1. The Company's leveraged financial position poses substantial
consequences to holders of the Exchange Notes, including the risks that: (i) a
substantial portion of the Company's cash flow from operations will be
dedicated to the payment of interest on the Exchange Notes and the payment of
principal and interest on other indebtedness; (ii) the Company's leveraged
position may impede its ability to obtain financing in the future for working
capital, capital expenditures and general corporate purposes, including
acquisitions; and (iii) the Company's leveraged position may make it more
vulnerable to economic downturns and may limit its ability to withstand
competitive pressures. The Company believes that, based on its current level
of operations, it will have sufficient capital to carry on its business and
will be able to meet its scheduled debt service requirements. However, there
can be no assurance that the future cash flow of the Company will be
sufficient to meet the Company's obligations and commitments. If the Company
is unable to generate sufficient cash flow from operations in the future to
service its indebtedness and to meet its other commitments, the Company will
be required to adopt one or more alternatives, such as refinancing or
restructuring its indebtedness, selling material assets or operations or
seeking to raise additional debt or equity capital. There can be no assurance
that any of these actions could be effected on a timely basis or on
satisfactory terms or that these actions would enable the Company to continue
to satisfy its capital requirements. In addition, the terms of existing or
future debt agreements, including the Indenture and the Credit Agreement, may
prohibit the Company from adopting any of these alternatives. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources," "Description of Credit
Agreement" and "Description of Exchange Notes."
RISKS ASSOCIATED WITH FLUCTUATIONS IN PAPER COSTS
The Company's principal raw material is paper. While paper prices are
currently at the same levels as 1991, certain commodity grades have shown
considerable price volatility during that period. The Company's pricing
policies generally enable it to set product prices consistent with the
Company's cost of paper at the time of shipment. To date, such policies have
been accepted by customers; however, no assurance can be given that the
Company will continue to be successful in maintaining such pricing policies or
that future price fluctuations in the price of paper will not have a material
adverse effect on the Company. Fluctuation in paper prices can have an effect
on quarterly comparisons of the results of operations and financial condition
of the Company. See "Management's Discussion and Analysis of Financial
Condition and Result of Operations--Overview."
SUPPLIER RELATIONSHIPS
The Company has strong relationships with many of the country's largest
paper mills. These relationships afford the Company certain paper purchasing
advantages, including stable supply and favorable pricing arrangements. While
these relationships are stable, arrangements are by purchase order and
terminable at will at the option of either party. There can be no assurance
that any of the supplier relationships will not be terminated in the future.
While the Company has been able to obtain sufficient paper supplies during
recent paper shortages and otherwise, in part through purchases from foreign
suppliers, the Company is subject to the risk that it will be unable to
purchase sufficient quantities of paper to meet its production requirements
during times of tight supply.
15
<PAGE>
An interruption in the Company's supply of paper could have a material adverse
effect on the Company's business. See "Business Products and Services" and
"Industry--Distribution."
DEPENDENCE UPON SIGNIFICANT CUSTOMERS
The Company's aggregate net sales to Price Costco, Target Stores and Walmart
accounted for approximately 26.2%, 13.4% and 11.4% of the Company's net sales
for 1994, respectively, approximately 23.0%, 15.3% and 12.5% of the Company's
net sales for 1995, respectively, and aggregate net sales to Price Costco and
Target Stores accounted for approximately 21.8% and 15.6% of the Company's net
sales for 1996, respectively. The Company's top five customers accounted for
approximately 59.4% of its net sales in 1996. While these relationships are
stable, arrangements are by purchase order and terminable at will at the
option of either party. A significant decrease or interruption in business
from Price Costco and Target Stores or from any other of the Company's
significant customers would have a material adverse effect on the Company.
Additionally, the Company's customers are in a rapidly consolidating industry.
The loss of a significant customer due to consolidation could have a material
adverse impact on the Company. See "Business--Sales, Distribution and
Marketing."
SUBORDINATION OF EXCHANGE NOTES
The Exchange Notes will be contractually subordinated to all Senior Debt
including all future borrowings under the Credit Agreement. In the event of a
circumstance in which the contractual subordination provisions apply, holders
of the Exchange Notes will not be entitled to receive, and will have an
obligation to pay over to holders of Senior Debt, any payments they may
receive in respect of the Exchange Notes. At December 28, 1996, after giving
pro forma effect to the Transactions, the aggregate amount of consolidated
indebtedness and other liabilities which the Exchange Notes would have been
subordinated to would have been approximately $8.4 million. In addition, the
Company could have borrowed up to approximately $23 million under the terms of
the Credit Agreement, all of which would have constituted Senior Debt. Subject
to certain limitations, the Indenture will permit the Company to incur
additional indebtedness. See "The Transactions" and "Description of Exchange
Notes--Covenants--Limitation on Indebtedness." Substantially all of the assets
of the Company will or may in the future be pledged to secure other
indebtedness of the Company. See "Description of Credit Agreement" and
"Description of Exchange Notes."
RESTRICTIONS IMPOSED BY THE CREDIT AGREEMENT AND THE INDENTURE
The Credit Agreement requires the Company to maintain specified financial
ratios and tests, among other obligations, including a minimum interest
coverage ratio, a minimum fixed charge coverage ratio, a maximum leverage
ratio, a minimum EBITDA requirement and maximum amounts of capital
expenditures. In addition, the Credit Agreement restricts, among other things,
the Company's ability to incur additional indebtedness and make acquisitions
and capital expenditures beyond a certain level. A failure to comply with the
restrictions contained in the Credit Agreement could lead to an event of
default thereunder which could result in an acceleration of such indebtedness.
Such an acceleration would constitute an event of default under the Indenture
relating to the Exchange Notes. In addition, the Indenture restricts, among
other things, the Company's ability to incur additional indebtedness, sell
assets, make certain payments and dividends or merge or consolidate. A failure
to comply with the restrictions in the Indenture could result in an event of
default under the Indenture. See "Description of Credit Agreement" and
"Description of Exchange Notes."
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on the continued services of Alan Hodes. Although
the Company believes it could replace this key employee in an orderly fashion
should the need arise, the loss of such key employee could have a material
adverse effect on the Company. The Company maintains key-person insurance for
Mr. Hodes. See "Management--Directors and Key Officers."
16
<PAGE>
COMPETITION
The school, home and office products market is highly competitive. The
Company competes with other national and regional manufacturers in many
product sectors. Certain of the Company's principal competitors are less
highly-leveraged than the Company and may be better able to withstand volatile
market conditions within the industry. There can be no assurance that the
Company will not encounter increased competition in the future, which could
have a material adverse effect on the Company's business. See "Business--
Competition."
CONTROLLING SHAREHOLDERS; POTENTIAL CONFLICTS OF INTEREST
The Management Shareholders and CVC beneficially own substantially all of
the outstanding common stock of Holdings and collectively can control the
affairs and policies of the Company. Circumstances may occur in which the
interests of these shareholders could be in conflict with the interests of the
holders of the Exchange Notes. In addition, these shareholders may have an
interest in pursuing acquisitions, divestitures or other transactions that, in
their judgment, could enhance their equity investment, even though such
transactions might involve risks to the holders of the Exchange Notes. See
"Security Ownership."
LIMITATIONS ON CHANGE OF CONTROL
In the event of a Change of Control, Pen-Tab will be required to make an
offer for cash to repurchase the Exchange Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, thereon to the
repurchase date. A Change of Control will result in an event of default under
the Credit Agreement and may result in a default under other indebtedness of
Pen-Tab that may be incurred in the future. The Credit Agreement will prohibit
the purchase of outstanding Exchange Notes prior to repayment of the
borrowings under the Credit Agreement and any exercise by the holders of the
Exchange Notes of their right to require Pen-Tab to repurchase the Exchange
Notes will cause an event of default under the Credit Agreement. Finally,
there can be no assurance that Pen-Tab will have the financial resources
necessary to repurchase the Exchange Notes upon a Change of Control. See
"Description of Exchange Notes--Covenants--Change of Control."
RISK OF FRAUDULENT TRANSFER
A portion of the net proceeds of the Offering were paid as a dividend to
Holdings and used to repurchase a portion of its existing equity. Under
applicable provisions of the U.S. Bankruptcy Code or comparable provisions of
state fraudulent transfer or conveyance laws, if Pen-Tab, at the time it
issued the Notes, (i) incurred such indebtedness with intent to hinder, delay
or defraud creditors, or (ii)(a) received less than reasonably equivalent
value or fair consideration for incurring such indebtedness and (b)(1) was
insolvent at the time of incurrence, (2) was rendered insolvent by reason of
such incurrence (and the application of the proceeds thereof), (3) was engaged
or was about to engage in a business or transaction for which the assets
remaining with the Company constituted unreasonably small capital to carry on
its businesses, or (4) intended to incur, or believed that it would incur,
debts beyond its ability to pay such debts as they mature, then, in each case,
a court of competent jurisdiction could void, in whole or in part, the Notes,
or, in the alternative, subordinate the Notes to existing and future
indebtedness of the Company. The measure of insolvency for purposes of the
foregoing will vary depending upon the law applied in such case. Generally,
however, the Company would be considered insolvent if the sum of its debts,
including contingent liabilities, was greater than all of its assets at fair
valuation or if the present fair saleable value of its assets was less than
the amount that would be required to pay the probable liability on its
existing debts, including contingent liabilities, as they become absolute and
matured. Management believes that, for purposes of all such insolvency,
bankruptcy and fraudulent transfer or conveyance laws, the Notes were issued
without the intent to hinder, delay or defraud creditors and for proper
purposes and in good faith and that the Company, after the issuance of the
Notes and the application of the proceeds thereof, is solvent, has sufficient
capital for carrying on its business and is able to pay its debts as they
mature. There can be no assurance, however, that a court passing on such
questions would agree with management's view.
17
<PAGE>
IMPACT OF ENVIRONMENTAL REGULATION
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and
regulations, among other things, impose limitations on the discharge of
pollutants and establish standards for management of waste. While there can be
no assurance that the Company is at all times in complete compliance with all
such requirements, the Company believes that any such noncompliance is
unlikely to have a material adverse effect on the Company. As is the case with
manufacturers in general, if a release or threat of release of hazardous
materials occurs on or from the Company's properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any properties owned or operated by the Company, the Company may be held
liable for response costs and damages to natural resources. There can be no
assurance that the amount of any such liability would not be material.
ABSENCE OF PUBLIC MARKET
Prior to the Exchange Offer, there has not been any public market for the
Notes. The Notes have not been registered under the Securities Act and will be
subject to restrictions on transferability to the extent that they are not
exchanged for Exchange Notes by holders who are entitled to participate in
this Exchange Offer. The holders of Notes (other than any such holder that is
an "affiliate" of the company within the meaning of Rule 405 under the
Securities Act) who are not eligible to participate in the Exchange Offer are
entitled to certain registration rights, and the Company is required to file a
Shelf Registration Statement with respect to such Notes. The Exchange Notes
will constitute a new issue of securities with no established trading market.
Pen-Tab does not intend to list the Exchange Notes on any national securities
exchange or to seek the admission thereof to trading in the National
Association of Securities Dealers Automated Quotation System. The Initial
Purchaser has advised Pen-Tab that it currently intends to make a market in
the Exchange Notes, but it is not obligated to do so and may discontinue such
market making at any time. In addition, such market making activity will be
subject to the limits imposed by the Securities Act and the Exchange Act and
may be limited during the Exchange Offer and the pendency of the Shelf
Registration Statements. Accordingly, no assurance can be given that an active
public or other market will develop for the Exchange Notes or as to the
liquidity of the trading market for the Exchange Notes. If a trading market
does not develop or is not maintained, holders of the Exchange Notes may
experience difficulty in reselling the Exchange Notes or may be unable to sell
them at all. If a market for the Exchange Notes develops, any such market may
be discontinued at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of the Notes will depend on many factors, including, among other
things, prevailing interest rates, Pen-Tab's operating results and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of
Pen-Tab, the Exchange Notes may trade at a discount from their principal
amount.
EXCHANGE OFFER PROCEDURES
Issuance of the Exchange Notes in exchange for the Notes pursuant to the
Exchange Offer will be made only after a timely receipt by Pen-Tab of such
Notes, a properly completed and duly executed Letter of Transmittal and all
other required documents. Therefore, holders of the Notes desiring to tender
such Notes in exchange for Exchange Notes should allow sufficient time to
ensure timely delivery. Pen-Tab is under no duty to give notification of
defects or irregularities with respect to the tenders of Notes for exchange.
Notes that are not tendered or are tendered but not accepted will, following
the consummation of the Exchange Offer, continue to be subject to the existing
restrictions upon transfer thereof and, upon consummation of the Exchange
Offer, certain registration rights under the Registration Rights Agreement
will terminate. In addition, any holder of Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the Exchange Notes
may be deemed to have received restricted securities and, if so, will be
required to comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale transactions. Each
Participating Broker-Dealer that receives Exchange Notes for its own account
in exchange for Notes, where such Notes were acquired by such Participating
Broker-Dealer as a result of market-making activities or other trading
18
<PAGE>
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution." To the
extent that Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Notes could be adversely
affected. See "The Exchange Offer."
19
<PAGE>
THE TRANSACTIONS
THE RECAPITALIZATION AND OFFERING
Pursuant to a recapitalization agreement (the "Recapitalization Agreement")
dated January 9, 1997 among Alan Hodes and Michael Greenberg, Holdings and
Citicorp Venture Capital, Ltd. ("CVC"), the Company was recapitalized (the
"Recapitalization") as follows: (i) CVC purchased and Holdings issued to CVC
(a) 125,875 shares of its 12% Series 2 Senior Redeemable Preferred Stock, par
value $1.00 per share (the "Series 2 Senior Preferred Stock"), (b) 35.1380556
(36.69703 shares minus 1.5589744 shares assigned to James Stevens, as described
below) shares of its Class A Common Stock, par value $0.01 per share (the
"Class A Common Stock"), and (c) 3.05681 shares of its Class B Common Stock,
par value $0.01 per share (the "Class B Common Stock" and, collectively with
the Class A Common Stock, the "Common Stock"), for aggregate consideration of
approximately $14,915,000; (ii) pursuant to an Assignment Agreement, CVC
assigned certain of its rights under the Recapitalization Agreement to James
Stevens, and as a result, James Stevens purchased and Holdings issued to James
Stevens 1.5589744 shares of Class A Common Stock for aggregate consideration of
approximately $95,000; (iii) Holdings redeemed from the Management Shareholders
747.57692 shares of the Class A Common Stock and 122.33077 shares of Class B
Common Stock for aggregate consideration of approximately $48,197,000 (the
"Redemption"); and (iv) Holdings issued to the Management Shareholders
(a) 100,000 shares of its 10% Series 1 Senior Preferred Stock, par value $1.00
per share (the "Series 1 Senior Preferred Stock"), (b) 5.37115 shares of Class
A Common Stock and (c) 126,625 shares of its 12% Series 3 Junior Preferred
Stock, par value $1.00 per share (the "Series 3 Junior Preferred Stock" and
collectively with the Series 1 Senior Preferred Stock and the Series 2 Senior
Preferred Stock, the "Preferred Stock"), in exchange for 19.59936 shares of
Class A Common Stock and 357.66923 shares of Class B Common Stock
(the "Exchange"). Immediately following the Redemption and Exchange described
above, Holdings effectuated a stock split of each share of Common Stock into
60,937.50 shares of Class A Common Stock or Class B Common Stock, as the case
may be. Concurrently, Pen-Tab consummated the Offering, distributed to Holdings
a portion of the net proceeds of the Offering, repaid all outstanding
obligations under the existing credit facility (the "Existing Credit Facility")
and entered into the Credit Agreement. Following the consummation of the
Transactions, Alan Hodes retained a portion of the Class A Common Stock
originally held by him. Consummation of the Offering was conditioned upon the
concurrent consummation of the Recapitalization. See "Security Ownership."
The Recapitalization Agreement contains other provisions customary for
transactions of this size and type, including representations and warranties
with respect to the condition and operations of the business, covenants with
respect to the conduct of the business prior to the consummation of the
Recapitalization, limited indemnifications by the management shareholders and
various closing conditions, including the continued accuracy of representations
and warranties.
ORGANIZATIONAL STRUCTURE
In contemplation of the Recapitalization, Holdings formed Pen-Tab and
contributed all of its assets and liabilities to Pen-Tab. The Notes were, and
the Exchange Notes are being, offered by Pen-Tab and are structurally senior in
right of payment to all indebtedness of Holdings.
FUNDING THE RECAPITALIZATION
Concurrently with the Offering, Holdings purchased shares of the Class A
Common Stock and Original Class B Common Stock from the Management Shareholders
and CVC and James Stevens purchased securities from Holdings. A portion of the
net proceeds from the Offering were distributed to Holdings and, together with
the proceeds from the sale of securities to CVC, were used to finance the
purchase of securities from the Management Shareholders and the repayment of
all outstanding obligations under the Existing Credit Facility.
20
<PAGE>
The Exchange Offer results in no sources or uses of cash to Pen-Tab. The
sources and uses of cash which occurred in connection with the closing of the
Transactions on February 4, 1997 are set forth below (dollars in thousands):
<TABLE>
<CAPTION>
INTERCOMPANY
TOTAL ELIMINATIONS PEN-TAB HOLDINGS
------- ------------ ------- --------
<S> <C> <C> <C> <C>
SOURCES OF CASH:
Proceeds from sale of the Notes offered
for exchange............................ $75,000 $ -- $75,000 $ --
Dividend from Pen-Tab to finance a
portion of the Recapitalization......... -- 33,187 -- 33,187
Dividend from Pen-Tab to pay transaction
expenses related to the
Recapitalization........................ -- 1,000 -- 1,000
Proceeds from the sale of Holdings Pre-
ferred Stock............................ 12,588 -- -- 12,588
Proceeds from the sale of Holdings Common
Stock................................... 2,422 -- -- 2,422
------- ------- ------- -------
Total sources........................... $90,010 $34,187 $75,000 $49,197
======= ======= ======= =======
USES OF CASH:
Repurchase of Management Shareholder Se-
curities................................ $48,197 $ -- $ -- $48,197
Dividend to Holdings to finance a portion
of the Recapitalization................. -- 33,187 33,187 --
Dividend to Holdings to pay transaction
expenses................................ -- 1,000 1,000 --
Repayment of borrowings under the Exist-
ing Credit Facility..................... 21,581 -- 21,581 --
Working capital.......................... 16,232 -- 16,232 --
Estimated fees and expenses.............. 4,000 -- 3,000 1,000
------- ------- ------- -------
Total uses.............................. $90,010 $34,187 $75,000 $49,197
======= ======= ======= =======
</TABLE>
USE OF PROCEEDS
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Rights Agreement. Pen-Tab will not receive
any cash proceeds from the issuance of the Exchange Notes in the Exchange
Offer. The proceeds of $75.0 million from the issuance of the Notes on
February 4, 1997 were used to (i) repay all outstanding obligations under the
then Existing Credit Facility ($21.6 million as of February 4, 1997), (ii) pay
Holdings a dividend ($33.2 million) which was used to finance a portion of the
Recapitalization and (iii) pay transaction expenses related to the Redemption
and Exchange on behalf of Holdings in the form of a dividend ($1.0 million as
of February 4, 1997) (iv) pay transaction expenses related to the issuance of
Notes (approximately $3.0 million), with the remainder ($16.2 million)
retained by Pen-Tab for general corporate purposes. Holdings used the dividend
received from Pen-Tab, together with the proceeds from the sale of securities
to CVC and James Stevens, to finance the purchase of securities from the
Management Shareholders. The Existing Credit Facility terminated upon the
closing of the Transactions. See "The Transactions."
21
<PAGE>
CAPITALIZATION
The following table sets forth (i) the cash and cash equivalents and
capitalization of Holdings as of December 28, 1996 and (ii) the pro forma cash
and cash equivalents and the pro forma capitalization of Pen-Tab Industries,
Inc. as of December 28, 1996, as adjusted to give effect to the Transactions.
The information in this table should be read in conjunction with "Pro Forma
Unaudited Condensed Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the audited Financial
Statements and accompanying notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
PEN-TAB
PEN-TAB INDUSTRIES,
HOLDINGS, INC. INC. ADJUSTED
(FORMERLY PEN-TAB VA) PRO FORMA
DECEMBER 28, 1996 DECEMBER 28, 1996
--------------------- -----------------
(ACTUAL) (UNAUDITED)
<S> <C> <C>
Dollars in thousands except per share
amounts
Cash and cash equivalents.............. $ 111 $ 16,642
======= ========
Long-term debt obligations, including
current portion:
Collateralized loans payable to a
bank(1).............................. $15,782 $ --
Industrial development revenue bonds.. 7,500 7,500
Notes................................. -- 75,000
Other................................. 928 928
------- --------
24,210 83,428
------- --------
Stockholders' equity:(2)
Pen-Tab Holdings, Inc.
Common stock:
Class A (voting) $.01 par value,
1,000 shares authorized and issued;
800 shares outstanding at December
28, 1996........................... -- --
Class B (non-voting) $.01 par value,
1,000 shares authorized and issued;
480 shares outstanding at December
28, 1996........................... -- --
Retained earnings.................... 15,052 --
Pen-Tab Industries, Inc.:
Common stock......................... -- --
Contributed capital.................. -- 12,709
Retained earnings (deficit).......... -- (39,687)
------- --------
Total stockholders' equity (deficit)... $15,052 $(26,978)
======= ========
</TABLE>
- --------
(1) The information for the collateralized loans payable to a bank listed
under the actual column relates to the amounts outstanding under the then
Existing Credit Facility and the information listed under the adjusted pro
forma column relates to amounts outstanding under the Credit Agreement.
There were no borrowings outstanding under the Credit Agreement following
the closing of the Transactions.
(2) Does not give effect to the 60,937.5:1 stock split approved by the
stockholders following closing of the Transactions.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
(DOLLARS IN THOUSANDS)
Set forth below are selected historical financial data and other financial
data of Holdings as of the dates and for the periods presented. The summary
historical data of Holdings represent (i) for fiscal 1992, 1993, 1994 and
1995, the combined historical financial statements of Pen-Tab NY and Pen-Tab
CA, which were controlled under common ownership and (ii) for fiscal 1996, the
financial statements of Pen-Tab VA, after giving effect to the merger of Pen-
Tab NY and Pen-Tab CA, effective July 1, 1996. The selected historical
combined financial data as of January 2, 1993, January 1, 1994, December 31,
1994, December 30, 1995, and for the fiscal years then ended were derived from
the audited Combined Financial Statements of Holdings. The selected historical
financial data as of December 28, 1996 and for the fiscal year then ended was
derived from the audited financial statements of Holdings.
The information contained in this table and accompanying notes should be
read in conjunction with "Pro Forma Unaudited Condensed Financial Data,"
"Management Discussion and Analysis of Financial Condition and Results of
Operations," the audited Financial Statements and accompanying notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR
----------------------------------------------
1992 1993 1994 1995 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
Net sales........................ $79,491 $84,362 $90,472 $96,808 $106,365
Cost of goods sold (a)........... 62,464 67,569 70,581 74,305 74,781
Gross profit..................... 17,027 16,793 19,891 22,503 31,584
Selling, general and
administrative expenses......... 12,720 13,241 13,346 13,204 16,024
Relocation expenses (b).......... -- -- -- 1,906 --
Interest expense, net............ 1,900 2,097 2,410 2,883 2,346
Other (income) expense, net...... (104) 50 (3) (55) (4)
Income before income taxes....... 2,511 1,405 4,138 4,565 13,218
Income tax provision (benefit)
(c)............................. 508 531 825 (343) (191)
Net income....................... $ 2,003 $ 874 $ 3,313 $ 4,908 $ 13,409
OTHER FINANCIAL DATA
Pro forma income tax provision
(c)............................. $ -- $ -- $1,783 $1,948 $ 4,956
Pro forma net income (c)......... -- -- 2,355 2,617 8,262
Net cash provided by operating
activities...................... 2,847 369 5,576 10,926 13,356
Net cash provided by (used in)
financing activities............ 2,451 1,482 (4,163) (2,291) (13,191)
Adjusted EBITDA (d).............. 6,017 5,676 8,865 11,865 17,916
Adjusted EBITDA margin (d)....... 7.6% 6.7% 9.8% 12.3% 16.8%
Depreciation and amortization.... 1,606 2,174 2,317 2,760 2,352
Capital expenditures............. $ 6,545 $ 2,012 $ 1,371 $ 9,322 $ 890
Ratio of earnings to fixed
charges (e)..................... 2.1x 1.5x 2.4x 2.4x 5.8x
<CAPTION>
AS OF
----------------------------------------------
JAN. 2, JAN. 1, DEC. 31, DEC. 30, DEC. 28,
1993 1994 1994 1995 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets..................... $39,858 $42,675 $41,711 $43,805 $ 43,504
Long-term debt (including current
portion)........................ 28,492 30,427 26,890 28,000 24,210
Stockholders' equity............. $ 5,663 $ 6,417 $ 8,770 $11,044 $ 15,052
</TABLE>
- --------
(a) For fiscal 1992 and 1993, Pen-Tab NY and Pen-Tab CA determined inventory
cost using the first-in, first-out (FIFO) method and the last-in, first-
out method (LIFO), respectively. For fiscal 1994 and subsequent periods,
the Company has used the LIFO method to value substantially all of its
inventory.
23
<PAGE>
(b) Represents expenses relating to the relocation of the Company's
headquarters and east coast manufacturing facilities from New York to
Virginia. See Notes to audited Financial Statements appearing elsewhere in
this Prospectus. Relocation expenses include depreciation expense of $249.
(c) Pen-Tab NY, was taxed as a "C" corporation under the Internal Revenue Code
during fiscal 1992 through 1994, and accordingly was subject to federal
and New York state income taxes. For fiscal 1995 and 1996, the
shareholders of Pen-Tab NY elected to be treated as an "S" corporation for
federal income tax purposes under which income, losses, deductions and
credits were allocated to and reported by Pen-Tab NY's shareholders based
on their respective ownership interests. Accordingly, no provision for
income taxes was required for such periods, except for New York state
income taxes.
The shareholders of Pen-Tab CA elected to be taxed as an "S" corporation
for all periods presented. Accordingly, no tax provision for federal or
state income taxes was required for Pen-Tab CA during such periods, except
for a 1 1/2% California state tax imposed on "S" corporations.
Pro forma income tax provision and pro forma net income information are
presented for Pen-Tab Holdings for fiscal 1994, 1995 and 1996 as if the
Company had been subject to federal and state income taxes based on the tax
laws in effect during the respective periods. See Notes to Financial
Statements included elsewhere in this Prospectus.
(d) Adjusted EBITDA is defined as net income before interest, income taxes,
depreciation and amortization and certain nonrecurring expenses. EBITDA is
presented because it is a widely accepted financial indicator of a
company's ability to incur and service debt. However, Adjusted EBITDA
should not be considered in isolation as a substitute for net income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of a company's profitability or liquidity. In
addition, this measure of Adjusted EBITDA may not be comparable to similar
measures reported by other companies. Historical Adjusted EBITDA amounts
for fiscal 1995 has been adjusted for non-depreciation relocation expenses
of $1,657, related to the relocation of the Company's headquarters and
east coast manufacturing facilities from New York to Virginia. Adjusted
EBITDA margin is calculated as the ratio of Adjusted EBITDA to net sales
for the period. Funds depicted by adjusted EBITDA are not available for
management's discretionary use due to functional requirements to conserve
funds primarily for capital replacement and expansion, and debt service
requirements.
(e) For purposes of the ratio of earnings to fixed charges, (i) earnings are
calculated as the Company's earnings before income taxes and fixed charges
and (ii) fixed charges include interest on all indebtedness, amortization
of deferred financing costs and one-third of operating lease expense.
24
<PAGE>
PRO FORMA UNAUDITED CONDENSED FINANCIAL DATA
The following pro forma unaudited condensed financial data (the "Adjusted
Pro Forma Data") is based upon the historical financial statements of Holdings
for the year ended December 28, 1996 included elsewhere in this Prospectus,
adjusted to give effect to (i) the transfer of all of the assets and
liabilities of Holdings to a new entity (Pen-Tab) in accordance with the
Recapitalization Agreement; (ii) the issuance of $75.0 million aggregate
principal amount of Notes and recognition of (a) the related interest expense
thereon at a rate of 10 7/8% per annum and (b) amortization of deferred bond
issuance costs; (iii) the transfer via dividend of $33.2 million in cash from
Pen-Tab to Holdings; (iv) the repayment of amounts due under the Existing
Credit Facility; (v) the payment of $1.0 million in expenses relating to the
Transactions via dividend distribution to Holdings and (vi) the payment of
$5.5 million dividend distribution to shareholders as of February 3, 1997. The
Pro Forma Unaudited Condensed Statement of Income Data gives effect to such
transactions as if they had occurred as of January 1, 1996, and the Pro Forma
Unaudited Condensed Balance Sheet Data gives effect to such transactions as if
they had occurred as of December 28, 1996.
The transactions and the related adjustments are described in the
accompanying notes. The pro forma adjustments are based upon available
information and certain assumptions that management believes are reasonable.
The Pro Forma Financial Data does not purport to represent what the Company's
results of operations or financial condition would actually have been had such
transactions in fact occurred on such dates or to project the Company's
results of operations or financial condition for any future period or date.
The Pro Forma Financial Data should be read in conjunction with the historical
combined financial statements of the Company included elsewhere in this
Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
25
<PAGE>
PRO FORMA UNAUDITED CONDENSED STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 28, 1996
------------------------------------------------------------------------
PEN-TAB PEN-TAB
HOLDINGS, INC. "S" CORP. INDUSTRIES, INC.
(HISTORICAL) TERMINATION PRO FORMA ADJUSTMENTS ADJUSTED PRO FORMA
-------------- ----------- --------- ----------- ------------------
<S> <C> <C> <C> <C> <C>
Net sales............... $106,365 $ -- $106,365 $ -- $106,365
Cost of goods sold...... 74,781 -- 74,781 -- 74,781
Selling, general and
administrative
expenses............... 16,024 -- 16,024 -- 16,024
-------- ------- -------- ------- --------
15,560 -- 15,560 -- 15,560
-------- ------- -------- ------- --------
Interest expense, net... 2,346 -- 2,346 6,567 (b) 8,913
Other expense, net...... (4) -- (4) -- (4)
-------- ------- -------- ------- --------
Income (loss) before in-
come taxes............. 13,218 -- 13,218 (6,567) 6,651
Income tax provision
(benefit).............. (191) 5,147 (a) 4,956 (2,462)(c) 2,494
-------- ------- -------- ------- --------
Net income (loss)....... $ 13,409 $(5,147) $ 8,262 $(4,105) $ 4,157
======== ======= ======== ======= ========
</TABLE>
See notes to the Pro forma Unaudited Condensed Statement of Income
26
<PAGE>
NOTES TO PRO FORMA UNAUDITED CONDENSED
STATEMENT OF INCOME
(DOLLARS IN THOUSANDS)
(a) Holdings' "S" corporation status terminated upon completion of the
Transactions, and profits earned after February 4, 1997 will be subject to
federal and state income taxes. The pro forma condensed statement of
income contains an adjustment to reflect the estimated income tax
provision on historical income before taxes which would have been recorded
had Holdings been a "C" corporation during the year ended December 28,
1996. The Pro Forma Unaudited Condensed Statement of Income does not
reflect the nonrecurring deferred tax provision to record the net deferred
tax liability assumed by Pen-Tab upon termination of Holdings' "S"
corporation status, estimated to be $2,343 as of December 28, 1996. Refer
to Note(b) on page 28.
(b) The pro forma adjustment to interest expense reflects the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 28, 1996
-----------------
<S> <C>
Elimination of historical interest expense for amounts re-
paid under the Existing Credit Facility as a result of
the Transactions......................................... $(1,889)
Interest expense on Notes, at a rate of 10 7/8% per annum. 8,156
Amortization of the estimated debt issuance costs related
to the Offering.......................................... 300
-------
$ 6,567
=======
</TABLE>
The above pro forma adjustment does not include the additional interest
expense that would become payable if the Notes are not subsequently
registered for resale. See "Description of Exchange Notes."
(c) To reflect the estimated income tax provision on pro forma adjustments.
27
<PAGE>
PRO FORMA UNAUDITED CONDENSED BALANCE SHEET DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 28, 1996
-------------------------------------------------------------------------
PEN-TAB
PEN-TAB "S" CORP. ISSUANCE ADJUSTED
HISTORICAL(A) TERMINATION PRO FORMA OF NOTES OTHER PRO FORMA
------------- ----------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash................... $ 111 $ -- $ 111 $72,000 (c) $(34,187)(d)
(15,782)(e)
(5,500)(f) $16,642
Accounts receivable.... 10,697 -- 10,697 -- -- 10,697
Inventories............ 14,738 -- 14,738 -- -- 14,738
Prepaid expenses and
other current assets.. 577 -- 577 -- -- 577
------- ------ ------- ------- -------- -------
Total current assets.... 26,123 -- 26,123 72,000 (55,469) 42,654
------- ------ ------- ------- -------- -------
Property, plant and
equipment--net......... 16,767 -- 16,767 -- -- 16,767
Other assets............ 614 -- 614 3,000 (c) -- 3,614
------- ------ ------- ------- -------- -------
Total assets............ $43,504 $ -- $43,504 $75,000 $(55,469) $63,035
======= ====== ======= ======= ======== =======
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIT)
Current liabilities:
Accounts payable....... $ 2,774 $ -- $ 2,774 $ -- $ -- $ 2,774
Accrued expenses and
other liabilities..... 1,468 -- 1,468 -- -- 1,468
Deferred income taxes.. -- 474 (b) 474 -- -- 474
Current portion of
long-term debt........ 16,037 -- 16,037 -- (15,782)(e) 255
------- ------ ------- ------- -------- -------
Total current liabili-
ties................... 20,279 474 20,753 -- (15,782) 4,971
------- ------ ------- ------- -------- -------
Long-term debt.......... 8,173 -- 8,173 -- -- 8,173
Senior Subordinated
Notes.................. -- -- -- 75,000 (c) -- 75,000
Deferred income taxes--
long-term.............. -- 1,869 (b) 1,869 -- -- 1,869
------- ------ ------- ------- -------- -------
Total long-term liabili-
ties................... 8,173 1,869 10,042 75,000 -- 85,042
------- ------ ------- ------- -------- -------
Stockholder's equity
(deficit):
Contributed capital.... 15,052 (2,343)(b) 12,709 -- -- 12,709
Retained Earnings (def-
icit)................. -- -- -- -- (34,187)(d)
(5,500)(f) (39,687)
------- ------ ------- ------- -------- -------
Total stockholder's
equity (deficit)....... 15,052 (2,343) 12,709 -- (39,687) (26,978)
------- ------ ------- ------- -------- -------
Total liabilities and
equity................. $43,504 $ -- $43,504 $75,000 $(55,469) $63,035
======= ====== ======= ======= ======== =======
</TABLE>
See notes to Pro Forma Unaudited Condensed Balance Sheet Data
28
<PAGE>
NOTES TO THE PRO FORMA UNAUDITED CONDENSED BALANCE SHEET DATA
(DOLLARS IN THOUSANDS)
(a) To reflect the transfer of all of the assets and liabilities of Holdings
as of December 28, 1996 to Pen-Tab.
(b) To reflect the deferred tax liabilities assumed by Pen-Tab upon
termination of Holdings' "S" corporation election for federal and state
income tax purposes.
Holdings' "S" corporation status will terminate upon completion of the
Transactions, and the Company will be subject to income tax expense at the
corporate level. The pro forma deferred tax assets and liabilities
represent the tax effects of the cumulative differences between the
financial reporting bases and tax bases of certain assets and liabilities
as of December 28, 1996. The actual deferred tax assets and liabilities
recorded will be adjusted to reflect the effect of operations of the
Company for the period from December 28, 1996 through the date immediately
preceding the termination of its "S" corporation status.
The Company's pro forma current deferred tax liability consists primarily
of the tax effect of the difference between the LIFO reserve for financial
reporting purposes versus its value for tax purposes. The Company's pro
forma long-term deferred tax liability consists primarily of the tax effect
of the accumulated difference between the financial reporting basis and tax
basis of property, plant and equipment.
(c) To reflect the issuance of $75,000 aggregate principal amount of Notes and
payment of estimated debt issuance costs of $3,000.
(d) To reflect the dividend from Pen-Tab to Holdings in accordance with the
Recapitalization Agreement of $34,187, including $1,000 paid for
transaction expenses related to the Redemption and Exchange.
(e) To reflect the repayment of amounts borrowed under the then Existing
Credit Facility as of December 28, 1996.
(f) To reflect a dividend distribution to shareholders on February 3, 1997.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following discussion should be read in conjunction with the "Selected
Historical Financial Data", the audited Financial Statements and accompanying
notes thereto included elsewhere in this Prospectus.
The Company is a leading U.S. manufacturer of school and office supply
products. The Company's products include binders, pads, spiral and coilless
notebooks, planners, envelopes, school supplies and arts and crafts products
in hundreds of configurations. The Company has developed strong consumer
recognition for its proprietary and upscale styles under the Pen-Tab(R), Pen-
Tab Pro(R), Pen-Tab Paper Store(R) and Expert(R) brand names. The Company is
also a leading supplier of vinyl packaging products designed primarily for
audio and video cassette tapes. Certain factors which have affected, and may
affect prospectively, the operating results of the Company are discussed
below.
Differentiated products. In 1992, the Company recognized a previously
unfulfilled demand for higher quality, functionally superior, upscale school
and office-related products. The Company pioneered a line of these higher
price point and margin, branded products to serve the school and office
products markets. Substantially all of the Company's increase in sales since
1992 is due to the introduction of differentiated products. Additionally, the
Company's differentiated products and product lines result in higher margins
for the Company and its customers. Demand for differentiated products has
risen steadily since 1992 when the Company first introduced them and the
Company expects a significant portion of its future growth to come from
increased sales of differentiated products.
Seasonality. As a result of the seasonal nature of the back-to-school sector
of the business, the Company's inventory and associated working capital
borrowings typically increase throughout the calendar year until the latter
part of May and early June. At such time, the inventory is shipped to
customers, and converted into receivables. By the middle of September, account
collections occur and working capital borrowing is reduced.
Significant infrastructure investments. During the past six years, the
Company has made $21 million of infrastructure investments including the
relocation of the Company's headquarters and east coast manufacturing facility
from New York to Virginia in October 1995 and certain capital equipment
expenditures. The relocation and capital expenditures provide the Company with
available unused manufacturing capacity to support an additional $50 million
to $60 million in sales of paper products with no significant additional
capital expenditures. In addition, the relocation has positioned the Company
with ready access to a low-cost, skilled workforce and lower manufacturing
costs.
Paper prices. Paper represents the largest component of the Company's cost
of goods sold. While paper prices are currently at approximately the same
levels as in 1991, certain commodity grades have shown considerable price
volatility during that period. The Company's pricing policies generally enable
it to set product prices consistently with the Company's cost of paper at the
time of shipment. The Company believes that it is able to price its products
so as to minimize the impact of price volatility on dollar margins. However,
significant and unusual price fluctuations occurred during 1995 and 1996 which
were not all passed on to customers causing unusual profits in 1995 and
unusual losses in 1996. As a result of new product introductions, a
substantial portion of which have little or no paper content, the Company
offers a broader and more diverse product mix which is less susceptible to
paper price fluctuations. See "Risk Factors--Risks Associated with
Fluctuations in Paper Costs."
30
<PAGE>
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of
operations as a percentage of net sales:
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1995 FISCAL 1996
----------- ----------- -----------
<S> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. 100.0% 100.0% 100.0%
Gross Profit............................... 22.0 23.2 29.7
Selling, general and administrative ex-
penses.................................... 14.8 13.6 15.1
Relocation expenses........................ -- 2.0 --
Income from operations..................... 7.2 7.6 14.6
Interest expense, net...................... 2.7 3.0 2.2
Other (income) expense, net................ -- (0.1) --
----- ----- -----
Income before income taxes................. 4.6 4.7 12.4
Income taxes provision (benefit)........... 0.9 (0.4) (0.2)
----- ----- -----
Net income................................. 3.7% 5.1% 12.6%
===== ===== =====
</TABLE>
FISCAL 1996 COMPARED TO FISCAL 1995
Net sales for the year ended December 28, 1996 increased by $9.6 million, or
9.9%, to $106.4 million from $96.8 million for the year ended December 30,
1995. The increase is primarily due to sales of differentiated products
partially offset by a $2.1 million decrease in sales of Vinylweld products.
For the core product group, increased volumes were substantially offset by
lower prices resulting in flat sales between the periods.
Gross profit for the year ended December 28, 1996 increased by $9.1 million,
or 40.4%, to $31.6 million from $22.5 for the year ended December 30, 1995.
Gross profit margin increased to 29.7% for the year ended December 28, 1996
from 23.2% for the year ended December 30, 1995. The increase in gross profit
margin is related to (i) an increase in 1996 of sales of high margin
differentiated products, (ii) a LIFO adjustment decreasing gross profit in
1995 by $3.4 million due to significant increases in the cost of paper and a
LIFO adjustment increasing gross profit in 1996 by $3.6 million due to
significant decreases in the cost of paper and (iii) significant and unusual
paper price fluctuations which caused the Company to experience inventory
gains of $1.8 million in 1995 due to selling lower priced inventory at the
then current higher selling prices and inventory losses of $3.1 million in
1996 due to selling higher priced inventory at the then current lower selling
prices. Vinylweld gross profit percentage increased 5.7% in 1996 from 1995 due
to productivity improvements in the plant. However, decreases in unit volume
caused gross profit to be flat between the periods.
SG&A expenses for the year ended December 28, 1996 increased $2.8 million,
or 21.4%, to $16.0 million from $13.2 million for the year ended December 30,
1995. As a percentage of net sales, SG&A expenses increased to 15.1% for the
year ended December 28, 1996 from 13.6% for the year ended December 30, 1995
as a result of a multimedia advertising campaign launched in 1996. Vinylweld
SG&A expenses decreased by $0.4 million or 21.8% from $1.8 million in 1995 to
$1.4 million in 1996. The decrease is primarily attributed to an increase in
non-commission sales.
Income from operations for the year ended December 28, 1996 increased by
$6.3 million to $15.6 million from $9.3 million for the year ended December
30, 1995. Income from operations as a percentage of net sales for the year
ended December 28, 1996 increased to 14.6% from 9.6% for the year ended
December 30, 1995.
Interest expense for the year ended December 28, 1996 decreased $0.6 million
to $2.3 million from $2.9 million for the year ended December 30, 1995. The
decrease is attributable primarily to a lower interest rate which applied to
borrowings during 1996 compared to 1995. This was offset by a full year of
interest expense in 1996 on Industrial Development Revenue Bonds used to
finance the construction of the Virginia plant.
31
<PAGE>
FISCAL 1995 COMPARED TO FISCAL 1994
Net sales for the year ended December 30, 1995 increased by $6.3 million, or
7.0%, to $96.8 million from $90.5 million for the year ended December 31,
1994. The increase is primarily due to increases in sales of differentiated
products of $7.2 million and Vinylweld products of $0.6 million offset by
decreases in sales of core products of $1.5 million. The reduction in the
Company's sales of core products was primarily attributable to the Company's
selective elimination of numerous accounts which were not as profitable as the
major accounts.
Gross profit for the year ended December 30, 1995 increased by $2.6 million,
or 13.1%, to $22.5 million, from $19.9 million for the year ended December 31,
1994. Gross profit margin increased in the year ended December 30, 1995 to
23.2% from 22.0% in 1994. The increase is principally a result of (i) an
increase in 1995 of sales of high margin differentiated products (ii) offset
by LIFO adjustments decreasing gross profit in 1995 by $3.5 million and in
1994 by $1.2 million due to significant increases in the cost of paper. The
negative LIFO effect of $3.5 million in 1995 was partially offset by inventory
gains of $1.8 million due to selling lower priced inventory at the then
current higher selling prices. Vinylweld gross profit and gross profit
percentage remained flat between the periods.
SG&A expenses for the year ended December 30, 1995 decreased by $0.1
million, or 1.1%, to $13.2 million, from $13.3 million for the year ended
December 31, 1994. SG&A as a percentage of net sales for the year ended
December 30, 1995 decreased to 13.6% from 14.8% in 1994, as a result of
increases in unit selling prices, due to paper price increases and selling a
more favorable mix of higher priced differentiated products causing shipping
expenses to decrease as a percentage of sales. Vinylweld SG&A expenses
remained flat between the periods.
Relocation expenses. During the fourth quarter of 1995 the Company relocated
its headquarters and one of its manufacturing facilities from New York to
Virginia. As a result, certain relocation expense charges totaling $1.9
million were incurred and classified as relocation expense in the income
statement.
Income from operations for the year ended December 30, 1995 increased by
$2.8 million to $9.3 million from $6.5 million in 1994, for the reasons stated
above. Income from operations as a percentage of net sales for the year ended
December 30, 1995 increased to 9.6% from 7.2% for the year ended December 31,
1994.
Interest expense for the year ended December 30, 1995 increased $0.5
million, or 19.6%, to $2.9 million from $2.4 million for the year ended
December 31, 1994. The increase is attributable primarily to a 1.75% increase
in the average Prime rate in 1995 offset by a reduction in 1995 in the
interest rate on the credit facility from Prime plus 0.5% to Prime.
Income tax benefit for the year ended December 30, 1995 reflects an
effective tax rate of 8.8%, versus a 19.9% effective tax rate in 1994. During
1995 the Company recognized a federal income tax benefit related to a change
from "C" corporation status to "S" corporation status under which a deferred
tax liability of $0.7 million was recognized as income. The net tax benefit
represents the difference between the adjustment to the deferred tax liability
and state income tax expense for the year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the year ended December 28,
1996 was $13.4 million as compared to $10.9 million for the year ended
December 30, 1995. The increase was primarily attributable to an $8.5 million
increase in net income offset by $6.0 million increase in working capital.
Such increase in working capital was primarily attributable to higher accounts
receivable and inventory balances as of December 28, 1996.
Net cash provided by operating activities for the year ended December 30,
1995 was $10.9 million as compared to $5.6 million for the year ended December
31, 1994. The increase was primarily attributable to $1.6 million and $4.4
million increase in net income and decrease in working capital, respectively.
Such a decrease in working capital was primarily attributable to a lower
accounts receivable balance as of December 30, 1995.
32
<PAGE>
Cash used in financing activities for fiscal years 1996, 1995 and 1994, was
$13.2 million, $2.3 million and $4.2 million, respectively, and consisted
primarily of the net repayment of long term debt (amounting to $3.8 million,
$7.2 million and $3.5 million for fiscal 1996, 1995 and 1994, respectively)
and dividends to shareholders (amounting to $9.4 million, $2.6 million and
$1.0 million for fiscal 1996, 1995 and 1994, respectively) offset by $7.5
million of Industrial Development Bonds for the year ended December 30, 1995.
Capital expenditures in the fiscal years 1996, 1995 and 1994 were $0.9
million, $9.3 million and $1.4 million, respectively. The capital expenditures
for 1995 included $7.5 million for the construction of the Company's
headquarters and Virginia manufacturing facility. The Company expects that
capital expenditure requirements will be approximately $1.0 million for 1997.
The Company believes capital expenditure levels are sufficient to maintain
competitiveness and to provide sufficient manufacturing capacity. The Company
expects to fund capital expenditures primarily from available cash balances
and cash generated from operating activities.
The Company's average working capital borrowings under the then Existing
Credit Facility for fiscal 1996, 1995 and 1994 was $24.9 million, $29.7
million, and $30.6 million, respectively. The Company's maximum working
capital borrowings outstanding were $39.4 million, $44.1 million, and $41.8
million.
Following completion of the Transactions, additional interest expense
associated with borrowings under the Credit Agreement and the Exchange Notes
will significantly increase the Company's liquidity requirements. Following
completion of the Transactions, no borrowings were outstanding under the
Credit Agreement. The Credit Agreement and the Indenture impose certain
restrictions on the Company, including restrictions on its ability to incur
indebtedness, pay dividends, make investments, grant liens, sell its assets
and engage in certain other activities. In addition, indebtedness under the
Credit Agreement is secured by substantially all of the assets of Pen-Tab,
including Pen-Tab's real and personal property, inventory, accounts
receivable, intellectual property and other intangibles. See "Description of
Certain Indebtedness--Credit Agreement." Pen-Tab expects that cash flows from
future operating activities together with borrowings available under the
Credit Agreement will be sufficient to fund Pen-Tab's working capital needs,
capital spending requirements and debt service requirements for the
foreseeable future.
The information below relating to the Credit Agreement is a summary of all
the material terms thereof qualified by reference to the complete text of the
documents entered into in connection therewith. Borrowings under the Credit
Agreement are available for working capital and general corporate purposes,
including letters of credit. The Credit Agreement is secured by first priority
liens on substantially all of Pen-Tab's assets. Pen-Tab did not draw upon the
Credit Agreement in connection with the consummation of the Transactions.
The Credit Agreement expires one year from the date of closing, unless
extended. The interest rate per annum applicable to the Credit Agreement is
the prime rate, as announced by the Bank plus a margin from 0.0% to 0.5% or,
at Pen-Tab's option, the Eurodollar rate plus a margin from 1.0% to 2.0%
(based on Pen-Tab's ratio of FIFO EBITDA minus capital expenditures to
Interest Expense). Pen-Tab is not required to pay a commitment fee on unused
commitments under the Credit Agreement. The Credit Agreement permits Pen-Tab
to prepay loans and to permanently reduce credit commitments or letters of
credit, in whole or in part, at any time in certain minimum amounts.
The availability of the Credit Agreement is subject to various conditions
precedent. Advances are made under the Credit Agreement based on a borrowing
base comprised of eligible accounts receivable, inventory and net fixed assets
at the following advance rates: 85% of the value of eligible accounts
receivable, plus 55% of the value of eligible inventory, plus approximately
$7.4 million on net fixed assets (which amortizes over time; minus a reserve
of $2.5 million).
Management believes that based on current levels of operations and
anticipated internal growth, cash flow provided by future operating
activities, together with other available sources of funds including the
availability of seasonal borrowings under the Credit Agreement will be
adequate for the foreseeable future to make required
33
<PAGE>
payments of principal and interest on Pen-Tab's indebtedness, to fund
anticipated capital expenditures and working capital requirements. The ability
of Pen-Tab to meet its debt service obligations and reduce its total debt will
be dependent, however, upon the future performance of Pen-Tab which, in turn,
will be subject to general economic conditions and to financial, business and
other factors, including factors beyond Pen-Tab's control. A portion of Pen-
Tab's debt bears interest at floating rates; therefore, its financial
condition is and will continue to be affected by changes in prevailing
interest rates.
INFLATION
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended December 28, 1996.
34
<PAGE>
INDUSTRY
SCHOOL, HOME AND OFFICE PRODUCTS
The North American school, home and office products industry, excluding
contract office furniture and business machines, generates approximately $60
billion to $70 billion in annual sales at retail prices. The Company believes
that the market has grown at an approximate average annual rate of 4% from
1992 to 1995. School, home and office products include paper, envelopes,
writing products, writing instruments, mailroom supplies, filing supplies,
organizers, desktop accessories, business forms, binders, tape, printed
products, staples and fastening products and other consumable items. The
Company participates in the school supplies, business and correspondence
products, and envelope industry sectors.
School supplies. This sector includes wirebound notebooks, binders, filler
paper, art papers and upscale personal use/organizational products. The U.S.
school age population is expected to reach an estimated 54.4 million students
by the year 2000 compared to 50.7 million in 1995. This growth marks an
improvement over a decline in student enrollment over the last two decades.
Total enrollment in higher education is also expected to continue to rise
steadily further supporting demand for quality, educational based products.
The Company estimates the 1996 market for both upscale and basic use school
supplies at wholesale prices was approximately $3.2 billion in size.
Business and correspondence products. The business and correspondence
products sector includes writing pads, specialty notebooks, easels, flip
charts, data pads, message pads, certain business forms, specialty computer
forms, business machine paper, organizers and other categories, including a
wide range of products based on size, quality, finish, thickness,
reusability/refillability and various customized features. The Company
estimates that the 1996 market for business and correspondence products at
wholesale prices was approximately $2.9 billion in size.
Envelopes. The envelope sector includes both standard size and specialty
envelopes such as catalog mailing envelopes, envelopes closable by metal clasp
or button-and-string, and giant, X-ray, remittance and overnight delivery
envelopes. Envelopes are made from mill branded and commodity grades of paper.
According to the Envelope Manufacturers Association of America, the United
States envelope market in 1995 was estimated to be approximately $2.8 billion
dollars at wholesale prices or 168.6 billion units at the manufacturer's
level. The historical growth rate for the envelope market has shown high
correlation with that of Gross Domestic Product.
The Company believes that demand for school supplies, business and
correspondence products, and envelopes has not been significantly affected by
the growth in electronic office tools such as e-mail and electronic organizers
and the Company does not expect these tools to have a significant impact on
such demand for the foreseeable future.
DISTRIBUTION
School, home and office products are distributed from the manufacturer to
the end-user through several different channels, including retail channels
such as mass merchandisers, warehouse clubs and national office product
superstores; commercial channels such as national contract stationers; and
other channels such as regional distributors, school campuses and direct mail.
Business and correspondence products and a relatively small portion of
envelopes were traditionally distributed through contract stationers,
wholesalers and independent dealers. Envelopes have been distributed primarily
through paper merchants/distributors. Since the mid-1980s, the school, home
and office products industry has experienced significant changes in the
channels through which products are distributed such as the emergence of new
channels, including mass merchandisers, national office product superstores
and national contract stationers, and consolidation within these and other
channels. As a result of these changes, approximately 6,800 office product
distributors existed in 1994 compared with approximately 13,300 in 1987.
35
<PAGE>
Retail channels. The Company estimates that total 1995 sales of school, home
and office products to end-users in North America through retail channels were
approximately $25 billion. Mass merchandisers (such as Target, Wal-Mart and K-
Mart), warehouse clubs (such as Price Costco) and office products superstores
(such as Staples, Office Depot and Office Max) are significant and growing
retailers of office products. In addition to the growth experienced by these
operators within the retail channel, the retail channel as a whole has also
captured significant market share from other distribution channels.
Commercial channels. The Company estimates that total 1995 sales of office
products to end-users in North America through commercial channels were
approximately $30 billion. Commercial distributors typically serve large and
medium-sized business customers through product catalogs and direct sales
forces. Generally, commercial distributors stock products in distribution
centers and deliver them to customers on a next-day basis against orders
received electronically, by telephone or fax, or taken by a salesperson on the
customer's premises. A growing sector within commercial channels is the
contract stationer channel. Major contract stationers purchase in large
quantities directly from manufacturers, rely upon wholesaler intermediaries to
only a limited extent for inventory backup and product breadth, and offer
significant volume-related discounts and a high level of service to their
customers. In the past, most contract stationers have operated in only one or
very few major metropolitan areas. There has been significant consolidation of
contract stationers into national companies in recent years, and the Company
expects this consolidation trend to continue. Major national participants
include Boise Cascade Office Products, BT Office Products, Corporate Express,
U.S. Office Products and the contract stationer divisions of Office Depot and
Staples. These national contract stationers now account for approximately 25%
of commercial office products sales and approximately 11% of total office
products sales. Given this consolidation and opportunity for growth, suppliers
capable of distributing a broad and deep product line nationwide, such as the
Company, are best positioned to serve major contract stationers.
Other channels. The Company estimates that total sales of office products to
end-users in North America through other channels, such as regional
distributors, school campuses and direct mail, are approximately $10 billion.
The Company's strategy with respect to each of these distribution channels
is to focus on the most rapidly growing customers, particularly dominant
industry participants leading the trend towards consolidation. See "Business--
Growth Strategy."
VINYL PACKAGING INDUSTRY
The vinyl packaging industry includes suppliers of custom packaging products
for audio cassette tapes and compact discs, video cassette tapes and computer
compact disc cartridges. Major customers include the publishing industry for
its audio and video cassette packages, including foreign language tutorials,
self-help guide, and motivational packages and the producers of cassette tapes
sold through infomercials.
The vinyl packaging industry is highly fragmented, with suppliers utilizing
a variety of solutions to the unique challenges in packaging audio, video and
computer products. Standard industry technology, however, includes vacuum-
forming and radio frequency sealing (often referred to as heat-sealing) for
audio and video packaging.
36
<PAGE>
BUSINESS
The Company is a leading U.S. manufacturer of school, home and office supply
products. Pen-Tab's core products include binders, pads, filler paper, spiral
and coilless notebooks, planners, envelopes, school supplies and arts and
crafts products in hundreds of configurations. In 1992, the Company recognized
a previously unfulfilled demand for higher quality, upscale school and office-
related products. Pen-Tab pioneered a line of these higher price point,
branded products to serve the school and office product markets. Pen-Tab has
developed strong consumer recognition for its proprietary office styles and
its upscale school styles under the Pen-Tab(R), Pen-Tab Pro(R) and Expert(R)
brand names. These differentiated products provide both the Company and the
retailer with higher margins. Pen-Tab, through its Vinylweld division, is also
a leading supplier of vinyl packaging products designed primarily for audio
and video cassette tapes. For fiscal 1996, core products represented 59.9% of
revenue, differentiated products represented 30.3% of revenue and Vinylweld
represented 9.8% of revenue. For fiscal 1996, school-related products
represented 59.4% of revenue, office-related products represented 30.8% of
revenue and Vinylweld represented 9.8% of revenue.
Pen-Tab's move into differentiated products is primarily responsible for the
Company's significant increases in sales and profitability. From 1993 to 1996,
the Company's sales have grown from $84.4 million to $106.4 million and
Adjusted EBITDA (as defined herein) has grown from $5.7 million to $17.9
million. During the same period, the Company's Adjusted EBITDA margin
increased from 6.7% to 16.8%. The Company's strategy is to grow through
continued internal design of new, differentiated product lines and possible
strategic acquisitions.
The Company has a long-standing customer base featuring mass merchandisers,
national discount stores, wholesale clubs, and office supply superstores in
the United States and Canada. The Company is headquartered in a newly built
282,000 sq. ft. facility in Front Royal, Virginia. Pen-Tab also maintains
large, modern manufacturing facilities in Chicago and Los Angeles. The Company
has invested heavily in state-of-the-art automated production equipment to
provide a low cost manufacturing environment. As of December 28, 1996, the
Company employed approximately 750 people in its three facilities.
COMPETITIVE STRENGTHS
The combination of the Company's products, customers and proven track record
distinguishes it as a leading manufacturer and marketer of school, home and
office products in North America. The Company attributes this success and its
continued opportunities for growth and profitability to the following
competitive strengths:
. Market leader in differentiated, branded school, home and office
products. Pen-Tab is widely recognized as a market leader in
differentiated, branded school, home and office products. Pen-Tab has
pioneered a line of high-quality, functionally superior, higher price
point and margin, branded items to serve the school and office products
markets. Consumer demand for its proprietary products has been strong.
Demand for differentiated products has risen steadily since 1992 when
the Company first introduced them and the Company expects a significant
portion of its future growth to come from increased sales of
differentiated products.
. Partnering reduces inventory risk. Pen-Tab's creative department has
strong design capabilities and together with senior sales and marketing
people has been successful in developing these relationships with major
customers. Senior sales management personally handle the Company's
largest accounts allowing the Company to design branded products in
concert with its major customers, tailoring high-quality, upscale
products to meet a mutual vision. The Company's differentiated, branded
school-related products are only mass-produced once they have been pre-
sponsored by a major customer.
. Strong brand name recognition. Through the manufacturing of high-quality
products for over 60 years, Pen-Tab has developed strong brand
recognition with consumers, retailers and distributors. The Company
focuses on building its brand name by internally designing new,
differentiated products and product formats and does not produce
products under license. This allows the Company to achieve
37
<PAGE>
higher margins than would be achievable with core products without the
additional expense of licensing fees. Several trademarks, sub-brands and
proprietary styles, including Pen-Tab(R), Pen-Tab Pro(R) and Expert(R),
have been developed to service targeted market sectors. In an effort to
further enhance its brand equity and consumer and retailer loyalty, the
Company recently initiated a television advertising campaign on which it
spent $2.0 million during 1996.
. Modern, efficient and strategically located facilities. Over the past
six years, the Company has invested over $21 million in the latest
advances in plant and capital equipment. Management has expanded
manufacturing capacity in advance of customer demand. The Company has
available unused manufacturing capacity to support an additional $50
million to $60 million in sales of paper products with no significant
additional capital expenditures. Management believes the Company's heavy
investment in technologically advanced high-speed equipment provides it
with what it believes to be one of the lowest manufacturing cost
environments in the school, home and office products industry. Moreover,
with large plants in or near the metropolitan areas of Los Angeles,
Chicago and Washington D.C., Pen-Tab is well positioned to serve the
largest national retailers and distributors in the United States. Its
locations offer additional expansion capacity and ready access to low-
cost road and rail transportation. The Company relocated to Virginia in
October 1995 for improved access to a low-cost, skilled workforce, lower
manufacturing costs and additional expansion capacity.
. Long-standing customer base. Pen-Tab has cultivated long-term customer
relationships with well-capitalized, high-growth retailers and
distributors in the school, home and office products industry.
Management has identified the fastest growing distribution channels in
the Company's marketplaces and has focused the resources of the Company
on the key accounts in those channels. The Company's customers include
the nation's largest discount stores and mass merchandisers, wholesale
clubs, office supply superstores and contract stationers. These
customers are expected to benefit from the continuing consolidation of
retailers and distributors in the school and office products category.
. Leading edge information systems. Pen-Tab's newly installed state-of-
the-art network and MRP II software system manages the manufacturing,
accounting, distribution, inventory, sales and billing systems. The
system links all of the Company's locations to provide timely
information for management. The Company has also established electronic
data interchange programs with numerous customers.
. Experienced management team. Between them, Alan Hodes, President and
Chief Executive Officer of the Company, and Michael Greenberg, Executive
Vice President of the Company, have over 55 years with the Company. The
Company has supplemented its senior management ranks with a strong team
of new sales, marketing and design professionals within the past five
years. Management has profitably operated the Company under leveraged
conditions and has successfully integrated the operations of acquired
companies into the Company's existing business. Management will hold a
significant equity interest in the Company following the Transactions
and is committed to the long-term success of the Company.
GROWTH STRATEGY
The school, home and office products industry is a growing, consolidating
industry in which the Company has a significant market position. According to
the U.S. Department of Education and LINK Resources Corp., enrollment in
elementary and secondary schools is expected to rise to an estimated 54.4
million by the year 2000 from 50.7 million in 1995. This growth in enrollment,
coupled with an increased demand for high-quality, functionally superior,
creatively designed school-related products, provides a large potential market
for upscale, differentiated products. The Company's strategy is to fulfil the
demand for upscale, differentiated products in the school, home and office
products markets, by pursuing the following:
. Focus on rapidly growing customers. The Company serves many of the
largest and best positioned customers in the school, home and office
products industry including mass merchandisers, warehouse
38
<PAGE>
clubs, national office products superstores, and national contract
stationers. Sales to the three largest companies in each of these
distribution channels represent approximately 64.5% of the Company's
1996 net sales. Anticipating further consolidation in the school, home
and office products industry, the Company expects that its national
scope and broad product line will be increasingly important in meeting
the needs of its customers. The Company will continue to target those
customers driving consolidation in the school, home and office products
industry.
. Continue to introduce differentiated products. Differentiated, higher
value-added, branded products give the Company a greater selection to
offer its customers and improve product line profitability for both the
Company and its customers. The Company plans to continue to distinguish
itself from other suppliers and improve profitability through product
innovation, differentiation and line extensions. The Company will
accomplish this by continued internal design of new, differentiated
product lines.
. Focus on partnering relationships. The Company will continue to utilize
and expand the integrated efforts of the creative department and senior
sales and marketing personnel to develop and foster partnering
relationships with major customers. Partnering should allow the Company
to continue designing branded products in concert with its major
customers while expanding production of upscale products that meet a
mutual vision.
. Broaden product distribution. The Company's market presence and
distribution strength position it to sell new or acquired product lines
across its distribution channels, including mass merchandisers, national
office products superstores, national contract stationers, and office
product wholesalers. In the future, Pen-Tab intends to strengthen its
position in the contract stationer market. Pen-Tab has recently
established a strong relationship with B.T. Office Products
International, Inc., one of the nation's largest contract stationers.
Currently, however, the Company has not entered into any contractual or
exclusive dealing arrangements with B.T. Office Products International,
Inc. National contract stationers account for approximately 25% of
commercial office products sales, a $25 billion to $30 billion market in
1995.
. Growth through acquisition. In addition to the growth the Company
expects to come from the development of new, differentiated products and
product lines and expanding sales of existing products and product
lines, the Company actively evaluates acquisition candidates. Future
strategic acquisitions may be undertaken to broaden the Company's
product lines, expand its manufacturing capacity, and strengthen its
presence within the various channels of distribution. The Company
currently has no plans with respect to any specific material
acquisition.
PRODUCTS AND SERVICES
The Company designs, manufactures and markets school, home and office-
related products, custom binders and other related packaging materials. Pen-
Tab's core products include binders, pads, filler paper, wirebound notebooks,
and envelopes. Pen-Tab manufactures over 500 variations of these core
products, based on differences in color, size, count, packaging and other
features.
Several years ago, management recognized a market need for well-designed,
high-quality, functionally superior school and office products. To serve this
need, Pen-Tab pioneered a new line of branded, differentiated products with
value-added features. The Company's high-quality, fashion-forward school-
related designs and high-quality, functionally superior, office-related
products have been very successful with major mass merchandisers and
consumers. Approximately 30 percent of the Company's 1996 sales are derived
from differentiated products which have been developed over the last four
years.
School-related products (59.4% of 1996 net sales). The Company produces
tablets, spiral and coilless notebooks, filler paper and binders for the
school market. Pen-Tab's high-technology production equipment is designed to
produce these products in mass quantity in virtually any configuration
according to the customer needs. The Company also designs, assembles and
markets nylon binders, planners, knapsacks and other school products. Products
are packaged in a variety of quantities, rulings, sizes and papers.
Pen-Tab is a market leader for higher quality, upscale, creatively designed
school products largely for the teenage market. The Company's design
department has carefully researched market demands to develop a range
39
<PAGE>
of product offerings. The Company created a broad line of innovative styles
and designs to appeal to segmented markets of school-age children through its
Pen-Tab Pro(R), Tough Tracks(R), Pro-Active Black Lightning, Pro-Active, Pro
Ball(R) and Pen-Tab Online(R) product lines. Durable nylon covers and colorful
designs have been incorporated into core products to differentiate its line.
The value-added products sell at retail price points up to $20. Whereas
certain basic school supplies often work as a loss leader for retailers, Pen-
Tab's differentiated products give a mass merchandiser a fashion-forward image
and an attractive profit margin.
Leveraging its creative capabilities and experience, Pen-Tab has created a
brand name for high quality, upscale school supplies. For example, the "Pro
Ball" line is targeted at sports-minded school children and incorporates
embossed textured sports look and attractive color combinations. The Tough
Tracks(R) line incorporates a rugged, outdoors look which is targeted at
environmentally-conscious school children and utilizes textures, designs and
colors to appeal to the target market. The "Pro Series" is the Company's best
selling premium notebook line. Features of this line include pressboard
covers, inside pockets, coated double wire, extended tab dividers, and
heavyweight 20 lb. paper.
The Company also produces a variety of paper products for use in creative
and artistic leisure activities, including construction paper, poster paper,
tracing paper and drawing pads. These items are sold by the Company both in
conventional packaging and in innovative combination packs and jumbo bonus
packs. The Company distinguishes its arts and crafts packages by including
special "kids activity ideas" to encourage creativity.
Sales of school-related products peak during spring and summer. Orders for
back-to-school products are generally placed during January through March, and
shipped June through August. The Company builds a substantial inventory of
finished back-to-school products before shipment. Certain differentiated
products that are assembled by the Company from materials manufactured
overseas are only mass produced with firm customer commitments to limit
inventory risk. Sales of the Company's low unit cost school and office supply
products are not vulnerable to business cycles.
Management believes the growth opportunities for differentiated, creatively
designed school products remain largely untapped. The Company has numerous
exciting new products for the coming year, and management expects continued
growth from these items.
Office-related products (30.8% of 1996 net sales). The Company produces a
variety of similar products for the office, including pads and envelopes.
Sales of office products are not seasonal. New, differentiated products for
the office market have included double wire spiral pads with hard covers,
organizers and other high-quality, functionally superior products sold under
the Expert(R) brand. The Expert(R) series is a premium office supply line.
The office products market represents significant growth potential for Pen-
Tab. Office products distribution is shifting to Pen-Tab's existing core
customer base of mass merchandisers, wholesale clubs and office supply
superstores. In addition, Pen-Tab has recently established a strong
relationship with B.T. Office Products International, Inc., one of the
nation's largest contract stationers. Currently, however, the Company has not
entered into any contractual or exclusive dealing arrangements with B.T.
Office Products International, Inc. Management believes the same opportunity
exists to develop innovative higher quality products for the office supply
market as in the school products market. Pen-Tab's design department has
already created several high-quality, functionally superior designs for
planners and pads in the office supply market.
Custom packaging products (9.8% of 1996 net sales). The Company, under the
trade name Vinylweld, is a leading supplier of custom packaging products.
Vinylweld's customer strategy is to find innovative solutions to unique
challenges in packaging and product applications designed for the customer's
product. The Company utilizes the technology of vacuum-forming and radio
frequency sealing (often referred to as heat-sealing) to produce customized
packaging which is utilized by customers primarily for audio and video
cassette tapes. The Company also produces innovative packaging for the growing
market of computer compact disc cartridges. Vinylweld's working capital needs
are low because it operates in a made-to-order environment with little need to
maintain inventory.
40
<PAGE>
Pen-Tab is a leading supplier of packaging products to the publishing
industry for its audio and video cassette packages including foreign language
tutorials, self-help guides, and motivational packages. Customers include
Berlitz, Simon & Schuster, Barron's, Nightingale-Conant, Excel
Telecommunications, Inc., American Marketing, Syquest and Internet, Inc. The
Company believes it is one of the industry leaders in the production of
packaging for cassette tapes sold through infomercials. Although this market
is highly fragmented, management believes growth opportunities exist through
consolidation.
SALES, DISTRIBUTION AND MARKETING
The Company markets its broad range of products to a wide variety of
customers through virtually every channel of distribution for school, home and
office products including the largest mass merchandisers, warehouse clubs,
office product superstores, and major contract stationers. The Company's
aggregate net sales to Price Costco, Target Stores and Walmart accounted for
approximately 26.2%, 13.4% and 11.4% of the Company's net sales for 1994,
respectively, approximately 23.0%, 15.3% and 12.5% of the Company's net sales
for 1995, respectively, and aggregate net sales to Price Costco and Target
Stores accounted for approximately 21.8% and 15.6% of the Company's net sales
for 1995, respectively. The Company's top five customers accounted for
approximately 59.4% of its net sales in 1996.
The largest retailers, wholesalers and contract stationers have been rapidly
expanding as industry channels are undergoing consolidation. Management has
identified the fastest growing distribution channels in their marketplaces and
has focused the resources of the Company to the key accounts in those
channels. Management selectively pruned its customer base over the past
several years to concentrate on strong growth companies which purchase a more
profitable product mix. As a result, its number of customer accounts has
declined despite the Company's strong revenue growth.
The Company will continue to target those customers driving consolidation in
the office products industry and believes that it is strongly positioned to
meet the special requirements of these customers in the growing distribution
channels of the school, home and office products industry. Leading
merchandisers favor larger suppliers with national manufacturing capabilities
such as Pen-Tab that have implemented automated ordering, manufacturing and
distribution practices. These customers seek suppliers, such as the Company,
who are able to offer broad product lines, higher value-added innovative
products, national distribution capabilities, low costs and reliable service.
Furthermore, as these customers continue to grow and they consolidate their
supplier bases, the Company's ability to meet their special requirements
should be an increasingly important competitive advantage.
Pen-Tab has been a market leader in bringing a marketing focus to the school
and office products industry. The Company was the first in the industry to
introduce differentiated products which broke the $10 retail price barrier.
Retailers and consumers have demonstrated the market need for these products.
While some competitors have responded with imitations and licensed products,
Pen-Tab is still viewed as a market leader with innovative new designs and
products.
Senior sales management personally handle the Company's largest accounts.
The Company also employs approximately 17 manufacturer representative agencies
with over 60 agents to market its products. Pen-Tab assists the representative
agencies in servicing these accounts. The Company's sales staff is compensated
by a base salary and a bonus based on performance. Manufacturer
representatives are compensated strictly based on commission.
Management starts its product plan by segmenting its customer base (e.g. for
the teen market, consumers with a focus on a sports, fashion, rugged or
'techie' image). Product designs are then evaluated through focus groups and
sample testing. The Company reinforces its product message with brand and
image advertising and promotion. Through over 60 years of customer presence,
Pen-Tab has developed strong brand identity for quality products. Its Pen-Tab
Pro(R), Tough Tracks(R), Pen-Tab On-line(R), Expert(R) and Pen-Tab Paper
Store(R) lines are also building customer loyalty in segmented markets. The
Company typically leads marketing efforts with its core established product
lines and leverages this stable business to increase sales of its value-added
differentiated products.
41
<PAGE>
Vinylweld sells an extensive line of stock and custom audio/video software
packaging in many configurations and price ranges. Customers vary from
individual authors of programs to Fortune 500 companies. Sales may be made
direct to end-users or indirectly through a variety of channels including:
distributors, duplicators, multi-level marketers and direct selling companies.
Vinylweld has a core group of major, long term, high volume customers and
these accounts are personally handled by executive sales management personnel.
Additionally, the Company employs five field sales people.
New product development by Vinylweld's customers drives the need for
packaging. In particular, CD-Rom applications are expanding and the number of
CD packaging design requests and orders are rapidly increasing. In addition,
Vinylweld intends to aggressively and actively promote its packaging
technology into a number of predominately untapped markets. Targets include
packaging design firms, consumer product manufacturers, equipment and
instrumentation manufacturers, and a number of other packaging motivated
sectors.
COMPETITION
The markets for the Company's products are highly competitive. Competition
is based largely on a company's ability to offer a broad range of products on
a regional or national scale at competitive prices and to deliver these
products on a timely basis. The Company has many local and regional
competitors. The markets in which the Company operates have become
increasingly characterized by a limited number of large companies selling
under recognized trade names. These larger companies, including the Company,
have the economies of scale, national presence, management information systems
and breadth of product line required by the major customers. In addition to
branded product lines, manufacturers also produce private-label products,
especially in the context of broader supply relationships with office product
superstores and contract stationers.
The school, home and office products industry is fragmented, ranging from
large national manufacturers to single-facility, regional manufacturers. A few
manufacturers, including the Company, have developed strong brand name
recognition for a number of product lines. Other national companies include
Mead, the Stuart Hall division of Newell Co. and American Pad & Paper Company.
In addition, the Company still competes with a large number of smaller,
regional companies which have more limited product lines.
Pen-Tab believes significant barriers to the entry of new competitors in the
school and office products business include (i) well-established relationships
with customers, (ii) well-established relationships among raw paper vendors,
paper manufacturers, and carriers, (iii) the need to establish an efficient
and reliable purchasing, manufacturing and distribution capability and (iv)
the lengthy delivery schedule and high cost for new manufacturing equipment.
Vinylweld's primary competition comes from six competing manufacturers that
represent approximately 60% of the market. These competitors are primarily
privately held organizations ranging in size from a reported $3 million to $20
million in annual sales. The product range differs slightly from company to
company with some companies producing more than just audio/video cassette and
software packaging. Competitors generally have additional product lines
including binders, plastic dividers and inserts, and a wide variety of
specialty and miscellaneous products. In most cases, however, these additional
product lines are product adjuncts and do not directly compete in the vinyl
packaging market. Most of the competitors have not aggressively pursued
packaging business outside the vertical niche of audio/video and software
packaging.
INTELLECTUAL PROPERTY
The Company seeks trademark protection for all of its product line trade
names. Pen-Tab presently holds several trademarks covering designs, symbols
and trade names used in connection with its products, including Pen-Tab(R),
Pen-Tab Pro(R), Expert(R) and Pen-Tab Paper Store(R).
42
<PAGE>
EMPLOYEES
The Company had approximately 750 employees as of December 28, 1996.
Approximately 400 employees are represented by collective bargaining
agreements at the Illinois and California facilities. In California, the
employees are represented by the Graphic Communications Union Local No. 388-M
AFL-CIO, whose contract expires October 31, 1999. In Illinois, the employees
are represented by the Warehouse, Mailorder, Office and Professional Employees
Local 743 Affiliated International Brotherhood of Teamsters AFL-CIO, whose
contract expires December 19, 1998. The Company enjoys an amicable
relationship with unionized labor. The following table provides information on
the Company's employees by operating function:
<TABLE>
<CAPTION>
EMPLOYEES CATEGORIZED BY FUNCTION
---------------------------------
<S> <C>
Manufacturing.......................... 690
Sales.................................. 20
Administrative......................... 34
Executive.............................. 6
---
Total.................................. 750
===
</TABLE>
As of December 28, 1996, the Company's manufacturing employees numbered 250
in the Virginia facility, 235 in the California facility, and 205 in the
Chicago facility.
PROPERTIES AND FACILITIES
In October 1995, the Company relocated its executive offices and its east
coast paper products manufacturing facilities from New York City to a 282,000
square foot building in Front Royal, Virginia. The new plant was designed to
reduce manufacturing costs, improve quality and enhance capacity. The Company
financed the new building with Industrial Revenue Development Bonds.
The following table summarizes Pen-Tab's facilities by location.
<TABLE>
<CAPTION>
COMPANY FACILITIES
------------------------------------------------------------------------------------------------
APPROXIMATE
LOCATION SQUARE FEET OWNED/LEASED PRODUCT CATEGORIES LEASE EXPIRATION
-------- ----------- ------------ ----------------------------- ----------------
<S> <C> <C> <C> <C>
Front Royal, VA......... 282,000 Owned School, Office & Home N/A
City of Industry, CA.... 250,000 Leased School, Office & Home 2002
Chicago, IL............. 210,000 Leased Primarily Vinyl and Packaging 2009
</TABLE>
Pen-Tab's Front Royal, VA facility is pledged as collateral under the Credit
Agreement.
LEGAL PROCEEDINGS
The Company is a party to various litigation matters incidental to the
conduct of its business. Management does not believe that the outcome of any
of the matters in which it is currently involved will have a material adverse
effect on the financial condition or results of operations of the Company.
ENVIRONMENTAL, HEALTH AND SAFETY MATTERS
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and
regulations, among other things, impose limitations on the discharge of
pollutants and establish standards for management of waste. While there can be
no assurance that the Company is at all times in complete compliance with all
such requirements, the Company believes that any such noncompliance is
unlikely to have a material adverse effect on the Company. As is the case with
manufacturers in general, if a release or threat of release of hazardous
materials occurs on or from the Company's properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any properties owned or operated by the Company, the Company may be held
liable for response costs and damages to natural resources. There can be no
assurance that the amount of any such liability would not be material.
43
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names, ages as of December, 1996 and a
brief account of the business experience of each person who will be a director
or executive officer of the Company following the Transactions.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Alan Hodes............... 53 President, Chief Executive Officer and Director
Michael Greenberg........ 56 Executive Vice President and
General Manager--Vinylweld Division
William Leary............ 37 Vice President, Chief Financial and
Administrative Officer
Jim Diorio............... 44 Vice President of Sales
Deborah Hodes............ 44 Vice President/Creative Director and Director
Thomas McWilliams........ 53 Director
David Howe............... 32 Director
James Stevens............ 60 Director
</TABLE>
Alan Hodes joined Williamhouse-Regency in 1966. From 1972 to 1982, Mr. Hodes
served as Vice President of Williamhouse-Regency and President of its Pen-Tab
division. Mr. Hodes and Michael Greenberg purchased Pen-Tab in 1982 from
Williamhouse-Regency. Mr. Hodes received his B.S. degree in Accounting from
Brooklyn College. He is married to Deborah Hodes.
Michael Greenberg has been Executive Vice President and General Manager-
Vinylweld Division of the Company since 1971. Mr. Greenberg was Vice President
of Vinylweld, Inc. the predecessor of the Company's packaging business, when
it was acquired by Pen-Tab. He was previously Manufacturing Manager for Mohawk
Tablet Company. Mr. Greenberg graduated from the University of Illinois with a
B.S. degree in Industrial Engineering.
William Leary has been Vice President, Chief Financial and Administrative
Officer of the Company since 1991. Mr. Leary is a certified public accountant.
He was previously employed by Ernst & Young as a Senior Manager in the Audit
practice. Mr. Leary earned a Bachelors of Business Administration degree in
Accounting in 1982 from Bernard M. Baruch College of the City University of
New York.
Jim Diorio has been Vice President of Sales of the Company since 1992. He
joined the Company in 1989 as National Sales Manager. His prior experience
includes a sales manager position with Stuart Hall Company, a major competitor
in the paper industry. Mr. Diorio has over 23 years experience in the consumer
products industry.
Deborah Hodes has been Vice President/Creative Director of the Company since
1992. Her experience in the fashion related industry includes a position as
Fashion Director for a chain of specialty department stores and Assistant to a
leading clothing and fragrance designer. Ms. Hodes' education includes the New
York School of Interior Design, Parsons School of Design and Chamberlayne
College. Ms. Hodes is married to Alan Hodes.
Thomas McWilliams has been affiliated with CVC since 1983 and presently
serves as managing director of CVC as well as a member of CVC's investment
committee. From 1978 until 1983, Mr. McWilliams served as an executive
officer, including as vice president, president and chief operating officer,
of Shelter Resources Corporation, a publicly-held holding company with
operating subsidiaries in the manufactured housing industry. From 1967 until
1978, Mr. McWilliams served in various corporate finance and management
positions at Citibank, N.A. Mr. McWilliams is currently a director of each of
Chase Brass Industries, Inc., Ergo Science Corporation and various privately
owned companies.
44
<PAGE>
David Howe has been employed at CVC since 1993. Prior thereto, he worked at
Butler Capital, a private investment company. He serves on the Board of
Directors of Aetna Industries, Inc., Brake-Pro, Inc., Cable Systems
International, Inc., Copes-Vulcan, Inc., Sinter Metals, Inc., Milk Specialties
Company and American-Italian Pasta Company. He also represents Citicorp on the
Board of Del Monte Foods Company. He is a graduate of Harvard College and
Harvard Business School.
James Stevens is presently a financial consultant and serves a variety of
organizations as a corporate director or as a trustee. From 1987 through 1994,
Mr. Stevens was affiliated with Prudential Insurance Company of America,
serving as Executive Vice President. He was also Chairman and Chief Executive
Officer of the Prudential Asset Management Group (August 1993 through December
1994), the Senior Officer in charge of the Private Placement Group (October
1987 through August 1993) and a member of the Operating Council. Mr. Stevens
is a former Managing Director of Dillon, Read & Co. Inc., a former Executive
Vice President of Citicorp/Citibank and a former Chairman of CVC.
COMPENSATION OF DIRECTORS
The Company will reimburse directors for any out-of-pocket expenses incurred
by them in connection with services provided in such capacity. In addition,
the Company may compensate directors for services provided in such capacity.
COMPENSATION OF EXECUTIVE OFFICERS
The following summarizes the principal components of compensation of the
Company's Chairman and Chief Executive Officer and each other officer whose
compensation exceeded $100,000 for fiscal 1996. The compensation set forth
below fully reflects compensation for work performed on behalf of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
SALARY BONUS
NAME AND PRINCIPAL POSITION FISCAL YEAR ($) ($)
- --------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Alan Hodes.................................... 1996 $ 300,000 --
President and Chief Executive Officer
Michael Greenberg............................. 1996 228,800 $ 60,000
Exec. Vice President, General Manager--
Vinylweld Division
William Leary................................. 1996 110,000 95,000
Vice President, Chief Financial and
Administrative Officer
Jim Diorio.................................... 1996 170,400 62,000
Vice President of Sales
</TABLE>
There were no options granted to the above named executive officers during
fiscal 1996, there were no options exercised by the above named executive
officers in fiscal 1996, and no options were held by such executive officers
at the end of fiscal 1996.
EMPLOYMENT AGREEMENTS
In connection with the consummation of the Transactions, the Company entered
into employment agreements with Messrs. Hodes and Greenberg. The information
set forth below with respect to the employment agreements is a summary of all
the material terms thereof and is qualified by reference to the complete text
of such agreements. The employment agreements provide for (i) an initial term
of five years, (ii) payment of a base salary indexed to inflation, (iii)
payment of bonuses of up to fifty percent of base salary to be awarded at the
discretion of the Company's Board of Directors and (iv) certain fringe
benefits. Each employment agreement
45
<PAGE>
provides that the executive may be terminated by the Company only with cause,
and provides that the executive will not compete with the Company or its
subsidiaries during the period of employment and for the three years
thereafter. Each executive will be entitled to receive a severance payment in
the event of a resignation caused by the relocation of the Company's office at
which the executive is employed.
STOCK OPTION PLAN
On February 4, 1997, the Board of Directors adopted and the stockholders of
the Company approved the 1997 Stock Option Plan (the "Stock Option Plan"),
which provides for the grant to key employees of the Company of stock options
that are non-qualified options for federal income tax purposes. The total
number of shares of Common Stock expected to be granted pursuant to the Stock
Option Plan is 527,777, subject to certain adjustments reflecting changes in
the Company's capitalization. Effective February 4, 1997, the Company granted
options to purchase 197,916.375 shares of Common Stock pursuant to the Stock
Option Plan. The Stock Option Plan is administered by the Compensation
Committee of the Board of Directors. The Compensation Committee has broad
powers under the Stock Option Plan, including exclusive authority (except as
otherwise provided in the Stock Option Plan) to determine (i) which of the
Company's employees will receive awards, (ii) the type, size and terms of
awards, (iii) the time when awards will be granted and (iv) vesting criteria,
if any, of the awards.
401(K) PLAN
The Company sponsors a 401(k) plan for all non-union employees meeting the
participation requirements. The Company matches the employee's contribution at
a rate of 50% on the employee's first 5% of wages.
SECURITY OWNERSHIP
All of Pen-Tab's issued and outstanding capital stock is owned by Holdings.
The following table sets forth certain information with respect to the common
and preferred equity interests of Holdings following consummation of the
Transactions. The common equity interests of Holdings consist of both Class A
Common Stock and non-voting Class B Common Stock. The preferred equity
interests of Holdings consist of the Series 1 Senior Preferred Stock, the
Series 2 Senior Preferred Stock and the Series 3 Junior Preferred Stock. See
"The Transactions."
<TABLE>
<CAPTION>
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
CLASS A CLASS B SERIES 1 SERIES 2 SERIES 3
COMMON STOCK(1) COMMON STOCK PREFERRED(2) PREFERRED(3) PREFERRED(4)
NAME AND ADDRESS ---------------------- -------------------- -------------------- -------------------- ---------------------
OF BENEFICIAL OWNER NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE NUMBER PERCENTAGE
- ------------------- ----------- ---------- --------- ---------- --------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Citicorp Venture
Capital, Ltd. . 2,141,225.5 46.9% 186,274.5 100.0% -- -- % 125,875.0 100.0% -- -- %
399 Park Avenue
New York,
New York 10043
Alan Hodes...... 2,000,195.3 43.8 -- -- 85,937.5 85.9 -- -- 108,818.36 85.9
Michael
Greenberg...... 327,304.7 7.2 -- -- 14,062.5 14.1 -- -- 17,806.64 14.1
James Stevens... 95,000.0 2.1 -- -- -- -- -- -- -- --
----------- ----- --------- ----- --------- ----- --------- ----- ---------- -----
4,563,725.5 100.0% 186,274.5 100.0% 100,000.0 100.0% 125,875.0 100.0% 126,675.00 100.0%
=========== ===== ========= ===== ========= ===== ========= ===== ========== =====
</TABLE>
- --------
(1) Does not include stock options granted pursuant to the Stock Option Plan,
all of which will be subject to certain vesting requirements.
(2) Represents 100,000.0 shares of Series 1 Senior Preferred Stock, which have
a dividend rate of 10%, mature 2007 and rank in priority to all other
series of Preferred Stock.
(3) Represents 125,875.0 shares of Series 2 Senior Preferred Stock, which have
a dividend rate of 12%, mature 2008 and rank in priority to the Series 3
Junior Preferred Stock.
(4) Represents 126,625.0 shares of Series 3 Junior Preferred Stock, which have
a dividend rate of 12%, mature 2008 and rank in priority to the Common
Stock.
46
<PAGE>
CERTAIN TRANSACTIONS
SHAREHOLDERS AGREEMENT AND CERTIFICATE OF INCORPORATION
In connection with the Recapitalization, Holdings, CVC and the Management
Shareholders entered into a shareholders agreement (the "Shareholders
Agreement") which contains certain agreements among such parties with respect
to the equity interests and corporate governance of Holdings and Pen-Tab
following the Recapitalization. The Board of Directors of each of Holdings and
Pen-Tab is comprised of five (5) members. CVC has the right to appoint two (2)
directors. Pursuant to the Shareholders Agreement, the disposition of Common
Stock and Preferred Stock is restricted. The Shareholders Agreement also
contains certain participation rights, approval rights and rights of first
offer exercisable by CVC and the Management Shareholders in the event of
certain sales or proposed sales of equity interests by the other. The
participation rights under the Shareholders Agreement entitle Other
Shareholders (as defined in the Shareholders Agreement) to elect to
participate in any contemplated disposition of Common Stock by CVC or certain
of its related parties, at the same price and upon the same terms as the
proposed sale. The Shareholders Agreement also entitles, in certain
circumstances, first, the Company and second, CVC and Other Shareholders to
elect to purchase shares of Common Stock proposed to be sold by any Executive
(as defined in the Shareholders Agreement), at the same price and upon the
same terms as the proposed sale. The Shareholders Agreement further requires
the Company to offer to sell shares of Common Stock under certain
circumstances, at the same price and upon the same terms, to Other
Shareholders in the event the Company issues any shares of Common Stock or
grants any rights to acquire shares of Common Stock to CVC or certain of its
related parties. The above summary is qualified by reference to the complete
text of the Shareholders Agreement which is filed as an exhibit to the
Registration Statement of which this prospectus is a part.
REGISTRATION AGREEMENT
Holdings entered into a registration agreement (the "Registration
Agreement") with CVC and the Management Shareholders. Pursuant to the terms of
the Registration Agreement, such shareholders will have the right to require
Holdings, at Holdings' sole cost and expense and subject to certain
limitations, to register under the Securities Act or list on any nationally
recognized stock exchange all or part of the common stock held by such
shareholders (the "Registrable Securities"). All such shareholders will be
entitled to participate in all registrations by Holdings or other
shareholders, subject to certain limitations. In connection with all such
registrations, Holdings will agree to indemnify all holders of Registrable
Securities against certain liabilities, including liabilities under the
Securities Act and applicable state securities laws. Registrations pursuant to
the Registration Agreement will be made, if applicable, on the appropriate
registration form and may be underwritten registrations.
DESCRIPTION OF CREDIT AGREEMENT
In connection with the Transactions, Pen-Tab entered into a $35.0 million
Credit Agreement with Bank of America Illinois (the "Bank") to replace the
Existing Credit Facility. The information below relating to the Credit
Agreement is a summary of all the material terms thereof qualified by
reference to the complete text of the documents entered into in connection
therewith. Borrowings under the Credit Agreement are available for working
capital and general corporate purposes, including letters of credit. The
Credit Agreement is secured by first priority liens on substantially all of
Pen-Tab's assets. Pen-Tab did not draw upon the Credit Agreement in connection
with the consummation of the Transactions.
The Credit Agreement expires one year from the date of closing, unless
extended. The interest rate per annum applicable to the Credit Agreement is
the prime rate, as announced by the Bank plus a margin from 0.0% to 0.5% or,
at Pen-Tab's option, the Eurodollar rate plus a margin from 1.0% to 2.0%
(based on Pen-Tab's ratio of FIFO EBITDA minus capital expenditures to
Interest Expense). Pen-Tab is not required to pay a commitment fee on unused
commitments under the Credit Agreement. The Credit Agreement permits Pen-Tab
to prepay loans and to permanently reduce credit commitments or letters of
credit, in whole or in part, at any time in certain minimum amounts.
The Credit Agreement contains customary representations and warranties and
events of default and requires compliance with certain covenants by Pen-Tab,
including, among other things: (i) maintenance of certain
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financial ratios and compliance with certain financial tests and limitations,
(ii) limitations on the payment of capital expenditures, dividends, incurrence
of additional indebtedness and granting of certain liens and
(iii) restrictions on mergers, acquisitions, asset sales and investments.
The availability of the Credit Agreement is subject to various conditions
precedent. Advances are made under the Credit Agreement based on a borrowing
base comprised of eligible accounts receivable, inventory and net fixed assets
at the following advance rates: 85% of the value of eligible accounts
receivable, plus 55% of the value of eligible inventory, plus approximately
$7.4 million on net fixed assets (which amortizes over time; minus a reserve
of $2.5 million).
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DESCRIPTION OF EXCHANGE NOTES
As used below in this "Description of Exchange Notes" section and "The
Exchange Offer" section, the "Company" means Pen-Tab Industries, Inc.
following the consummation of the Transactions but not any of its
subsidiaries. The Series B 10 7/8% Senior Subordinated Notes due 2007 (the
"Exchange Notes") are to be issued under an Indenture, dated as of February 1,
1997 (the "Indenture"), between the Company and United States Trust Company of
New York, as Trustee (the "Trustee"). The terms of the Exchange Notes include
those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Exchange Notes are subject to all such terms, and holders of the
Exchange Notes are referred to the Indenture and the Trust Indenture Act for a
statement thereof. A copy of the Indenture and the Registration Rights
Agreement described below will be made available to prospective investors upon
request. The statements under this caption relating to the Exchange Notes, the
Indenture and the Registration Rights Agreement are summaries of all material
terms thereof and do not purport to be complete, and where reference is made
to particular provisions of the Indenture or the Registration Rights
Agreement, such provisions, including the definitions of certain terms, are
qualified by such reference. For purposes of this section, references to the
"Senior Subordinated Notes" include the Notes and the Exchange Notes.
The Notes are, and the Exchange Notes will be, general unsecured obligations
of the Company, limited to $200,000,000 aggregate principal amount of which
$75,000,000 aggregate principal amount was issued in the Offering. Additional
amounts may be issued in one or more series from time to time subject to the
limitations set forth under "--Covenants--Limitations on Indebtedness" and
restrictions contained in the Credit Agreement. The Exchange Notes will be
senior subordinated obligations of the Company, subordinated in right of
payment to all Senior Debt of the Company. The Exchange Notes will be issued
only in fully registered form, without coupons, in denominations of $1,000 and
any integral multiple thereof. No service charge will be made for any
registration of transfer or exchange of Senior Subordinated Notes, but the
Company may require payment of a sum sufficient to cover any tax or other
governmental charge payable in connection therewith. Initially, the Trustee
will act as paying agent and registrar for the Exchange Notes. The form and
terms of the Exchange Notes are the same as the form and terms of the Notes
(which they replace) except that (i) the Exchange notes bear a Series B
designation, (ii) the Exchange Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer thereof,
and (iii) the holders of Exchange Notes will not be entitled to certain rights
under the Registration Rights Agreement, including the provisions providing
for an increase in the interest rate on the Notes in certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated.
PRINCIPAL, MATURITY AND INTEREST
The Senior Subordinated Notes will mature on February 1, 2007 and will bear
interest at the rate per annum shown on the cover page hereof, except as noted
under "--Registration Rights," from the Issue Date or from the most recent
interest payment date to which interest has been paid or provided for.
Interest will be payable semiannually on February 1 and August 1 of each year,
commencing August 1, 1997, to the Person in whose name a Senior Subordinated
Note is registered at the close of business on the preceding January 15 or
July 15 (each, a "Record Date"), as the case may be. Interest on the Senior
Subordinated Notes will be computed on the basis of a 360-day year of twelve
30-day months. Holders must surrender the Senior Subordinated Notes to the
paying agent for the Senior Subordinated Notes to collect principal payments.
The Company will pay principal and interest by check and may mail interest
checks to a holder's registered address.
OPTIONAL REDEMPTION
The Exchange Notes will be subject to redemption, at the option of the
Company, in whole or in part, at any time on or after February 1, 2002 and
prior to maturity, upon not less than 30 nor more than 60 days' notice mailed
to each holder of Exchange Notes to be redeemed at his address appearing in
the register for the Exchange Notes, in amounts of $1,000 or an integral
multiple of $1,000, at the following redemption prices (expressed as
percentages of principal amount) plus accrued interest to but excluding the
date fixed for redemption (subject to
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the right of holders of record on the relevant Record Date to receive interest
due on an interest payment date that is on or prior to the date fixed for
redemption), if redeemed during the 12-month period beginning February 1 of the
years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002.............................. 105.438%
2003.............................. 103.625
2004.............................. 101.813
2005 and thereafter............... 100.000
</TABLE>
In addition, prior to February 1, 2000, the Company may redeem up to 35% of
the principal amount of the Exchange Notes (including, for this purpose, one or
more series of Senior Subordinated Notes issued under the Indenture after the
Issue Date) with the net cash proceeds received by the Company from one or more
public offerings of Capital Stock (other than Disqualified Stock) of the
Company or Holdings, at a redemption price (expressed as a percentage of the
principal amount) of 110.875% of the principal amount thereof, plus accrued and
unpaid interest to the date fixed for redemption; provided, however, that at
least $65 million in aggregate principal amount of the Senior Subordinated
Notes remains outstanding immediately after any such redemption (excluding any
Senior Subordinated Notes owned by the Company or any of its Affiliates).
Notice of redemption pursuant to this paragraph must be mailed to holders of
Senior Subordinated Notes not later than 60 days following the consummation of
such public offering.
Selection of Senior Subordinated Notes for any partial redemption shall be
made by the Trustee, in accordance with the rules of any national securities
exchange on which the Senior Subordinated Notes may be listed or, if the Senior
Subordinated Notes are not so listed, pro rata or by lot or in such other
manner as the Trustee shall deem appropriate and fair. Senior Subordinated
Notes in denominations larger than $1,000 may be redeemed in part but only in
integral multiples of $1,000. Notice of redemption will be mailed before the
date fixed for redemption to each holder of Senior Subordinated Notes to be
redeemed at his or her registered address. On and after the date fixed for
redemption, interest will cease to accrue on Senior Subordinated Notes or
portions thereof called for redemption.
The Notes do not, and the Exchange Notes will not, have the benefit of any
sinking fund.
RANKING
The Company's obligations with respect to the payment of the principal of,
premium, if any, and interest of the Senior Subordinated Notes is subordinated
in right of payment, to the extent and in the manner provided in the Indenture,
to the prior payment in full of all Senior Debt of the Company and pari passu
or senior to all other Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities, upon any
dissolution or winding up or total or partial liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all amounts due or to become due with
respect to Senior Debt of the Company (including any interest accruing
subsequent to an event of bankruptcy to the extent that such interest is an
allowed claim enforceable against the debtor under the Bankruptcy Code) shall
first be paid in full, or payment provided for, before the Holders of the
Senior Subordinated Notes or the Trustee on behalf of such Holders shall be
entitled to receive any payment by the Company of the principal of, premium, if
any, or interest on the Senior Subordinated Notes, or any payment to acquire
any of the Senior Subordinated Notes for cash, property or securities, or any
distribution with respect to the Senior Subordinated Notes of any cash,
property or securities. Before any payment may be made by, or on behalf of, the
Company of the principal of, premium, if any, or interest on the Senior
Subordinated Notes upon any such dissolution or winding up or liquidation or
reorganization, any payment or distribution of assets or securities of the
Company of any kind or character, whether in cash, property or securities, to
which the Holders of the Senior Subordinated Notes or the Trustee on their
behalf would be entitled, but for the subordination provisions of the
Indenture, shall be made by the Company or by any receiver,
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trustee in bankruptcy, liquidating trustee, agent or other person making such
payment or distribution, directly to the holders of Senior Debt of the Company
or their representatives or to the trustee or trustees under any indenture
pursuant to which any such Senior Debt may have been issued as their respective
interests may appear, to the extent necessary to pay all such Senior Debt in
full after giving effect to any concurrent payment, distribution or provision
therefor to or for the holders of such Senior Debt.
No direct or indirect payment by or on behalf of the Company of principal of,
premium, if any, or interest on the Senior Subordinated Notes, whether pursuant
to the terms of the Senior Subordinated Notes or upon acceleration or
otherwise, will be made if, at the time of such payment, there exists a default
in the payment of all or any portion of the obligations on any Designated
Senior Debt, whether at maturity, on account of mandatory redemption or
prepayment, acceleration or otherwise (and the Trustee has received written
notice thereof), and such default shall not have been cured or waived or the
benefits of this sentence waived by or on behalf of the holders of such
Designated Senior Debt. In addition, during the continuance of any non-payment
default or non-payment event of default with respect to any Designated Senior
Debt pursuant to which the maturity thereof may be accelerated, and upon
receipt by the Trustee of notice (a "Payment Blockage Notice") from a holder or
holders of such Designated Senior Debt or the trustee or agent acting on behalf
of such Designated Senior Debt, then, unless and until such default or event of
default has been cured or waived or has ceased to exist or such Designated
Senior Debt has been discharged or repaid in full, no payment or distribution
will be made by or on behalf of the Company on account of or with respect to
the Senior Subordinated Notes, except from those funds held in trust for the
benefit of the Holders of any Senior Subordinated Notes to such Holders, during
a period (a "Payment Blockage Period") commencing on the date of receipt of
such Payment Blockage Notice by the Trustee and ending 179 days thereafter.
Notwithstanding anything herein to the contrary, (x) in no event will a Payment
Blockage Period extend beyond 179 days from the date of the Payment Blockage
Notice in respect thereof was given and (y) there must be 180 days in any 365
day period during which no Payment Blockage Period is in effect. Not more than
one Payment Blockage Period may be commenced with respect to the Senior
Subordinated Notes during any period of 365 consecutive days. No default or
event of default that existed or was continuing on the date of commencement of
any Payment Blockage Period with respect to the Designated Senior Debt
initiating such Payment Blockage Period may be, or be made, the basis for the
commencement of any other Payment Blockage Period by the holder or holders of
such Designated Senior Debt or the trustee or agent acting on behalf of such
Designated Senior Debt, whether or not within a period of 365 consecutive days,
unless such default or event of default has been cured or waived for a period
of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Senior Subordinated Notes by reason of the provisions of the Indenture
described under this section will not be construed as preventing the occurrence
of an Event of Default described in clause (a), (b) or (c) of the first
paragraph under "--Events of Default."
By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders of
the Senior Subordinated Notes will be paid to the holders of Senior Debt of the
Company to the extent necessary to repay such Senior Debt in full, and the
Company may be unable to fully meet its obligations with respect to the Senior
Subordinated Notes. Subject to the restrictions set forth in the Indenture, in
the future the Company may incur additional Senior Debt.
COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness), except: (i) Indebtedness of the
Company or any of its Restricted Subsidiaries, if immediately after giving
effect to the Incurrence of such
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Indebtedness and the receipt and application of the net proceeds thereof, the
Consolidated Cash Flow Ratio of the Company for the four full fiscal quarters
for which quarterly or annual financial statements are available next preceding
the Incurrence of such Indebtedness, calculated on a pro forma basis in
accordance with Article 11 of Regulation S-X under the Securities Act of 1933
or any successor provision as if such Indebtedness had been Incurred on the
first day of such four full fiscal quarters, would be greater than 2.0 to 1.00;
(ii) Indebtedness of the Company and its Restricted Subsidiaries, Incurred
under the Credit Agreement in an amount not to exceed the greater of (a) $40
million or (b) an amount equal to the sum (x) 85% of the book value of the
accounts receivable of the Company and its Restricted Subsidiaries, (y) 60% of
the book value (as determined on a first-in first-out basis) of the inventory
of the Company and its Restricted Subsidiaries and (z) $5.0 million, in the
case of clauses (x) and (y) determined in accordance with GAAP; (iii)
Indebtedness owed by the Company to any direct or indirect Wholly Owned
Subsidiary of the Company or Indebtedness owed by a direct or indirect
Restricted Subsidiary of the Company to the Company or a direct or indirect
Wholly Owned Subsidiary of the Company; provided, however, upon either (I) the
transfer or other disposition by such direct or indirect Wholly Owned
Subsidiary or the Company of any Indebtedness so permitted under this clause
(iii) to a Person other than the Company or another direct or indirect Wholly
Owned Subsidiary of the Company or (II) the issuance (other than directors'
qualifying shares), sale, transfer or other disposition of shares of Capital
Stock or other ownership interests (including by consolidation or merger) of
such direct or indirect Wholly Owned Subsidiary to a Person other than the
Company or another such Wholly Owned Subsidiary of the Company, the provisions
of this clause (iii) shall no longer be applicable to such Indebtedness and
such Indebtedness shall be deemed to have been Incurred at the time of any such
issuance, sale, transfer or other disposition, as the case may be;
(iv) Indebtedness of the Company or any Restricted Subsidiary under any
interest rate agreement to the extent entered into to hedge any other
Indebtedness permitted under the Indenture (including the Senior Subordinated
Notes); (v) Indebtedness Incurred to renew, extend, refinance or refund
(collectively for purposes of this clause (v) to "refund") any Indebtedness
outstanding on the Issue Date, any Indebtedness Incurred under the prior clause
(i) above or the Senior Subordinated Notes and the Guarantee, if any; provided,
however, that (I) such Indebtedness does not exceed the principal amount (or
accrual amount, if less) of Indebtedness so refunded (plus unused commitments
under revolving credit facilities) plus the amount of any premium required to
be paid in connection with such refunding pursuant to the terms of the
Indebtedness refunded or the amount of any premium reasonably determined by the
issuer of such Indebtedness as necessary to accomplish such refunding by means
of a tender offer, exchange offer, or privately negotiated repurchase, plus the
expenses of such issuer reasonably incurred in connection therewith and (II)(A)
in the case of any refunding of Indebtedness that is pari passu with the Senior
Subordinated Notes, such refunding Indebtedness is made pari passu with or
subordinate in right of payment to the Senior Subordinated Notes, and, in the
case of any refunding of Indebtedness that is subordinate in right of payment
to the Senior Subordinated Notes, such refunding Indebtedness is subordinate in
right of payment to the Senior Subordinated Notes on terms no less favorable to
the holders of the Senior Subordinated Notes than those contained in the
Indebtedness being refunded, (B) in either case, the refunding Indebtedness by
its terms, or by the terms of any agreement or instrument pursuant to which
such Indebtedness is issued, does not have an Average Life that is less than
the remaining Average Life of the Indebtedness being refunded and does not
permit redemption or other retirement (including pursuant to any required offer
to purchase to be made by the Company or a Restricted Subsidiary of the
Company) of such Indebtedness at the option of the holder thereof prior to the
final stated maturity of the Indebtedness being refunded, other than a
redemption or other retirement at the option of the holder of such Indebtedness
(including pursuant to a required offer to purchase made by the Company or a
Restricted Subsidiary of the Company) which is conditioned upon a change of
control of the Company pursuant to provisions substantially similar to those
contained in the Indenture described under "--Change of Control" below and (C)
any Indebtedness Incurred to refund any Indebtedness is Incurred by the obligor
on the Indebtedness being refunded or by the Company; (vi) Indebtedness of the
Company or its Subsidiaries not otherwise permitted to be Incurred pursuant to
clauses (i) through (v) above which, together with any other outstanding
Indebtedness Incurred pursuant to this clause (vi), has an aggregate principal
amount not in excess of $3.0 million at any time outstanding, which
Indebtedness may be incurred under the Credit Agreement or otherwise; (vii)
commodity agreements of the Company or any of its Restricted Subsidiaries to
the extent entered into to protect the Company and its Restricted Subsidiaries
from fluctuations in the prices of raw materials used in their businesses;
(viii) exchange rate agreements of the
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Company or any of its Restricted Subsidiaries to the extent entered into to
protect the Company and its Restricted Subsidiaries from fluctuations in
exchange rates; (ix) Indebtedness of the Company under the Senior Subordinated
Notes and Indebtedness of the Guarantors, if any, under the Guarantee incurred
in accordance with the Indenture; (x) Indebtedness outstanding on the Issue
Date; (xi) Indebtedness (including Capitalized Lease Obligations) incurred by
the Company or any of its Restricted Subsidiaries to finance the purchase,
lease or improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any Person owning
such assets) in an aggregate principal amount outstanding not to exceed 10% of
Tangible Assets at any time (which amount may, but need not, be incurred in
whole or in part under the Credit Agreement) provided that the principal amount
of such Indebtedness does not exceed the fair market value of such property or
equipment; (xii) Indebtedness incurred by the Company or any of its Restricted
Subsidiaries constituting reimbursement obligations with respect to letters of
credit issued in the ordinary course of business, including, without
limitation, letters of credit in respect of workers' compensation claims or
self-insurance, or other Indebtedness with respect to reimbursement type
obligations regarding workers' compensation claims or self-insurance, and
obligations in respect of performance and surety bonds and completion
guarantees provided by the Company or any Restricted Subsidiary of the Company
in the ordinary course of business and (xiii) guarantees by the Company or its
Restricted Subsidiaries of Indebtedness otherwise permitted to be incurred
hereunder.
Limitation on Restricted Payments
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, (i) declare or pay
any dividend, or make any distribution of any kind or character (whether in
cash, property or securities), in respect of any class of the Capital Stock of
the Company or any of its Restricted Subsidiaries or to the holders thereof,
excluding any (x) dividends or distributions payable solely in shares of
Capital Stock of the Company (other than Disqualified Stock) or in options,
warrants or other rights to acquire Capital Stock of the Company (other than
Disqualified Stock), or (y) in the case of any Restricted Subsidiary of the
Company, dividends or distributions payable to the Company or a Restricted
Subsidiary of the Company, (ii) purchase, redeem, or otherwise acquire or
retire for value shares of Capital Stock of the Company or any of its
Restricted Subsidiaries, any options, warrants or rights to purchase or acquire
shares of Capital Stock of the Company or any of its Restricted Subsidiaries or
any securities convertible or exchangeable into shares of Capital Stock of the
Company or any of its Restricted Subsidiaries, excluding any such shares of
Capital Stock, options, warrants, rights or securities which are owned by the
Company or a Restricted Subsidiary of the Company, (iii) make any Investment in
(other than a Permitted Investment), or payment on a guarantee of any
obligation of, any Person, other than the Company or a direct or indirect
Wholly Owned Subsidiary of the Company, or (iv) redeem, defease, repurchase,
retire or otherwise acquire or retire for value, prior to any scheduled
maturity, repayment or sinking fund payment, Subordinated Indebtedness (each of
the transactions described in clauses (i) through (iv) (other than any
exception to any such clause) being a "Restricted Payment") if at the time
thereof: (1) a Default or an Event of Default shall have occurred and be
continuing, or (2) upon giving effect to such Restricted Payment, the Company
could not Incur at least $1.00 of additional Indebtedness pursuant to the terms
of the Indenture described in clause (i) of "--Limitation on Indebtedness"
above, or (3) upon giving effect to such Restricted Payment, the aggregate of
all Restricted Payments made on or after the Issue Date exceeds the sum of: (a)
50% of cumulative Consolidated Net Income of the Company (or, in the case
cumulative Consolidated Net Income of the Company shall be negative, less 100%
of such deficit) since the end of the fiscal quarter in which the Issue Date
occurs through the last day of the fiscal quarter for which financial
statements are available; plus (b) 100% of the aggregate net proceeds received
after the Issue Date, including the fair market value of property other than
cash (determined in good faith by the Board of Directors of the Company as
evidenced by a resolution of such Board of Directors filed with the Trustee),
from the issuance of, or equity contribution with respect to, Capital Stock
(other than Disqualified Stock) of the Company and warrants, rights or options
on Capital Stock (other than Disqualified Stock) of the Company (other than in
respect of any such issuance to a Restricted Subsidiary of the Company) and the
principal amount of Indebtedness of the Company or any of its Restricted
Subsidiaries that has been converted into or exchanged for Capital Stock of the
Company which Indebtedness was Incurred after the Issue Date; plus (c) 100% of
the aggregate after-tax net proceeds, including the fair market value of
property other than cash (determined in good faith by the Board of Directors
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of the Company as evidenced by a resolution of such Board of Directors filed
with the Trustee) of the sale or other disposition of any Investment
constituting a Restricted Payment made after the Issue Date; provided that any
gain on the sale or disposition included in such after tax net proceeds shall
not be included in determining Consolidated Net Income for purposes of clause
(a) above.
The foregoing provision will not be violated by (i) any dividend on any class
of Capital Stock of the Company or any of its Restricted Subsidiaries paid
within 60 days after the declaration thereof if, on the date when the dividend
was declared, the Company or such Restricted Subsidiary, as the case may be,
could have paid such dividend in accordance with the provisions of the
Indenture, (ii) the renewal, extension, refunding or refinancing of any
Indebtedness otherwise permitted pursuant to the terms of the Indenture
described in clause (v) of "--Limitation on Indebtedness" above, (iii) the
exchange or conversion of any Indebtedness of the Company or any of its
Restricted Subsidiaries for or into Capital Stock of the Company (other than
Disqualified Stock), (iv) so long as no Default or Event of Default has
occurred and is continuing, any Investment made with the proceeds of a
substantially concurrent sale (other than to a Restricted Subsidiary of the
Company) of Capital Stock of the Company (other than Disqualified Stock);
provided, however, that the proceeds of such sale of Capital Stock shall not be
(and have not been) included in subclause (b) of clause (3) of the preceding
paragraph, (v) the redemption, repurchase, retirement or other acquisition of
any Capital Stock of the Company in exchange for or out of the net cash
proceeds of the substantially concurrent sale (other than to a Restricted
Subsidiary of the Company) of Capital Stock of the Company (other than
Disqualified Stock); provided, however, that the proceeds of such sale of
Capital Stock shall not be (and have not been) included in subclause (b) of
clause (3) of the preceding paragraph, (vi) the payment of dividends to
Holdings in an amount equal to the amount required for Holdings to pay Federal,
state and local income taxes to the extent such income taxes are attributable
to the income of the Company and its Restricted Subsidiaries, (vii)
distributions of up to $500,000 annually to Holdings to pay its bona fide
operating expenses, (viii) other Restricted Payments of up to $2.5 million in
the aggregate, (ix) the payment of the dividend to Holdings described herein on
the Issue Date in connection with the consummation of the Transactions, (x)
payments in lieu of fractional shares in an amount not in excess of $100,000 in
the aggregate and (xi) distributions to Holdings to permit Holdings to
repurchase its Common Stock at no more than fair market value (determined in
good faith by the Board of Directors of the Company as evidenced by a
resolution of such Board of Directors filed with the Trustee) from present or
former Management Investors (other than Alan Hodes, Michael Greenberg or any of
their respective Related Persons or Affiliates) in an amount not in excess of
$2,000,000 in the aggregate. Each Restricted Payment described in clauses (i)
(to the extent not already taken into account for purposes of computing the
aggregate amount of all Restricted Payments pursuant to clause 3 above), (iv),
(vii), (viii) (x) and (xi) of the previous sentence shall be taken into account
for purposes of computing the aggregate amount of all Restricted Payments
pursuant to clause (3) of the preceding paragraph.
The Indenture will provide that for purposes of this covenant, (i) an
"Investment" shall be deemed to have been made at the time any Restricted
Subsidiary is designated as an Unrestricted Subsidiary in an amount
(proportionate to the Company's equity interest in such Subsidiary) equal to
the net worth of such Restricted Subsidiary at the time that such Restricted
Subsidiary is designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate of all Restricted Payments made as Investments since the Issue Date
shall exclude and be reduced by an amount (proportionate to the Company's
equity interest in such Subsidiary) equal to the net worth of an Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary, not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of
Investments previously made by the Company and the Restricted Subsidiaries in
such Unrestricted Subsidiary (in each case (i) and (ii) "net worth" to be
calculated based upon the fair market value of the assets of such Subsidiary as
of any such date of designation which shall, in no event, be less than zero);
and (iii) any property transferred to or from an Unrestricted Subsidiary shall
be valued at its fair market value at the time of such transfer.
Limitations Concerning Distributions and Transfers by Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist any consensual encumbrance or restriction
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<PAGE>
on the ability of any Restricted Subsidiary of the Company to (i) pay, directly
or indirectly, dividends or make any other distributions in respect of its
Capital Stock or pay any Indebtedness or other obligation owed to the Company
or any Restricted Subsidiary of the Company, (ii) make loans or advances to the
Company or any Restricted Subsidiary of the Company or (iii) transfer any of
its property or assets to the Company or any Restricted Subsidiary of the
Company, except for such encumbrances or restrictions existing under or by
reason of (a) any agreement in effect on the Issue Date as any such agreement
is in effect on such date, (b) the Credit Agreement, (c) any agreement relating
to any Indebtedness Incurred by such Restricted Subsidiary prior to the date on
which such Restricted Subsidiary was acquired by the Company and outstanding on
such date and not Incurred in anticipation or contemplation of becoming a
Restricted Subsidiary and provided such encumbrance or restriction shall not
apply to any assets of the Company or its Restricted Subsidiaries other than
such Restricted Subsidiary, (d) customary provisions contained in an agreement
which has been entered into for the sale or disposition of all or substantially
all of the Capital Stock or assets of a Restricted Subsidiary; provided,
however, that such encumbrance or restriction is applicable only to such
Restricted Subsidiary or assets, (e) an agreement effecting a renewal,
exchange, refunding, amendment or extension of Indebtedness Incurred pursuant
to an agreement referred to in clause (a) above; provided, however, that the
provisions contained in such renewal, exchange, refunding, amendment or
extension agreement relating to such encumbrance or restriction are no more
restrictive in any material respect than the provisions contained in the
agreement that is the subject thereof in the reasonable judgment of the Board
of Directors of the Company as evidenced by a resolution of such Board of
Directors filed with the Trustee, (f) the Indenture, (g) applicable law, (h)
customary provisions restricting subletting or assignment of any lease
governing any leasehold interest of any Restricted Subsidiary of the Company,
(i) restrictions contained in Indebtedness permitted to be incurred subsequent
to the Issue Date pursuant to the provisions of the covenant described under
"--Limitation on Indebtedness"; provided that any such restrictions are
ordinary and customary with respect to the type of Indebtedness incurred, (j)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the type referred to in clause (iii) of
this covenant or (k) restrictions of the type referred to in clause (iii) of
this covenant contained in security agreements securing Indebtedness of a
Restricted Subsidiary of the Company to the extent that such Liens were
otherwise incurred in accordance with "--Limitation on Liens" below and
restrict the transfer of property subject to such agreements.
Limitation on Liens
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, incur any Lien on or with respect to any
property or assets of the Company or such Restricted Subsidiary owned on the
Issue Date or thereafter acquired or on the income or profits thereof, which
Lien secures Indebtedness, without making, or causing any such Restricted
Subsidiary to make, effective provision for securing the Senior Subordinated
Notes and all other amounts due under the Indenture (and, if the Company shall
so determine, any other Indebtedness of the Company or such Restricted
Subsidiary, including Subordinated Indebtedness; provided, however, that Liens
securing the Senior Subordinated Notes and any Indebtedness pari passu with the
Senior Subordinated Notes are senior to such Liens securing such Subordinated
Indebtedness) equally and ratably with such Indebtedness or, in the event such
Indebtedness is subordinate in right of payment to the Senior Subordinated
Notes or the Guarantee, if any, prior to such Indebtedness, as to such property
or assets for so long as such Indebtedness shall be so secured.
The foregoing restrictions shall not apply to (i) Liens existing on the Issue
Date securing Indebtedness existing on the Issue Date; (ii) Liens securing
Senior Debt (including Liens securing Indebtedness outstanding under the Credit
Agreement) and any guarantees thereof to the extent that the Indebtedness
secured thereby is permitted to be incurred under the covenant described under
"--Limitation on Indebtedness" above; (iii) Liens securing only the Senior
Subordinated Notes and the Guarantees, if any; (iv) Liens in favor of the
Company or a Guarantor, if any; (v) Liens to secure Indebtedness Incurred for
the purpose of financing all or any part of the purchase price or the cost of
construction or improvement of the property (or any other capital expenditure
financing) subject to such Liens; provided, however, that (a) the aggregate
principal amount of any Indebtedness secured by such a Lien does not exceed
100% of such purchase price or cost, (b) such Lien does not extend to or cover
any other property other than such item of property and any improvements on
such item, (c) the
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Indebtedness secured by such Lien is Incurred by the Company within 180 days of
the acquisition, construction or improvement of such property and (d) the
Incurrence of such Indebtedness is permitted by the provisions of the Indenture
described under "--Limitation on Indebtedness" above; (vi) Liens on property
existing immediately prior to the time of acquisition thereof (and not created
in anticipation or contemplation of the financing of such acquisition); (vii)
Liens on property of a Person existing at the time such Person is acquired or
merged with or into or consolidated with the Company or any such Restricted
Subsidiary (and not created in anticipation or contemplation thereof); (viii)
Liens to secure Indebtedness Incurred to extend, renew, refinance or refund (or
successive extensions, renewals, refinancings or refundings), in whole or in
part, any Indebtedness secured by Liens referred to in the foregoing clauses
(i)-(vii) so long as such Liens do not extend to any other property and the
principal amount of Indebtedness so secured is not increased except for the
amount of any premium required to be paid in connection with such renewal,
refinancing or refunding pursuant to the terms of the Indebtedness renewed,
refinanced or refunded or the amount of any premium reasonably determined by
the Company as necessary to accomplish such renewal, refinancing or refunding
by means of a tender offer, exchange offer or privately negotiated repurchase,
plus the expenses of the issuer of such Indebtedness reasonably incurred in
connection with such renewal, refinancing or refunding; (ix) Liens in favor of
the Trustee as provided for in the Indenture on money or property held or
collected by the Trustee in its capacity as Trustee; and (x) Liens incurred in
the ordinary course of business securing assets not having a fair market value
in excess of $500,000.
Limitation on Certain Asset Dispositions
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, make one or more
Asset Dispositions unless: (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration for such Asset Disposition at least
equal to the fair market value of the assets sold or disposed of as determined
by the Board of Directors of the Company in good faith and evidenced by a
resolution of such Board of Directors filed with the Trustee; (ii) except in
the case of a Permitted Asset Swap, not less than 75% of the consideration for
the disposition consists of cash or readily marketable cash equivalents or the
assumption of Indebtedness (other than non-recourse Indebtedness or any
Subordinated Indebtedness) of the Company or such Restricted Subsidiary or
other obligations relating to such assets (and release of the Company or such
Restricted Subsidiary from all liability on the Indebtedness or other
obligations assumed); and (iii) all Net Available Proceeds, less any amounts
invested within 360 days of such Asset Disposition in assets related to the
business of the Company (including the Capital Stock of another Person (other
than any Person that is a Restricted Subsidiary of the Company immediately
prior to such investment); provided, however, that immediately after giving
effect to any such investment (and not prior thereto) such Person shall be a
Restricted Subsidiary of the Company), are applied, on or prior to the 360th
day after such Asset Disposition, unless and to the extent that the Company
shall determine to make an Offer to Purchase, to the permanent reduction and
prepayment of any Senior Debt of the Company then outstanding (including a
permanent reduction of commitments in respect thereof). Any Net Available
Proceeds from any Asset Disposition which is subject to the immediately
preceding sentence that are not applied as provided in the immediately
preceding sentence shall be used promptly after the expiration of the 360th day
after such Asset Disposition, or promptly after the Company shall have earlier
determined to not apply any Net Available Proceeds therefrom as provided in
clause (iii) of the immediately preceding sentence, to make an Offer to
Purchase outstanding Senior Subordinated Notes at a purchase price in cash
equal to 100% of their principal amount plus accrued interest to the Purchase
Date. Notwithstanding the foregoing, the Company may defer making any Offer to
Purchase outstanding Senior Subordinated Notes until there are aggregate
unutilized Net Available Proceeds from Asset Dispositions otherwise subject to
the two immediately preceding sentences equal to or in excess of $5 million (at
which time, the entire unutilized Net Available Proceeds from Asset
Dispositions otherwise subject to the two immediately preceding sentences, and
not just the amount in excess of $5 million, shall be applied as required
pursuant to this paragraph). Any remaining Net Available Proceeds following the
completion of the required Offer to Purchase may be used by the Company for any
other purpose (subject to the other provisions of the Indenture) and the amount
of Net Available Proceeds then required to be otherwise applied in accordance
with this covenant shall be reset to zero, subject to any subsequent Asset
Disposition.
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These provisions will not apply to a transaction consummated in compliance with
the provisions of the Indenture described under "--Mergers, Consolidations and
Certain Sales of Assets" below.
In the event that the Company makes an Offer to Purchase the Senior
Subordinated Notes, the Company shall comply with any applicable securities
laws and regulations, including any applicable requirements of Section 14(e)
of, and Rule 14e-1 under, the Exchange Act.
Limitation on Issuance and Sale of Capital Stock of Restricted Subsidiaries
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, (a) transfer, convey, sell or otherwise
dispose of any shares of Capital Stock of any Restricted Subsidiary of the
Company (other than to the Company or a Wholly Owned Subsidiary of the
Company), except that the Company and any such Restricted Subsidiary may, in
any single transaction, sell all, but not less than all, of the issued and
outstanding Capital Stock of any such Restricted Subsidiary to any Person,
subject to complying with the provisions of the Indenture described under "--
Limitation on Certain Asset Dispositions" above and (b) issue shares of Capital
Stock of a Restricted Subsidiary of the Company (other than directors'
qualifying shares), or securities convertible into, or warrants, rights or
options to subscribe for or purchase shares of, Capital Stock of a Restricted
Subsidiary of the Company to any Person other than to the Company or a Wholly
Owned Subsidiary of the Company.
Limitation on Transactions with Affiliates and Related Persons
The Indenture will provide that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into directly or indirectly any
transaction with any of their respective Affiliates or Related Persons (other
than the Company or a Restricted Subsidiary of the Company), including, without
limitation, the purchase, sale, lease or exchange of property, the rendering of
any service, or the making of any guarantee, loan, advance or Investment,
either directly or indirectly, involving aggregate consideration in excess of
$1,000,000 unless a majority of the disinterested directors of the Board of
Directors of the Company determines, in its good faith judgment evidenced by a
resolution of such Board of Directors filed with the Trustee, that the terms of
such transaction are at least as favorable as the terms that could be obtained
by the Company or such Restricted Subsidiary, as the case may be, in a
comparable transaction made on an arms-length basis between unaffiliated
parties; provided, however, that if the aggregate consideration is in excess of
$5 million the Company shall also obtain, prior to the consummation of the
transaction, the favorable opinion as to the fairness of the transaction to the
Company or such Restricted Subsidiary, from a financial point of view from an
independent financial advisor. The provisions of this covenant shall not apply
to (i) transactions permitted by the provisions of the Indenture described
above under the caption "--Limitation on Restricted Payments" above, (ii)
reasonable fees and compensation paid to, and indemnity provided on behalf of,
officers, directors and employees of the Company and its Restricted
Subsidiaries as determined in good faith by the Board of Directors of the
Company and (iii) loans to employees in the ordinary course of business which
are approved in good faith by the Board of Directors of the Company.
Change of Control
Within 30 days following the date of the consummation of a transaction
resulting in a Change of Control, the Company will commence an Offer to
Purchase all outstanding Senior Subordinated Notes at a purchase price in cash
equal to 101% of their principal amount plus accrued interest to the Purchase
Date. Such Offer to Purchase will be consummated not earlier than 30 days and
not later than 60 days after the commencement thereof. Each holder shall be
entitled to tender all or any portion of the Senior Subordinated Notes owned by
such holder pursuant to the Offer to Purchase, subject to the requirement that
any portion of a Senior Subordinated Note tendered must be an integral multiple
of $1,000 principal amount. A "Change of Control" will be deemed to have
occurred in the event that (whether or not otherwise permitted by the
Indenture), after the Issue Date (a) any Person or any Persons acting together
that would constitute a group (for purposes of Section 13(d) of the Exchange
Act, or any successor provision thereto) (a "Group"), together with any
Affiliates
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or Related Persons thereof, other than Permitted Holders, shall "beneficially
own" (as defined in Rule 13d-3 under the Exchange Act, or any successor
provision thereto) at least 40% of the voting power of the outstanding Voting
Stock of the Company; (b) any sale, lease or other transfer (in one transaction
or a series of related transactions) is made by the Company or any of its
Restricted Subsidiaries of all or substantially all of the consolidated assets
of the Company and its Restricted Subsidiaries to any Person; (c) the Company
consolidates with or merges with or into another Person or any Person
consolidates with, or merges with or into, the Company, in any such event
pursuant to a transaction in which immediately after the consummation thereof
Persons owning a majority of the Voting Stock of the Company immediately prior
to such consummation shall cease to own a majority of the Voting Stock of the
Company or the surviving entity if other than the Company, (d) Continuing
Directors cease to constitute at least a majority of the Board of Directors of
the Company; or (e) the stockholders of the Company approve any plan or
proposal for the liquidation or dissolution of the Company.
In the event that the Company makes an Offer to Purchase the Senior
Subordinated Notes, the Company shall comply with any applicable securities
laws and regulations, including any applicable requirements of Section 14(e)
of, and Rule 14e-1 under, the Exchange Act.
With respect to the sale of assets referred to in the definition of "Change
of Control," the phrase "all or substantially all" of the assets of the Company
will likely be interpreted under applicable law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Senior Subordinated Notes
tendered upon the occurrence of a Change of Control. The ability of the Company
to pay cash to the holders of Senior Subordinated Notes upon a Change of
Control may be limited by its then existing financial resources. The Credit
Agreement will contain certain covenants prohibiting, or requiring waiver or
consent of the lenders thereunder prior to, the repurchase of the Senior
Subordinated Notes upon a Change of Control and future debt agreements of the
Company may provide the same. If the Company does not obtain such waiver or
consent or repay such Indebtedness, the Company will remain prohibited from
repurchasing the Senior Subordinated Notes. In such event, the Company's
failure to purchase tendered Senior Subordinated Notes would constitute an
Event of Default under the Indenture which would in turn constitute a default
under the Credit Agreement and possibly other Indebtedness. None of the
provisions relating to a repurchase upon a Change of Control are waivable by
the Board of Directors of the Company or the Trustee.
The foregoing provisions will not prevent the Company from entering into
transactions of the types described above with management or their affiliates.
In addition, such provisions may not necessarily afford the holders of the
Senior Subordinated Notes protection in the event of a highly leveraged
transaction, including a reorganization, restructuring, merger or similar
transaction involving the Company that may adversely affect the holders because
such transactions may not involve a shift in voting power or beneficial
ownership, or even if they do, may not involve a shift of the magnitude
required under the definition of Change of Control to trigger the provisions.
Future Guarantors
The Indenture will provide that the Company will not create or acquire, nor
permit any of its Restricted Subsidiaries to create or acquire, any Restricted
Subsidiary after the Issue Date unless, at the time such Restricted Subsidiary
has either assets or stockholder's equity in excess of $25,000, such Restricted
Subsidiary executes and delivers to the Trustee a supplemental indenture in
form reasonably satisfactory to the Trustee pursuant to which such Restricted
Subsidiary shall unconditionally guarantee all of the Company's obligations
under the Senior Subordinated Notes and the Indenture on the terms set forth in
the Indenture.
Provision of Financial Information
Whether or not the Company is subject to Section 13(a) or 15(d) of the
Exchange Act, or any successor provision thereto, following the effectiveness
of the Exchange Offer the Company shall file with the Commission
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the annual reports, quarterly reports and other documents which the Company
would have been required to file with the Commission pursuant to such Section
13(a) or 15(d) or any successor provision thereto if the Company were so
required, such documents to be filed with the Commission on or prior to the
respective dates (the "Required Filing Dates") by which the Company would have
been required so to file such documents if the Company were so required.
Regardless of whether the Company files such reports or other documents with
the Commission, the Company shall (a) within 15 days of each Required Filing
Date (i) transmit by mail to all holders of Senior Subordinated Notes, as their
names and addresses appear in the Note Register, without cost to such holders,
and (ii) file with the Trustee, copies of such annual reports, quarterly
reports and other documents, and (b) if filing such documents by the Company
with the Commission is not permitted under the Exchange Act, promptly upon
written request supply copies of such documents to any prospective holder of
Senior Subordinated Notes.
Mergers, Consolidations and Certain Sales of Assets
The Company will not consolidate or merge with or into any Person, or sell,
assign, lease, convey or otherwise dispose of (or cause or permit any
Restricted Subsidiary of the Company to consolidate or merge with or into any
Person or sell, assign, lease, convey or otherwise dispose of) all or
substantially all of the Company's assets (determined on a consolidated basis
for the Company and its Restricted Subsidiaries), whether as an entirety or
substantially an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution, to any Person
unless, in each such case: (i) the entity formed by or surviving any such
consolidation or merger (if other than the Company or such Restricted
Subsidiary, as the case may be), or to which such sale, assignment, lease,
conveyance or other disposition shall have been made (the "Surviving Entity"),
is a corporation organized and existing under the laws of the United States,
any state thereof or the District of Columbia; (ii) the Surviving Entity
assumes by supplemental indenture all of the obligations of the Company on the
Senior Subordinated Notes and under the Indenture; (iii) immediately after
giving effect to such transaction and the use of any net proceeds therefrom on
a pro forma basis, the Company or the Surviving Entity, as the case may be,
could Incur at least $1.00 of Indebtedness pursuant to clause (i) of the
provisions of the Indenture described under "--Limitation on Indebtedness"
above; (iv) immediately before and after giving effect to such transaction and
treating any Indebtedness which becomes an obligation of the Company or any of
its such Restricted Subsidiaries as a result of such transaction as having been
incurred by the Company or such Restricted Subsidiary, as the case may be, at
the time of the transaction, no Default or Event of Default shall have occurred
and be continuing; and (v) if, as a result of any such transaction, property or
assets of the Company or a Restricted Subsidiary would become subject to a Lien
not excepted from the provisions of the Indenture described under "--Limitation
on Liens" above, the Company, the Company, Restricted Subsidiary or the
Surviving Entity, as the case may be, shall have secured the Senior
Subordinated Notes as required by said covenant. The provisions of this
paragraph shall not apply to any merger of a Restricted Subsidiary of the
Company with or into the Company or a Wholly Owned Subsidiary of the Company or
any transaction pursuant to which a Guarantor, if any, is to be released in
accordance with the terms of the Guarantee and the Indenture in connection with
any transaction complying with the provisions of the Indenture described under
"--Limitation on Certain Asset Dispositions" above.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Senior Subordinated Note when due
(whether or not prohibited by the provisions of the Indenture described under
"--Ranking" above); (b) failure to pay any interest on any Senior Subordinated
Note when due and payable, and the default continues for 30 days (whether or
not prohibited by the provisions of the Indenture described under "--Ranking"
above); (c) default in the payment of principal of and interest on Senior
Subordinated Notes required to be purchased pursuant to an Offer to Purchase as
described under "--Covenants--Change of Control" and "--Covenants--Limitation
on Certain Asset Dispositions" above when due and payable (whether or not
prohibited by the provisions of the Indenture described under "--Ranking"
above); (d) failure to perform or comply with any of the provisions described
under "--Covenants--Mergers, Consolidations and Certain Sales of Assets" above;
(e) failure to perform any other covenant or
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agreement of the Company under the Indenture or the Senior Subordinated Notes
and the default continues for 30 days after written notice to the Company by
the Trustee or holders of at least 25% in aggregate principal amount of
outstanding Senior Subordinated Notes; (f) default under the terms of one or
more instruments evidencing or securing Indebtedness of the Company or any of
its Subsidiaries having an outstanding principal amount of $5.0 million or more
individually or in the aggregate that has resulted in the acceleration of the
payment of such Indebtedness or failure to pay principal when due at the stated
maturity of any such Indebtedness; (g) the rendering of a final judgment or
judgments (not subject to appeal) against the Company or any of its
Subsidiaries in an amount of $5.0 million or more which remains undischarged or
unstayed for a period of 60 days after the date on which the right to appeal
has expired; (h) certain events of bankruptcy, insolvency or reorganization
affecting the Company or any of its Subsidiaries; and (i) the Guarantee, if
any, ceases to be in full force and effect or is declared null and void and
unenforceable or is found to be invalid or a Guarantor, if any, denies its
liability under the Guarantee (other than by reason of a release of such
Guarantor from the Guarantee in accordance with the terms of the Indenture and
the Guarantee).
If an Event of Default (other than an Event of Default with respect to the
Company described in clause (h) of the preceding paragraph) shall occur and be
continuing, either the Trustee or the holders of at least 25% in aggregate
principal amount of the outstanding Senior Subordinated Notes may accelerate
the maturity of all Senior Subordinated Notes; provided, however, that after
such acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of outstanding Senior
Subordinated Notes may, under certain circumstances, rescind and annul such
acceleration if all Events of Default, other than the non-payment of
accelerated principal, have been cured or waived as provided in the Indenture.
If an Event of Default specified in clause (h) of the preceding paragraph with
respect to the Company occurs, the outstanding Senior Subordinated Notes will
ipso facto become immediately due and payable without any declaration or other
act on the part of the Trustee or any holder. For information as to waiver of
defaults, see "--Modification and Waiver."
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the Senior
Subordinated Notes, give the holders thereof notice of all uncured Defaults or
Events of Default known to it; provided, however, that, except in the case of
an Event of Default or a Default in payment with respect to the Senior
Subordinated Notes or a Default or Event of Default in complying with "--
Covenants--Mergers, Consolidations and Certain Sales of Assets," the Trustee
shall be protected in withholding such notice if and so long as the Board of
Directors or responsible officers of the Trustee in good faith determine that
the withholding of such notice is in the interest of the holders of the Senior
Subordinated Notes.
No holder of any Senior Subordinated Note will have any right to institute
any proceeding with respect to the Indenture or for any remedy thereunder,
unless such holder shall have previously given to the Trustee written notice of
a continuing Event of Default and unless the holders of at least 25% in
aggregate principal amount of the outstanding Senior Subordinated Notes shall
have made written request, and offered reasonable indemnity, to the Trustee to
institute such proceeding as Trustee, and the Trustee shall not have received
from the holders of a majority in aggregate principal amount of the outstanding
Senior Subordinated Notes a direction inconsistent with such request and shall
have failed to institute such proceeding within 60 days. However, such
limitations do not apply to a suit instituted by a holder of a Senior
Subordinated Note for enforcement of payment of the principal of and premium,
if any, or interest on such Senior Subordinated Note on or after the respective
due dates expressed in such Senior Subordinated Note.
The Company will be required to furnish to the Trustee annually a statement
as to its performance of certain of its obligations under the Indenture and as
to any default in such performance.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may terminate its substantive obligations and the substantive
obligations of the Guarantors, if any, in respect of the Senior Subordinated
Notes by delivering all outstanding Senior Subordinated Notes to
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the Trustee for cancellation and paying all sums payable by the Company on
account of principal of, premium, if any, and interest on all Senior
Subordinated Notes or otherwise. In addition to the foregoing, the Company may,
provided that no Default or Event of Default has occurred and is continuing or
would arise therefrom (or, with respect to a Default or Event of Default
specified in clause (h) of "--Events of Default" above, any time on or prior to
the 95th calendar day after the date of such deposit (it being understood that
this condition shall not be deemed satisfied until after such 95th day)) and
provided that no default under any Senior Debt would result therefrom,
terminate its substantive obligations and the substantive obligations of the
Guarantors, if any, in respect of the Senior Subordinated Notes (except for the
Company's obligation to pay the principal of (and premium, if any, on) and the
interest on the Senior Subordinated Notes and such Guarantors' guarantee
thereof) by (i) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or United States Government Obligations sufficient
(without reinvestment) to pay all remaining indebtedness on the Senior
Subordinated Notes, (ii) delivering to the Trustee either an Opinion of Counsel
or a ruling directed to the Trustee from the Internal Revenue Service to the
effect that the holders of the Senior Subordinated Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
deposit and termination of obligations, (iii) delivering to the Trustee an
Opinion of Counsel to the effect that the Company's exercise of its option
under this paragraph will not result in the Company, the Trustee or the trust
created by the Company's deposit of funds pursuant to this provision becoming
or being deemed to be an "investment company" under the Investment Company Act
of 1940, as amended, and (iv) complying with certain other requirements set
forth in the Indenture. In addition, the Company may, provided that no Default
or Event of Default has occurred, and is continuing or would arise therefrom
(or, with respect to a Default or Event of Default specified in clause (h) of
"--Events of Default" above, any time on or prior to the 95th calendar day
after the date of such deposit (it being understood that this condition shall
not be deemed satisfied until after such 95th day)) and provided that no
default under any Senior Debt would result therefrom, terminate all of its
substantive obligations and all of the substantive obligations of the
Guarantors, if any, in respect of the Senior Subordinated Notes (including the
Company's obligation to pay the principal of (and premium, if any, on) and
interest on the Senior Subordinated Notes and such Guarantors' guarantee
thereof by (i) depositing with the Trustee, under the terms of an irrevocable
trust agreement, money or United States Government Obligations sufficient
(without reinvestment) to pay all remaining indebtedness on the Senior
Subordinated Notes, (ii) delivering to the Trustee either a ruling directed to
the Trustee from the Internal Revenue Service to the effect that the holders of
the Senior Subordinated Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such deposit and termination of
obligations or an Opinion of Counsel based upon such a ruling addressed to the
Trustee or a change in the applicable Federal tax law since the date of the
Indenture, to such effect, (iii) delivering to the Trustee an Opinion of
Counsel to the effect that the Company's exercise of its option under this
paragraph will not result in the Company, the Trustee or the trust created by
the Company's deposit of funds pursuant to this provision becoming or being
deemed to be an "investment company" under the Investment Company Act of 1940,
as amended, and (iv) complying with certain other requirements set forth in the
Indenture.
The Company may make an irrevocable deposit pursuant to this provision only
if at such time it is not prohibited from doing so under the subordination
provisions of the Indenture or certain covenants in the instruments governing
Senior Debt and the Company has delivered to the Trustee and any Paying Agent
an Officers' Certificate to that effect.
GOVERNING LAW
The Indenture, the Senior Subordinated Notes and the Guarantee will be
governed by the laws of the State of New York without regard to principles of
conflicts of laws.
MODIFICATION AND WAIVER
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the holders of a majority in aggregate
principal amount of the outstanding Senior Subordinated Notes; provided,
however, that no such modification or amendment may, without the consent of the
holder of each
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Senior Subordinated Note affected thereby, (a) change the Stated Maturity of
the principal of or any installment of interest on any Senior Subordinated Note
or alter the optional redemption or repurchase provisions of any Senior
Subordinated Note or the Indenture in a manner adverse to the holders of the
Senior Subordinated Notes, (b) reduce the principal amount of (or the premium)
of any Senior Subordinated Note, (c) reduce the rate of or extend the time for
payment of interest on any Senior Subordinated Note, (d) change the place or
currency of payment of principal of (or premium) or interest on any Senior
Subordinated Note, (e) modify any provisions of the Indenture relating to the
waiver of past defaults (other than to add sections of the Indenture subject
thereto) or the right of the holders to institute suit for the enforcement of
any payment on or with respect to any Senior Subordinated Note or the
Guarantee, if any, or the modification and amendment of the Indenture and the
Senior Subordinated Notes (other than to add sections of the Indenture or the
Senior Subordinated Notes which may not be amended, supplemented or waived
without the consent of each holder affected), (f) reduce the percentage of the
principal amount of outstanding Senior Subordinated Notes necessary for
amendment to or waiver of compliance with any provision of the Indenture or the
Senior Subordinated Notes or for waiver of any Default, (g) waive a default in
the payment of principal of, interest on, or redemption payment with respect
to, any Senior Subordinated Note (except a recision of acceleration of the
Senior Subordinated Notes by the holders as provided in the Indenture and a
waiver of the payment default that resulted from such acceleration), (h) modify
the ranking or priority of the Senior Subordinated Notes or the Guarantee, if
any, or modify the definition of Senior Debt or Designated Senior Debt or amend
or modify the subordination provisions of the Indenture in any manner adverse
to the Holders, (i) release the Guarantors, if any, from any of their
respective obligations under the Guarantee or the Indenture otherwise than in
accordance with the Indenture, or (j) modify the provisions relating to any
Offer to Purchase required under the covenants described under "--Covenants--
Limitation on Certain Asset Dispositions" or "--Covenants--Change of Control"
in a manner materially adverse to the holders of Senior Subordinated Notes with
respect to any Asset Disposition that has been consummated or Change of Control
that has occurred.
The holders of a majority in aggregate principal amount of the outstanding
Senior Subordinated Notes, on behalf of all holders of Senior Subordinated
Notes, may waive compliance by the Company with certain restrictive provisions
of the Indenture. Subject to certain rights of the Trustee, as provided in the
Indenture, the holders of a majority in aggregate principal amount of the
outstanding Senior Subordinated Notes, on behalf of all holders of Senior
Subordinated Notes, may waive any past default under the Indenture, except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Senior Subordinated Note tendered pursuant to an
Offer to Purchase, or a default in respect of a provision that under the
Indenture cannot be modified or amended without the consent of the holder of
each outstanding Senior Subordinated Note affected.
THE TRUSTEE
The Indenture provides that, except during the continuance of a Default, the
Trustee will perform only such duties as are specifically set forth in the
Indenture. During the existence of a Default, the Trustee will exercise such
rights and powers vested in it under the Indenture and use the same degree of
care and skill in their exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs. The Indenture and
provisions of the Trust Indenture Act incorporated by reference therein contain
limitations on the rights of the Trustee, should it become a creditor of the
Company, the Guarantors, if any, or any other obligor upon the Senior
Subordinated Notes, to obtain payment of claims in certain cases or to realize
on certain property received by it in respect of any such claim as security or
otherwise. The Trustee is permitted to engage in other transactions with the
Company or an Affiliate of the Company; provided, however, that if it acquires
any conflicting interest (as defined in the Indenture or in the Trust Indenture
Act), it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture or the Registration Rights Agreement. Reference is made to the
Indenture or the Registration Rights Agreement for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
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"ACQUIRED INDEBTEDNESS" means, with respect to any Person, Indebtedness of
such Person (i) existing at the time such Person becomes a Restricted
Subsidiary or (ii) assumed in connection with the acquisition of assets from
another Person, including Indebtedness Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, as the case may be.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with any specified Person. For purposes of this definition, "control"
when used with respect to any Person means the power to direct the management
and policies of such Person, directly or indirectly, whether through the
ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"ASSET DISPOSITION" means any sale, transfer or other disposition (including,
without limitation, by merger, consolidation or sale-and-leaseback transaction)
of (i) shares of Capital Stock of a Subsidiary of the Company (other than
directors' qualifying shares) or (ii) property or assets of the Company or any
Subsidiary of the Company other than in the ordinary course of business;
provided, however, that an Asset Disposition shall not include (a) any sale,
transfer or other disposition of shares of Capital Stock, property or assets by
a Restricted Subsidiary of the Company to the Company or to any Wholly Owned
Subsidiary of the Company, (b) any sale, transfer or other disposition of
defaulted receivables for collection or any sale, transfer or other disposition
of property or assets in the ordinary course of business, (c) any isolated
sale, transfer or other disposition that does not involve aggregate
consideration in excess of $500,000 individually, (d) the grant in the ordinary
course of business of any non-exclusive license of patents, trademarks,
registrations therefor and other similar intellectual property, (e) any Lien
(or foreclosure thereon) securing Indebtedness to the extent that such Lien is
granted in compliance with "--Covenants--Limitation on Liens" above, (f) any
Restricted Payment permitted by "--Covenants--Limitation on Restricted
Payments" above, (g) any disposition of assets or property in the ordinary
course of business to the extent such property or assets are obsolete, worn-out
or no longer useful in the Company's or any of its Restricted Subsidiaries'
business, (h) the sale, lease, conveyance or disposition or other transfer of
all or substantially all of the assets of the Company as permitted under "--
Covenants--Mergers, Consolidations and Certain Sales of Assets" above;
provided, that the assets not so sold, leased, conveyed, disposed of or
otherwise transferred shall be deemed an Asset Disposition or (i) any
disposition that constitutes a Change of Control.
"AVERAGE LIFE" means, as of the date of determination, with respect to any
Indebtedness for borrowed money or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the number of years from the date of
determination to the dates of each successive scheduled principal or
liquidation value payments of such Indebtedness or Preferred Stock,
respectively, and the amount of such principal or liquidation value payments,
by (ii) the sum of all such principal or liquidation value payments.
"CAPITAL LEASE OBLIGATIONS" of any Person means the obligations to pay rent
or other amounts under a lease of (or other Indebtedness arrangements conveying
the right to use) real or personal property of such Person which are required
to be classified and accounted for as a capital lease or liability on the face
of a balance sheet of such Person in accordance with GAAP. The amount of such
obligations shall be the capitalized amount thereof in accordance with GAAP and
the stated maturity thereof shall be the date of the last payment of rent or
any other amount due under such lease prior to the first date upon which such
lease may be terminated by the lessee without payment of a penalty.
"CAPITAL STOCK" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock of
such Person (including any Preferred Stock outstanding on the Issue Date).
"COMMON STOCK" of any Person means Capital Stock of such Person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such Person, to shares of Capital Stock of any other class of such Person.
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"CONSOLIDATED CASH FLOW AVAILABLE FOR FIXED CHARGES" of any Person means for
any period the Consolidated Net Income of such Person for such period increased
(to the extent Consolidated Net Income for such period has been reduced
thereby) by the sum of (without duplication) (i) Consolidated Interest Expense
of such Person for such period (which, for purposes of this definition, shall
include the amortization of the premiums, fees and expenses referred to in
clause (i) of the second sentence of the definition of GAAP), plus (ii)
Consolidated Income Tax Expense of such Person for such period, plus (iii) the
consolidated depreciation and amortization expense included in the income
statement of such Person prepared in accordance with GAAP for such period, plus
(iv) any other non-cash charges to the extent deducted from or reflected in
Consolidated Net Income except for any non-cash charges that represent accruals
of, or reserves for, cash disbursements to be made in any future accounting
period.
"CONSOLIDATED CASH FLOW RATIO" of any Person means for any period the ratio
of (i) Consolidated Cash Flow Available for Fixed Charges of such Person for
such period to (ii) the sum of (A) Consolidated Interest Expense of such Person
for such period, plus (B) the annual interest expense with respect to any
Indebtedness proposed to be Incurred by such Person or its Restricted
Subsidiaries, minus (C) Consolidated Interest Expense of such Person to the
extent included in clause (ii)(A) with respect to any Indebtedness that will no
longer be outstanding as a result of the Incurrence of the Indebtedness
proposed to be Incurred, plus (D) the annual interest expense with respect to
any other Indebtedness Incurred by such Person or its Restricted Subsidiaries
since the end of such period to the extent not included in clause (ii)(A),
minus (E) Consolidated Interest Expense of such Person to the extent included
in clause (ii)(A) with respect to any Indebtedness that no longer is
outstanding as a result of the Incurrence of the Indebtedness referred to in
clause (ii)(D); provided, however, that in making such computation, the
Consolidated Interest Expense of such Person attributable to interest on any
Indebtedness bearing a floating interest rate shall be computed on a pro forma
basis as if the rate in effect on the date of computation (after giving effect
to any hedge in respect of such Indebtedness that will, by its terms, remain in
effect until the earlier of the maturity of such Indebtedness or the date one
year after the date of such determination) had been the applicable rate for the
entire period; provided, further, however, that, in the event such Person or
any of its Restricted Subsidiaries has made any Asset Dispositions or
acquisitions of assets not in the ordinary course of business (including
acquisitions of other Persons by merger, consolidation or purchase of Capital
Stock) during or after such period and on or prior to the date of measurement,
such computation shall be made on a pro forma basis as if the Asset
Dispositions or acquisitions had taken place on the first day of such period.
Notwithstanding the previous sentence Consolidated Interest Expense shall not
include the consolidated interest expense included in a consolidated income
statement of such Person for such period associated with Indebtedness incurred
for working capital purposes ("Working Capital Debt") but shall include as
Consolidated Interest Expense a pro forma interest expense determined using on
the then current weighted average rates in effect on the date of computation on
all Working Capital Debt (or if no such Working Capital Debt is then
outstanding, the rate that would be in effect under the Credit Agreement) and
(y) the average principal amount of Working Capital Debt of such Person that
was outstanding during the four full fiscal quarters immediately for which
quarterly or annual financial statements are available next preceding the date
of computation. Calculations of pro forma amounts in accordance with this
definition shall be done in accordance with Article 11 of Regulation S-X under
the Securities Act of 1933 or any successor provision and may include
reasonably ascertainable cost savings.
"CONSOLIDATED INCOME TAX EXPENSE" of any Person means for any period the
consolidated provision for income taxes of such Person and its Restricted
Subsidiaries for such period calculated on a consolidated basis in accordance
with GAAP.
"CONSOLIDATED INTEREST EXPENSE" for any Person means for any period, without
duplication, (a) the consolidated interest expense included in a consolidated
income statement (without deduction of interest or finance charge income) of
such Person and its Restricted Subsidiaries for such period calculated on a
consolidated basis in accordance with GAAP and (b) dividend requirements of
such Person and its Restricted Subsidiaries with respect to Disqualified Stock
and with respect to all other Preferred Stock of Restricted Subsidiaries of
such Person (in each case whether in cash or otherwise (except dividends
payable solely in shares
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of Capital Stock of such Person or such Restricted Subsidiary)) paid, declared,
accrued or accumulated during such period times a fraction the numerator of
which is one and the denominator of which is one minus the then effective
consolidated Federal, state and local tax rate of such Person, expressed as a
decimal.
"CONSOLIDATED NET INCOME" of any Person means for any period the consolidated
net income (or loss) of such Person and its Restricted Subsidiaries for such
period determined on a consolidated basis in accordance with GAAP; provided,
however, that there shall be excluded therefrom (a) the net income (or loss) of
any Person acquired by such Person or a Restricted Subsidiary of such Person in
a pooling-of-interests transaction for any period prior to the date of such
transaction, (b) the net income (but not net loss) of any Restricted Subsidiary
of such Person which is subject to restrictions which prevent or limit the
payment of dividends or the making of distributions to such Person to the
extent of such restrictions (regardless of any waiver thereof), (c) non-cash
gains and losses due solely to fluctuations in currency values, (d) the net
income of any Person that is not a Restricted Subsidiary of such Person, except
to the extent of the amount of dividends or other distributions representing
such Person's proportionate share of such other Person's net income for such
period actually paid in cash to such Person by such other Person during such
period, (e) gains but not losses on Asset Dispositions by such Person or its
Restricted Subsidiaries, (f) all gains and losses classified as extraordinary,
unusual or nonrecurring in accordance with GAAP and (g) in the case of a
successor to the referent Person by consolidation or merger or as a transferee
of the referent Person's assets, any earnings (or losses) of the successor
corporation prior to such consolidation, merger or transfer of assets.
"CONTINUING DIRECTOR" means a director who either was a member of the Board
of Directors of the Company on the Issue Date or who became a director of the
Company subsequent to the Issue Date and whose election, or nomination for
election by the Company's stockholders, was duly approved by a majority of the
Continuing Directors then on the Board of Directors of the Company, either by a
specific vote or by approval of the proxy statement issued by the Company on
behalf of the entire Board of Directors of the Company in which such individual
is named as nominee for director.
"CREDIT AGREEMENT" means, collectively, (i) that certain Loan and Security
Agreement, to be dated as of February 4, 1997, between the Company and Bank of
America Illinois, (ii) that certain Reimbursement Agreement, dated as of April
1, 1995, between the Company and Bank of America Illinois and (iii) any
deferrals, renewals, extensions, replacements, refinancings or refundings of
any of the foregoing, or amendments, modifications or supplements to
(including, without limitation, any amendment increasing the amount borrowed or
reimbursement obligation thereunder) whether by or with the same or any other
lender, creditor, or group of creditors and including related notes, guarantee
agreements and other instruments and agreements executed in connection
therewith.
"DEFAULT" means any event that is, or after notice or lapse of time or both
would become, an Event of Default.
"DESIGNATED SENIOR DEBT" means (i) so long as the Credit Agreement is in
effect, the Senior Debt incurred thereunder and (ii) thereafter, any other
Senior Debt which has at the time of initial issuance an aggregate outstanding
principal amount in excess of $25 million which has been so designated as
Designated Senior Debt by the Board of Directors of the Company at the time of
initial issuance in a resolution delivered to the Trustee.
"DISQUALIFIED STOCK" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of the holder thereof,
in whole or in part, on or prior to the final maturity of the Senior
Subordinated Notes.
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"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended and the
rules and regulations promulgated by the Commission thereunder.
"GAAP" means generally accepted accounting principles, consistently applied,
as in effect on the Issue Date in the United States of America, as set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as is approved by a significant segment of the
accounting profession in the United States. All ratios and computations based
on GAAP contained in the Indenture shall be computed in conformity with GAAP
applied on a consistent basis, except that calculations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
deduction or amortization of any premiums, fees, and expenses incurred in
connection with any financings or any other permitted incurrence of
Indebtedness and (ii) depreciation, amortization or other expenses recorded as
a result of the application of purchase accounting in accordance with
Accounting Principles Board Opinion Nos. 16 and 17.
"GUARANTEE" means the guarantee of the Senior Subordinated Notes by each
Guarantor under the Indenture.
"GUARANTOR" means each Restricted Subsidiary, if any, of the Company formed
or acquired after the Issue Date, which pursuant to the terms of the Indenture
executes a supplement to the Indenture as a Guarantor.
"INCUR" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of any Person or any of
its Restricted Subsidiaries existing at the time such Person becomes a
Restricted Subsidiary of the Company (or is merged into or consolidates with
the Company or any of its Restricted Subsidiaries), whether or not such
Indebtedness was incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary of the Company (or being merged into or
consolidated with the Company or any of its Restricted Subsidiaries), shall be
deemed Incurred at the time any such Person becomes a Restricted Subsidiary of
the Company or merges into or consolidates with the Company or any of its
Restricted Subsidiaries.
"INDEBTEDNESS" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in
connection with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business which are not
overdue or which are being contested in good faith), (v) every Capital Lease
Obligation of such Person, (vi) every net obligation under interest rate swap
or similar agreements or foreign currency hedge, exchange or similar agreements
of such Person and (vii) every obligation of the type referred to in clauses
(i) through (vi) of another Person and all dividends of another Person the
payment of which, in either case, such Person has guaranteed or is responsible
or liable for, directly or indirectly, as obligor, guarantor or otherwise.
Indebtedness shall include the liquidation preference and any mandatory
redemption payment obligations in respect of any Disqualified Stock of the
Company, and any Preferred Stock of a Subsidiary of the Company. Indebtedness
shall never be calculated taking into account any cash and cash equivalents
held by such Person. Indebtedness shall not include obligations arising from
agreements of the Company or a Restricted Subsidiary of the Company to provide
for indemnification, adjustment of purchase price, earn-out, or other similar
obligations, in each case, incurred or assumed in connection with the
disposition of any business or assets of a Restricted Subsidiary of the
Company.
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"INVESTMENT" by any Person means any direct or indirect loan, advance,
guarantee or other extension of credit or capital contribution to (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise), or purchase or
acquisition of Capital Stock, bonds, notes, debentures or other securities or
evidence of Indebtedness issued by any other Person.
"ISSUE DATE" means the original issue date of the Notes.
"LIEN" means, with respect to any property or assets, any mortgage or deed of
trust, pledge, hypothecation, assignment, security interest, lien, charge,
easement (other than any easement not materially impairing usefulness or
marketability), encumbrance, preference, priority or other security agreement
with respect to such property or assets (including, without limitation, any
conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"MANAGEMENT INVESTORS" means any of Alan Hodes, Michael Greenberg and other
full-time members of management of the Company who acquire stock of Holdings
through management stock purchase or option plans.
"NET AVAILABLE PROCEEDS" from any Asset Disposition by any Person means cash
or readily marketable cash equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Indebtedness or other obligations relating to such properties or
assets or received in any other non-cash form) therefrom by such Person,
including any cash received by way of deferred payment or upon the monetization
or other disposition of any non-cash consideration (including notes or other
securities) received in connection with such Asset Disposition, net of (i) all
legal, title and recording tax expenses, commissions and other fees and
expenses incurred and all federal, state, foreign and local taxes required to
be accrued as a liability as a consequence of such Asset Disposition, (ii) all
payments made by such Person or its Restricted Subsidiaries on any Indebtedness
which is secured by such assets in accordance with the terms of any Lien upon
or with respect to such assets or which must by the terms of such Lien, or in
order to obtain a necessary consent to such Asset Disposition or by applicable
law, be repaid out of the proceeds from such Asset Disposition, (iii) all
payments made with respect to liabilities associated with the assets which are
the subject of the Asset Disposition, including, without limitation, trade
payables and other accrued liabilities, (iv) appropriate amounts to be provided
by such Person or any Restricted Subsidiary thereof, as the case may be, as a
reserve in accordance with GAAP against any liabilities associated with such
assets and retained by such Person or any Restricted Subsidiary thereof, as the
case may be, after such Asset Disposition, including, without limitation,
liabilities under any indemnification obligations and severance and other
employee termination costs associated with such Asset Disposition, until such
time as such amounts are no longer reserved or such reserve is no longer
necessary (at which time any remaining amounts will become Net Available
Proceeds to be allocated in accordance with the provisions of clause (iii) of
the covenant of the Indenture described under "--Covenants--Limitation on
Certain Asset Dispositions") and (v) all distributions and other payments made
to minority interest holders in Restricted Subsidiaries of such Person or joint
ventures as a result of such Asset Disposition.
"OFFER TO PURCHASE" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each holder at his address appearing
in the register for the Senior Subordinated Notes on the date of the Offer
offering to purchase up to the principal amount of Senior Subordinated Notes
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to the Indenture). Unless otherwise required by applicable
law, the Offer shall specify an expiration date (the "Expiration Date") of the
Offer to Purchase which shall be not less than 30 days nor more than 60 days
after the date of such Offer and a settlement date (the "Purchase Date") for
purchase of Senior Subordinated Notes within five Business Days after the
Expiration Date. The Company shall notify the Trustee at least 15 Business Days
(or such shorter period as is acceptable to the Trustee) prior to the mailing
of the Offer of the Company's obligation to make an Offer to Purchase, and the
Offer shall be mailed by the Company or, at the Company's request, by the
Trustee in the name and at the expense of the Company. The Offer shall contain
all the information required by applicable law
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to be included therein. The Offer shall contain all instructions and materials
necessary to enable such holders to tender Senior Subordinated Notes pursuant
to the Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to Purchase is
being made;
(2) the Expiration Date and the Purchase Date;
(3) the aggregate principal amount of the outstanding Senior Subordinated Notes
offered to be purchased by the Company pursuant to the Offer to Purchase
(including, if less than 100%, the manner by which such amount has been
determined pursuant to the Section of the Indenture requiring the Offer to
Purchase) (the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of Senior Subordinated Notes accepted for payment (as
specified pursuant to the Indenture) (the "Purchase Price");
(5) that the holder may tender all or any portion of the Senior Subordinated
Notes registered in the name of such holder and that any portion of a
Senior Subordinated Note tendered must be tendered in an integral multiple
of $1,000 principal amount;
(6) the place or places where Senior Subordinated Notes are to be surrendered
for tender pursuant to the Offer to Purchase;
(7) that interest on any Senior Subordinated Note not tendered or tendered but
not purchased by the Company pursuant to the Offer to Purchase will
continue to accrue;
(8) that on the Purchase Date the Purchase Price will become due and payable
upon each Senior Subordinated Note being accepted for payment pursuant to
the Offer to Purchase and that interest thereon shall cease to accrue on
and after the Purchase Date;
(9) that each holder electing to tender all or any portion of a Senior
Subordinated Note pursuant to the Offer to Purchase will be required to
surrender such Senior Subordinated Note at the place or places specified in
the Offer prior to the close of business on the Expiration Date (such
Senior Subordinated Note being, if the Company or the Trustee so requires,
duly endorsed by, or accompanied by a written instrument of transfer in
form satisfactory to the Company and the Trustee duly executed by, the
holder thereof or his attorney duly authorized in writing);
(10) that holders will be entitled to withdraw all or any portion of Senior
Subordinated Notes tendered if the Company (or its Paying Agent) receives,
not later than the close of business on the fifth Business Day next
preceding the Expiration Date, a telegram, telex, facsimile transmission
or letter setting forth the name of the holder, the principal amount of
the Senior Subordinated Note the holder tendered, the certificate number
of the Senior Subordinated Note the holder tendered and a statement that
such holder is withdrawing all or a portion of his tender;
(11) that (a) if Senior Subordinated Notes in an aggregate principal amount
less than or equal to the Purchase Amount are duly tendered and not
withdrawn pursuant to the Offer to Purchase, the Company shall purchase
all such Senior Subordinated Notes and (b) if Senior Subordinated Notes in
an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Senior Subordinated Notes having an aggregate principal
amount equal to the Purchase Amount on a pro rata basis (with such
adjustments as may be deemed appropriate so that only Senior Subordinated
Notes in denominations of $1,000 or integral multiples thereof shall be
purchased); and
(12) that in the case of any holder whose Senior Subordinated Note is purchased
only in part, the Company shall execute and the Trustee shall authenticate
and deliver to the holder of such Senior Subordinated Note without service
charge, a new Senior Subordinated Note or Senior Subordinated Notes, of
any authorized denomination as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Senior Subordinated Note so tendered.
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An Offer to Purchase shall be governed by and effected in accordance with the
provisions above pertaining to any Offer.
"PERMITTED ASSET SWAP" means any one or more transactions in which the
Company or any of its Restricted Subsidiaries exchanges assets for
consideration consisting of cash and/or assets used or useful in the business
of the Company as conducted on the Issue Date or reasonable extensions,
developments or expansions thereof or ancillary thereto or other assets in an
amount less than 15% of the fair market value of such transaction or
transactions.
"PERMITTED HOLDER" means any of (i) the Principals and their Related Persons
and Affiliates and (ii) the Management Investors and their Related Persons and
Affiliates.
"PERMITTED INVESTMENTS" means (i) Investments in marketable, direct
obligations issued or guaranteed by the United States of America, or any
governmental entity or agency or political subdivision thereof (provided, that
the good faith and credit of the United States of America is pledged in support
thereof), maturing within one year of the date of purchase; (ii) Investments in
commercial paper issued by corporations or financial institutions maturing
within 180 days from the date of the original issue thereof, and rated "P-1" or
better by Moody's Investors Service or "A-1" or better by Standard & Poor's
Corporation or an equivalent rating or better by any other nationally
recognized securities rating agency; (iii) Investments in certificates of
deposit issued or acceptances accepted by or guaranteed by any bank or trust
company organized under the laws of the United States of America or any state
thereof or the District of Columbia, in each case having capital, surplus and
undivided profits totaling more than $500,000,000, maturing within one year of
the date of purchase; (iv) Investments representing Capital Stock or
obligations issued to the Company or any of its Restricted Subsidiaries in the
course of the good faith settlement of claims against any other Person or by
reason of a composition or readjustment of debt or a reorganization of any
debtor of the Company or any of its Restricted Subsidiaries; (v) deposits,
including interest-bearing deposits, maintained in the ordinary course of
business in banks; (vi) any acquisition of the Capital Stock of any Person;
provided, however, that after giving effect to any such acquisition such Person
shall become a Restricted Subsidiary of the Company; (vii) trade receivables
and prepaid expenses, in each case arising in the ordinary course of business;
provided, however, that such receivables and prepaid expenses would be recorded
as assets of such Person in accordance with GAAP; (viii) endorsements for
collection or deposit in the ordinary course of business by such Person of bank
drafts and similar negotiable instruments of such other Person received as
payment for ordinary course of business trade receivables; (ix) any interest
swap or hedging obligation with an unaffiliated Person otherwise permitted by
the Indenture; (x) Investments received as consideration for an Asset
Disposition in compliance with the provisions of the Indenture described under
"--Covenants--Limitation on Certain Asset Dispositions" above; (xi) Investments
in Restricted Subsidiaries or by virtue of which a person becomes a Restricted
Subsidiary; (xii) loans and advances to employees made in the ordinary course
of business; and (xiv) Investments the sole consideration for which consists of
Capital Stock of the Company.
"PERMITTED TRANSFEREE" means, with respect to any Management Investor (i) any
spouse or lineal descendant (including by adoption and stepchildren) of such
Management Investor and (ii) any trust, corporation or partnership, the
beneficiaries, stockholders or partners of which consist entirely of one or
more Management Investors or individuals described in clause (i) above.
"PERSON" means any individual, corporation, limited or general partnership,
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.
"PREFERRED STOCK", as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of
such Person, to shares of Capital Stock of any other class of such Person.
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"PRINCIPALS" means Citicorp Venture Capital, Ltd.
"PURCHASE DATE" has the meaning set forth in the definition of "Offer to
Purchase" above.
"RELATED PERSON" of any Person means any other Person directly or indirectly
owning (a) 5% or more of the outstanding Common Stock of such Person (or, in
the case of a Person that is not a corporation, 5% or more of the equity
interest in such Person) or (b) 5% or more of the combined voting power of the
Voting Stock of such Person.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
"SENIOR DEBT" means, with respect to any Person at any date, (i) in the case
of the Company or the Guarantor, if any, all Indebtedness under the Credit
Agreement, including principal, premium, if any, and interest on such
Indebtedness and all other amounts due on or in connection with such
Indebtedness including all charges, fees and expenses, (ii) all other
Indebtedness of such Person for borrowed money, including principal, premium,
if any, and interest on such Indebtedness, unless the instrument under which
such Indebtedness for money borrowed is created, incurred, assumed or
guaranteed expressly provides that such Indebtedness for money borrowed is not
senior or superior in right of payment to the Senior Subordinated Notes, and
all renewals, extensions, modifications, amendments or refinancing thereof and
(iii) all interest on any Indebtedness referred to in clauses (i) and (ii)
accruing during the pendency of any bankruptcy or insolvency proceeding,
whether or not allowed thereunder. Notwithstanding the foregoing, Senior Debt
shall not include (a) Indebtedness which is pursuant to its terms or any
agreement relating thereto or by operation of law subordinated or junior in
right of payment or otherwise to any other Indebtedness of such Person;
provided, however, that no Indebtedness shall be deemed to be subordinate or
junior in right of payment or otherwise to any other Indebtedness of a Person
solely by reason of such other Indebtedness being secured and such Indebtedness
not being secured, (b) the Senior Subordinated Notes, (c) any Indebtedness of
such Person to any of their Subsidiaries, and (d) any Indebtedness which, when
incurred and without respect to any election under Section 1111(b) of the
Bankruptcy Code, is without recourse to the Company.
"SUBORDINATED INDEBTEDNESS" means any Indebtedness (whether outstanding on
the date hereof or hereafter incurred) which is by its terms expressly
subordinate or junior in right of payment to the Senior Subordinated Notes.
"SUBSIDIARY" of any Person means (i) a corporation more than 50% of the
outstanding Voting Stock of which is owned, directly or indirectly, by such
Person or by one or more other Subsidiaries of such Person or by such Person
and one or more other Subsidiaries thereof or (ii) any other Person (other than
a corporation) in which such Person, or one or more other Subsidiaries of such
Person or such Person and one or more other Subsidiaries thereof, directly or
indirectly, has at least a majority ownership and voting power relating to the
policies, management and affairs thereof.
"TANGIBLE ASSETS" means the total amount of assets of the Company and the
Restricted Subsidiaries after deducting therefrom all good will, trade names,
trademarks, patents, unamortized debt discount and expense and other like
intangible assets, all as set forth on the most recent balance sheet of the
Company and its Subsidiaries and computed in accordance with GAAP.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company formed or
acquired after the Issue Date that at the time of determination is designated
an Unrestricted Subsidiary by the Board of Directors in the manner provided
below and (ii) any Subsidiary of an Unrestricted Subsidiary. Any such
designation by the Board of Directors will be evidenced to the Trustee by
promptly filing with the Trustee a copy of the board resolution giving effect
to such designation and an officers' certificate certifying that such
designation complied with the foregoing provisions. The Indenture will provide
that, the Board of Directors of the Company may not designate any Subsidiary of
the Company to be an Unrestricted Subsidiary if, after such
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designation, (a) the Company or any other Restricted Subsidiary (i) provides
credit support for, or a guarantee of, any Indebtedness of such Subsidiary
(including any undertaking, agreement or instrument evidencing such
Indebtedness) or (ii) is directly or indirectly liable for any Indebtedness of
such Subsidiary, (b) a default with respect to any Indebtedness of such
Subsidiary (including any right which the holders thereof may have to take
enforcement action against such Subsidiary) would permit (upon notice, lapse
of time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default on such other Indebtedness or cause
the payment thereof to be accelerated or payable prior to its final scheduled
maturity or (c) such Subsidiary owns any Capital Stock of, or owns or holds
any Lien on any property of, any Restricted Subsidiary which is not a
Subsidiary of the Subsidiary to be so designated.
"VOTING STOCK" of any Person means the Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only so
long as no senior class of securities has such voting power by reason of any
contingency.
"WHOLLY OWNED SUBSIDIARY" of any Person means a Restricted Subsidiary of
such Person all of the outstanding Capital Stock or other ownership interests
of which (other than directors' qualifying shares) shall at the time be owned
by such Person or by one or more Wholly Owned Subsidiaries of such Person or
by such Person and one or more Wholly Owned Subsidiaries of such Person.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Notes were originally sold by the Company on January 30, 1997 to the
Initial Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold the Notes to qualified institutional buyers in reliance on
Rule 144A under the Securities Act and to a limited number of institutional
accredited investors that agreed to comply with certain transfer restrictions
and other conditions. As a condition to the Purchase Agreement, the Company
entered into the Registration Rights Agreement with the Initial Purchaser (the
"Registration Rights Agreement") pursuant to which the Company has agreed, for
the benefit of the holders of the Notes, at the Company's cost, to use its
best efforts to (i) file the Exchange Offer Registration Statement within 60
days after the date of the original issue of the Notes (February 4, 1997) with
the Commission with respect to the Exchange Offer for the Exchange Notes, and
(ii) cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act within 135 days after the date of original issuance
of the Notes. Upon the Exchange Offer Registration Statement being declared
effective, the Company will offer the Exchange Notes in exchange for surrender
of the Notes. The Company will keep the Exchange Offer open for not less than
30 calendar days (or longer if required by applicable law) after the date on
which notice of the Exchange Offer is mailed to the holders of the Notes. For
each Note surrendered to the Company pursuant to the Exchange Offer, the
holder of such Note will receive an Exchange Note having a principal amount
equal to that of the surrendered Note. Interest on each Exchange Note will
accrue from the date of its original issue.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the Exchange Notes would in
general be freely tradeable after the Exchange Offer without further
registration under the Securities Act. However, any purchaser of Notes who is
an "affiliate" of the Company or who intends to participate in the Exchange
Offer for the purpose of distributing the Exchange Notes (i) will not be able
to rely on the interpretation of the staff of the Commission, (ii) will not be
able to tender its Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Notes, unless such sale or
transfer is made pursuant to an exemption from such requirements. See "--
Resale of the Exchange Notes."
Each holder of the Notes (other than certain specified holders) who wishes
to exchange the Notes for Exchange Notes in the Exchange Offer will be
required to represent in the Letter of Transmittal that (i) it is not an
affiliate of the Company, (ii) the Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) at the time of
commencement of the Exchange Offer, it has no arrangement with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. In addition, in connection with any resales of Exchange
Notes, any Participating Broker-Dealer who acquired the Notes for its own
account as a result of market-making or other trading activities must deliver
a prospectus meeting the requirements of the Securities Act. The Commission
has taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes (other
than a resale of an unsold allotment from the original sale of the Notes) with
the prospectus contained in the Exchange Offer Registration Statement. Under
the Registration Rights Agreement, the Company is required to allow
Participating Broker-Dealers and other persons, if any, subject to similar
prospectus delivery requirements to use the prospectus contained in the
Exchange Offer Registration Statement in connection with the resale of such
Exchange Notes.
In the event that changes in the law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect such an
Exchange Offer, or if for any other reason the Exchange Offer is not
consummated within 210 days after the original issue date of the Notes, or if
any holder of the Notes (other than an "affiliate" of the Company or the
Initial Purchaser) is not eligible to participate in the Exchange Offer, or
upon the request of the Initial Purchaser under certain circumstances, the
Company will, at its cost, (a) as promptly as practicable, file the Shelf
Registration Statement covering resales of the Notes, (b) use its best efforts
to cause the Shelf Registration Statement to be declared effective under the
Securities Act and (c) use its best efforts to keep effective the Shelf
Registration Statement until the earlier of three years after its effective
date and such time as all of the applicable Notes have been sold thereunder.
The Company will, in the event of the
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filing of the Shelf Registration Statement, provide to each applicable holder
of the Notes copies of the prospectus which is a part of the Shelf
Registration Statement, notify each such holder when the Shelf Registration
Statement has become effective and take certain other actions as are required
to permit unrestricted resales of the Notes. A holder of Notes that sells such
Notes pursuant to the Shelf Registration Statement generally will be required
to be named as a selling securityholder in the related prospectus and to
deliver a prospectus to purchasers, will be subject to certain of the civil
liability provisions under the Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement which
are applicable to such a holder (including certain indemnification
obligations). In addition, each holder of the Notes will be required to
deliver information to be used in connection with the Shelf Registration
Statement and to provide comments on the Shelf Registration Statement within
the time periods set forth in the Registration Rights Agreement in order to
have their Notes included in the Shelf Registration Statement and to benefit
from the provisions set forth in the following paragraph.
If the Company fails to comply with the above provisions or if such
registration statement fails to become effective, then, as liquidated damages,
additional interest (the "Additional Interest") shall become payable with
respect to the Notes as follows:
(i) if the Exchange Offer Registration Statement or Shelf Registration
Statement is not filed within 60 days following the Issue Date, Additional
Interest shall be accrued on the Notes over and above the stated interest
at a rate of 0.25% per annum for the first 90 days immediately following
the 61st day after the Issue Date, such Additional Interest rate increasing
by an additional 0.25% per annum at the beginning of each subsequent 90-day
period;
(ii) if an Exchange Offer Registration Statement or Shelf Registration
Statement is not declared effective by the Commission within 135 days
following the date on which such registration statement is required to be
filed, then, commencing on the 136th after the Issue Date, Additional
Interest shall be accrued on the Notes over and above the stated interest
at a rate of 0.25% per annum for the first 90 days immediately following
the 136th day after the Issue Date, such Additional Interest rate
increasing by an additional 0.25% per annum at the beginning of each
subsequent 90-day period; or
(iii) if (A) the Company has not exchanged all Notes validly tendered in
accordance with the terms of the Exchange Offer on or prior to 165 days
after the Issue Date or (B) the Exchange Offer Registration Statement
ceases to be effective at any time prior to the time that the Exchange
Offer is consummated or (C) if applicable, the Shelf Registration Statement
has been declared effective and such Shelf Registration Statement ceases to
be effective at any time prior to the third anniversary of its effective
date(unless all the Notes have been sold thereunder), then Additional
Interest shall be accrued on the Notes over and above the stated interest
at a rate of 0.25% per annum for the first 90 days commencing on (x) the
166th day after the Issue Date with respect to the Notes validly tendered
and not exchanged by the Company, in the case of (A) above, or (y) the day
the Exchange Offer Registration Statement ceases to be effective or usable
for its intended purpose in the case of (B) above, or (z) the day such
Shelf Registration Statement ceases to be effective in the case of (C)
above, such Additional Interest rate increasing by an additional 0.25% per
annum at the beginning of each subsequent 90-day period;
provided however that the Additional Interest rate on the Notes may not exceed
in the aggregate 1.0% per annum; and provided further that (1) upon the filing
of the Exchange Offer Registration Statement or a Shelf Registration Statement
(in the case of clause (i) above), (2) upon the effectiveness of the Exchange
Offer Registration Statement or a Shelf Registration Statement (in the case of
clause (ii) above), or (3) upon the exchange of Exchange Notes for all Notes
tendered (in the case of clause (iii)(A) above), or upon the effectiveness of
the Exchange Offer Registration Statement which has ceased to remain effective
(in the case of clause (iii)(B) above), or upon the effectiveness of the Shelf
Registration Statement which had ceased to remain effective (in the case of
clause (iii)(C) above), Additional Interest on the Notes as a result of such
clause (or the relevant subclause thereof), as the case may be, shall cease to
accrue.
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Any amounts of Additional Interest due pursuant to clauses (i), (ii) or
(iii) above will be payable in cash, on the same original interest payment
dates as the Notes. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate by the principal amount of
the Notes, multiplied by a fraction, the numerator of which is the number of
days such Additional Interest rate was applicable during such period
(determined on the basis of a 360-day year comprised of twelve 30-day months
and, in the case of a partial month, the actual number of days elapsed), and,
the denominator of which is 360.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
by, all the provisions of the Registration Rights Agreement, a copy of which
is filed as an exhibit to the Exchange Offer Registration Statement of which
this Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Notes who
were eligible to participate in the Exchange Offer but who did not tender
their Notes will not have any further registration rights and such Notes will
continue to be subject to certain restrictions on transfer. Accordingly, the
liquidity of the market for such Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Notes accepted in the Exchange Offer. Holders may tender some or all of their
Notes pursuant to the Exchange Offer. However, Notes may be tendered only in
integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Notes except that (i) the Exchange Notes bear a Series B designation
and a different CUSIP Number from the Notes, (ii) the Exchange Notes have been
registered under the Securities Act and hence will not bear legends
restricting the transfer thereof and (iii) the holders of the Exchange Notes
will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Notes in certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
terminated. The Exchange Notes will evidence the same debt as the Notes and
will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $75,000,000 aggregate principal amount of
Notes were outstanding. The Company has fixed the close of business on
, 1997 as the record date for the Exchange Offer for purposes of
determining the persons to whom this Prospectus and the Letter of Transmittal
will be mailed initially.
Holders of Notes do not have any appraisal or dissenters' rights under the
General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Company shall be deemed to have accepted validly tendered Notes when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering holders for the
purpose of receiving the Exchange Notes from the Company.
If any tendered Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date.
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Holders who tender Notes in the Exchange Offer will not be required to pay
brokerage commissions or fees or, subject to the instructions in the Letter of
Transmittal, transfer taxes with respect to the exchange of Notes pursuant to
the Exchange Offer. The Company will pay all charges and expenses, other than
transfer taxes in certain circumstances, in connection with the Exchange
Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
, 1997, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended. Notwithstanding the
foregoing, the Company will not extend the Expiration Date beyond ,
1997.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, each prior to 9:00 a.m., New York
City time, on the next business day after the previously scheduled expiration
date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Notes, to extend the Exchange Offer or to terminate the Exchange
Offer if any of the conditions set forth below under "--Conditions" shall not
have been satisfied, by giving oral or written notice of such delay, extension
or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof to the registered holders.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest from their date of issuance. Holders
of Notes that are accepted for exchange will receive, in cash, accrued
interest thereon to, but not including, the date of issuance of the Exchange
Notes. Such interest will be paid with the first interest payment on the
Exchange Notes on August 1, 1997. Interest on the Notes accepted for exchange
will cease to accrue upon issuance of the Exchange Notes.
Interest on the Exchange Notes is payable semi-annually on each February 1,
and August 1, commencing on August 1, 1997.
PROCEDURES FOR TENDERING
For a holder of Notes to tender Notes validly pursuant to the Exchange
Offer, a properly completed and duly executed Letter of Transmittal (or
facsimile thereof), with any required signature guarantee, or (in the case of
a book-entry transfer), an Agent's Message in lieu of the Letter of
Transmittal, and any other required documents, must be received by the
Exchange Agent at the address set forth below under "Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date. In addition, prior to
5:00 p.m., New York City time, on the Expiration Date, either (a) certificates
for tendered Notes must be received by the Exchange Agent at such address or
(b) such Notes must be transferred pursuant to the procedures for book-entry
transfer described below (and a confirmation of such tender received by the
Exchange Agent, including an Agent's Message if the tendering holder has not
delivered a Letter of Transmittal).
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the confirmation of a book-entry
transfer, which states that DTC has received an express acknowledgment from
the participant in DTC tendering Notes which are the subject of such book-
entry confirmation, that such participant has received and agrees to be bound
by the terms of the Letter of Transmittal and that Pen-Tab may enforce such
agreement against such participant. In the case of an Agent's Message relating
to guaranteed delivery, the term means a message transmitted by DTC and
received by the Depositary, which states that DTC has received an express
acknowledgment from the participant in DTC tendering Notes that such
participant has received and agrees to be bound by the Notice of Guaranteed
Delivery.
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By tendering Notes pursuant to the procedures set forth above, each holder
will make to the Company the representations set forth above in the third
paragraph under the heading "--Purpose and Effect of the Exchange Offer."
The tender by a holder and the acceptance thereof by the Company will
constitute agreement between such holder and the Company in accordance with
the terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF NOTES AND THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE RISK OF
THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE
EXPIRATION DATE. NO LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH
HOLDERS.
Any beneficial owner whose Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See
"Instruction to Registered Holder and/or Book-Entry Transfer Facility
Participant from Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal
or (ii) for the account of an Eligible Institution. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantee must be by a member firm
of the Medallion System (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Notes listed therein, such Notes must be endorsed or accompanied
by a properly completed bond power, signed by such registered holder as such
registered holder's name appears on such Notes with the signature thereon
guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, offices of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Company of their authority to so act must be submitted with the Letter of
Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Notes at the book-entry transfer facility, The Depository Trust Company ("DTC"
or the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Notes by causing such Book-Entry Transfer
Facility to transfer such Notes into the Exchange Agent's account with respect
to the Notes in accordance with the Book-Entry Transfer Facility's procedures
for such transfer. Although delivery of the Notes may be effected through
book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee, or, in the case of a
book-entry transfer, an Agent's message in lieu of the Letter of Transmittal
and all other required documents must in each case be transmitted to and
received or confirmed by the Exchange Agent at its address set forth below on
or prior to the Expiration Date, or, if the guaranteed delivery procedures
described below are complied with, within the time period provided under such
procedures. Delivery of documents to the Book-Entry Transfer Facility does not
constitute delivery to the Exchange Agent.
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The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for the DTC Automated Tender Offer Program ("ATOP"). Accordingly, DTC
participants may electronically transmit their acceptance of the Exchange
Offer by causing DTC to transfer Notes to the Exchange Agent in accordance
with DTC's ATOP procedures for transfer. DTC will then send an Agent's Message
to the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Notes and withdrawal of tendered Notes will
be determined by the Company in its sole discretion, which determination will
be final and binding. The Company reserves the absolute right to reject any
and all Notes not properly tendered or any Notes the Company's acceptance of
which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the right in its sole discretion to waive any defects,
irregularities or conditions of tender as to particular Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including
the instructions in the Letter of Transmittal) will be final and binding on
all parties. Unless waived, any defects or irregularities in connection with
tenders of Notes must be cured within such time as the Company shall
determine. Although the Company intends, to notify holders of defects or
irregularities with respect to tenders of Notes, neither the Company, the
Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Tenders of Notes will not be deemed to have been made
until such defects or irregularities have been cured or waived. Any Notes
received by the Exchange Agent that are not properly tendered and as to which
the defects or irregularities have not been cured or waived will be returned
by the Exchange Agent to the tendering holders, unless otherwise provided in
the Letter of Transmittal, as soon as practicable following the Expiration
Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Notes and (i) whose Notes are not
immediately available, (ii) who cannot deliver their Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the
Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Notes and the principal amount of Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Notes (or a confirmation of book-entry transfer of such
Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and any other documents required by the Letter of Transmittal
will be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Notes in proper form for transfer (or a confirmation of book-entry transfer
of such Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility), and all other documents required by the Letter of Transmittal
are received by the Exchange Agent upon five New York Stock Exchange
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
To withdraw a tender of Notes in the Exchange Offer, a telegram, telex,
letter or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m.,
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New York City time, on the Expiration Date. Any such notice of withdrawal must
(i) specify the name of the person having deposited the Notes to be withdrawn
(the "Depositor"), (ii) identify the Notes to be withdrawn (including the
certificate number(s) and principal amount of such Notes, or, in the case of
Notes transferred by book-entry transfer, the name and number of the account
at the Book-Entry Transfer Facility to be credited), (iii) be signed by the
holder in the same manner as the original signature on the Letter of
Transmittal by which such Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
have the Trustee with respect to the Notes register the transfer of such Notes
into the name of the person withdrawing the tender and (iv) specify the name
in which any such Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Company, whose
determination shall be final and binding on all parties. Any Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto
unless the Notes so withdrawn are validly retendered. Any Notes which have
been tendered but which are not accepted for exchange will be returned to the
holder thereof without cost to such holder as soon as practicable after
withdrawal, rejection of tender or termination of the Exchange Offer. Properly
withdrawn Notes may be retendered by following one of the procedures described
above under "--Procedures for Tendering" at any time prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or exchange Exchange Notes for, any Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Notes, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's reasonable discretion, might materially impair the
ability of the Company to proceed with the Exchange Offer or any material
adverse development has occurred in any existing action or proceeding with
respect to the Company or any of its subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff of
the Commission is proposed, adopted or enacted, which, in the Company's
reasonable discretion, might materially impair the ability of the Company
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its reasonable discretion that any of the
conditions are not satisfied, the Company may (i) refuse to accept any Notes
and return all tendered Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders to withdraw such
Notes (see "--Withdrawal of Tenders") or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Notes which have not been withdrawn.
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notice of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
United States Trust Company of New York
114 West 47th Street
New York, New York 10036-1532
Delivery to an address other than as set forth above will not constitute a
valid delivery.
78
<PAGE>
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers, or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include fees and expenses of the
Exchange Agent and Trustee, accounting and legal fees and printing costs,
among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company. The expenses of the Exchange Offer will be expensed
over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Notes that are not exchanged for Exchange Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Notes may be resold
only (i) to the Company (upon redemption thereof or otherwise), (ii) so long
as the Notes are eligible for resale pursuant to Rule 144A, to a person inside
the United States whom the seller reasonably believes is a qualified
institutional buyer within the meaning of Rule 144A under the Securities Act
in a transaction meeting the requirements of Rule 144A, in accordance with
Rule 144 under the Securities Act, or pursuant to another exemption from the
registration requirements of the Securities Act (and based upon an opinion of
counsel reasonably acceptable to the Company), (iii) outside the United States
to a foreign person in a transaction meeting the requirements of Rule 904
under the Securities Act, or (iv) pursuant to an effective registration
statement under the Securities Act, in each case in accordance with any
applicable securities laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties
(for example, the letters of the commission to (i) Exxon Capital Holdings
Corporation, available May 13, 1988, (ii) Morgan Stanley & Co., Inc.,
available June 5, 1991 and (iii) Shearman & Sterling, available July 2, 1993),
the Company believes that a holder or other person who receives Exchange
Notes, whether or not such person is the holder (other than a person that is
an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) who receives Exchange Notes in exchange for Notes in the
ordinary course of business and who is not participating, does not intend to
participate, and has no arrangement or understanding with person to
participate, in the distribution of the Exchange Notes, will be allowed to
resell the Exchange Notes to the public without further registration under the
Securities Act and without delivering to the purchasers of the Exchange Notes
a prospectus that satisfies the requirements of Section 10 of the Securities
Act. However, if any holder acquires Exchange Notes in the Exchange Offer for
the purpose of distributing or participating in a distribution of the Exchange
Notes, such holder cannot rely on the position of the staff of the Commission
enunciated in such no-action letters or any similar interpretive letters, and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction, unless an exemption
from registration is otherwise available. Further, each Participating Broker-
Dealer that receives Exchange Notes for its own account in exchange for Notes,
where such Notes were acquired by such Participating Broker-Dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes.
79
<PAGE>
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent
to the Company in the Letter of Transmittal that (i) the Exchange Notes are to
be acquired by the holder or the person receiving such Exchange Notes, whether
or not such person is the holder, in the ordinary course of business, (ii) the
holder or any such other person (other than a broker-dealer referred to in the
next sentence) is not engaging and does not intend to engage, in the
distribution of the Exchange Notes, (iii) the holder or any such other person
has no arrangement or understanding with any person to participate in the
distribution of the Exchange Notes, (iv) neither the holder nor any such other
person is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, and (v) the holder or any such other person acknowledges
that if such holder or other person participates in the Exchange Offer for the
purpose of distributing the Exchange Notes it must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale of the Exchange Notes and cannot rely on those no-
action letters. As indicated above, each Participating Broker-Dealer that
receives an Exchange Note for its own account in exchange for Notes must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. For a description of the procedures for such resales by
Participating Broker-Dealers, see "Plan of Distribution."
80
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion (including the opinion of special counsel described
below) is based upon current provisions of the Internal Revenue Code of 1986,
as amended, applicable Treasury regulations, judicial authority and
administrative rulings and practice. There can be no assurance that the
Internal Revenue Service (the "Service") will not take a contrary view, and no
ruling from the Service has been or will be sought. Legislative, judicial or
administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to holders. Certain holders (including insurance companies, tax-
exempt organizations, financial institutions, broker-dealers, foreign
corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. The Company
recommends that each holder consult such holder's own tax advisor as to the
particular tax consequences of exchanging such holder's Notes for Exchange
Notes, including the applicability and effect of any state, local or foreign
tax laws.
Kirkland & Ellis, special counsel to the Company, has advised the Company
that in its opinion, the exchange of the Notes for Exchange Notes pursuant to
the Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the Exchange Notes will not be considered to differ
materially in kind or extent from the Notes. Rather, the Exchange Notes
received by a holder will be treated as a continuation of the Notes in the
hands of such holder. As a result, there will be no federal income tax
consequences to holders exchanging Notes for Exchange Notes pursuant to the
Exchange Offer.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a Participating Broker-Dealer in connection with resales of Exchange
Notes received in exchange for Notes where such Notes were acquired as a
result of market-making activities or other trading activities. The Company
has agreed that for a period of 180 days after the Expiration Date, it will
make this Prospectus, as amended or supplemented, available to any
Participating Broker-Dealer for use in connection with any such resale.
In addition, until , 1997, all dealers effecting transactions in the
Exchange Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sales of the Exchange
Notes by Participating Broker-Dealers. Exchange Notes received by
Participating Broker-Dealers for their own account pursuant to the Exchange
Offer may be sold from time to time in one or more transactions in the over-
the-counter market, in negotiated transactions, through the writing of options
on the Exchange Notes or a combination of such methods of resale, at market
prices prevailing at the time of resale, at prices related to such prevailing
market prices or negotiated prices. Any such resale may be made directly to
purchaser or to or through brokers or dealers who may receive compensation in
the form of commissions or concessions from any such Participating Broker-
Dealer and/or the purchasers of any such Exchange Notes. Any Participating
Broker-Dealer that resells the Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
For a period of 180 days after the Expiration Date the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any Participating Broker-Dealer that requests such
documents in the Letter of Transmittal.
81
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the issuance of Exchange Notes
offered hereby will be passed upon for the Company by Kirkland & Ellis, New
York, New York.
EXPERTS
The financial statements of Pen-Tab Holdings, Inc. at December 28, 1996 and
December 30, 1995, and for each of the three years in the period ended
December 28, 1996, appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
82
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PEN-TAB HOLDINGS, INC.
(FORMERLY PEN-TAB INDUSTRIES, INC.)
<TABLE>
<CAPTION>
AUDITED FINANCIAL STATEMENTS PAGE
- ---------------------------- ----
<S> <C>
Report of Independent Auditors............................................ F-2
Balance Sheets as of December 30, 1995 and December 28, 1996.............. F-3
Statements of Income and Retained Earnings for fiscal years ended 1994,
1995 and 1996............................................................ F-5
Statements of Cash Flows for fiscal years ended 1994, 1995 and 1996....... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Pen-Tab Holdings, Inc. (formerly Pen-Tab Industries, Inc.)
We have audited the accompanying balance sheets of Pen-Tab Holdings, Inc.
(formerly Pen-Tab Industries Inc.) as of December 30, 1995 and December 28,
1996, and the related statements of income and retained earnings, and cash
flows for each of the three years in the period ended December 28, 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements 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 financial statements referred to above present fairly,
in all material respects, the financial position of Pen-Tab Holdings, Inc. at
December 30, 1995 and December 28, 1996, and the results of its operations and
its cash flows for each of the three years in the period ended December 28,
1996, in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
March 4, 1997
Vienna, Virginia
F-2
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA-
DECEMBER 30, DECEMBER 28, DECEMBER 28,
1995 1996 1996
------------ ------------ ---------------------
(COMBINED) PRO FORMA AS ADJUSTED
--------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents..... $ 836 $ 111 $ 111 $16,642
Accounts receivable (less
allowances for discounts,
credits and doubtful accounts
of $602 in 1995 and $1,375 in
1996) 9,169 10,697 10,697 10,697
Inventories................... 14,660 14,738 14,738 14,738
Prepaid expenses and other
current assets............... 297 577 577 577
------- ------- ------- -------
Total current assets........... 24,962 26,123 26,123 42,654
Property, plant and equipment,
at cost:
Machinery and equipment....... 20,799 20,296 20,296 20,296
Furniture and fixtures........ 912 1,069 1,069 1,069
Leasehold improvements........ 133 150 150 150
Land and building............. 6,832 6,893 6,893 6,893
------- ------- ------- -------
28,676 28,408 28,408 28,408
Less: accumulated depreciation
and amortization.............. 10,450 11,641 11,641 11,641
------- ------- ------- -------
18,226 16,767 16,767 16,767
Other assets................... 617 614 614 3,614
------- ------- ------- -------
Total assets................... $43,805 $43,504 $43,504 $63,035
======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
BALANCE SHEETS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA-
DECEMBER 30, DECEMBER 28, DECEMBER 28,
1995 1996 1996
------------ ------------ ---------------------
(COMBINED) PRO FORMA AS ADJUSTED
--------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable.............. $ 1,748 $ 2,774 $ 2,774 $ 2,774
Accrued expenses and other
current liabilities.......... 3,013 1,468 1,468 1,468
Deferred income taxes......... -- -- 474 474
Current portion of long-term 193 16,037 16,037 255
debt......................... ------- ------- ------- -------
Total current liabilities...... 4,954 20,279 20,753 4,971
------- ------- ------- -------
Long-term debt................. 27,807 8,173 8,173 8,173
Senior subordinated notes...... -- -- -- 75,000
Deferred income taxes.......... -- -- 1,869 1,869
Stockholders' equity:
Pen-Tab Holdings, Inc.
Common Stock:
Class A $.01 par value,
1,000 shares authorized;
1,000 shares issued at
December 30, 1995 and 800
shares issued at December
28, 1996................... -- -- -- --
Class B (non-voting) $.01
par value, 1,000 shares
authorized; 1,000 shares
issued at December 30, 1995
and 480 shares issued at
December 28, 1996.......... -- -- -- --
Treasury stock--at cost:
200 shares Class A and 520
shares Class B at
December 30, 1995......... (655) -- -- --
Additional capital............ 250 -- -- --
Retained earnings............. 6,642 15,052 12,709 --
------- ------- ------- -------
Total stockholders' equity--
Pen-Tab Holdings.............. 6,237 15,052 12,709 --
Pen-Tab Industries of Califor-
nia, Inc.
Common Stock at December 30,
1995:
Class A $.01 par value,
1,000 shares authorized and
issued..................... -- -- -- --
Class B (non-voting) $.01
par value, 1,000 shares
authorized and issued...... -- -- -- --
Treasury stock--at cost:
200 shares Class A and 520
shares Class B at
December 30, 1995......... (10) -- -- --
Additional capital........... 120 -- -- --
Retained earnings............ 4,697 -- -- --
------- ------- ------- -------
Total stockholders' equity--
Pen-Tab Industries of 4,807 -- -- --
California, Inc. ............. ------- ------- ------- -------
Pen-Tab Industries, Inc.--Pro
Forma
Contributed capital......... -- -- -- 12,709
Deficit..................... -- -- -- (39,687)
------- ------- ------- -------
Stockholder's deficit--Pen-Tab
Industries, Inc.--Pro Forma.. -- -- -- (26,978)
Total stockholders' equity 11,044 15,052 12,709 (26,978)
(deficit).................... ------- ------- ------- -------
Total liabilities and stock- $43,805 $43,504 $43,504 $63,035
holders' equity............... ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
STATEMENTS OF INCOME AND RETAINED EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
--------------------------
1994 1995 1996
------- ------- --------
(COMBINED)
<S> <C> <C> <C>
Net sales........................................... $90,472 $96,808 $106,365
Cost of goods sold.................................. 70,581 74,305 74,781
------- ------- --------
Gross profit........................................ 19,891 22,503 31,584
Expenses:
Selling, general and administrative................ 13,346 13,204 16,024
Relocation expenses................................ -- 1,906 --
Other:
Interest expense--net............................. 2,410 2,883 2,346
Other income--net................................. (3) (55) (4)
------- ------- --------
Total expenses...................................... 15,753 17,938 18,366
------- ------- --------
Income before income taxes.......................... 4,138 4,565 13,218
Income tax (provision) benefit...................... (825) 343 191
------- ------- --------
Net income.......................................... 3,313 4,908 13,409
------- ------- --------
Retained earnings, beginning of year................ 6,712 9,065 11,339
Dividends........................................... (960) (2,634) (9,401)
Adjustment for cancellation of treasury stock....... -- -- (295)
------- ------- --------
Retained earnings, end of year...................... $ 9,065 $11,339 $ 15,052
======= ======= ========
Unaudited Pro Forma Data:
Historical income before income taxes.............. $ 4,138 $ 4,565 $ 13,218
Pro forma tax provision............................. (1,783) (1,948) (4,956)
------- ------- --------
Pro forma net income................................ $ 2,355 $ 2,617 $ 8,262
======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------
1994 1995 1996
------- ------- -------
(COMBINED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income......................................... $ 3,313 $ 4,908 $13,409
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization..................... 2,317 2,760 2,352
Deferred income taxes............................. 169 (745) (351)
Provision for losses on accounts receivable....... 150 89 31
Changes in operating assets and liabilities:
Accounts receivable.............................. (1,292) 3,333 (1,559)
Inventories...................................... 555 1,207 (78)
Prepaid expenses and other current assets........ 320 (46) (280)
Accounts payable................................. 53 (1,162) 1,026
Accrued expenses and other liabilities........... -- 823 (1,194)
Other............................................ (9) (241) --
------- ------- -------
Net cash provided by operating activities.......... 5,576 10,926 13,356
------- ------- -------
INVESTING ACTIVITIES
Purchase of property, plant and equipment.......... (1,371) (8,556) (890)
Proceeds from sale of equipment.................... 40 35 --
------- ------- -------
Net cash used in investing activities.............. (1,331) (8,521) (890)
------- ------- -------
FINANCING ACTIVITIES
Proceeds from long-term borrowings................. 12,223 17,192 20,586
Repayments of long-term borrowings................. (15,760) (24,349) (24,376)
Proceeds from issuance of industrial development
revenue bonds..................................... -- 7,500 --
Dividends.......................................... (960) (2,634) (9,401)
Other.............................................. 334 -- --
------- ------- -------
Net cash used in financing activities.............. (4,163) (2,291) (13,191)
------- ------- -------
Increase (decrease) in cash and cash equivalents... 82 114 (725)
Cash and cash equivalents at beginning of year..... 640 722 836
------- ------- -------
Cash and cash equivalents at end of year........... $ 722 $ 836 $ 111
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest.......................................... $ 2,405 $ 2,776 $ 2,436
======= ======= =======
Income taxes...................................... $ 449 $ 284 $ 123
======= ======= =======
Non-cash transactions:
Purchase of machinery in exchange for promissory
note............................................. $ -- $ 766 $ --
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
Pen-Tab Holdings, Inc. (formerly, Pen-Tab Industries Inc.) ("Holdings" or
the "Company") is a leading manufacturer of paper products for use in the
office, school and home. Its products include legal pads, wirebound notebooks,
envelopes, school supplies, and arts and crafts products. The Company is a
primary supplier of many national discount store chains, office supply super
stores, and wholesale clubs throughout the United States and Canada. The
Company, through its Vinylweld division, is a leading designer and
manufacturer of vinyl packaging products. Sales are made on open account and
the Company generally does not require collateral. Following completion of the
recapitalization described in Note 13, Holdings conducts all operations
through a wholly-owned subsidiary.
The financial statements of Pen-Tab Holdings, Inc. for fiscal 1994 and 1995
represent the combined historical financial statements of Pen-Tab Industries,
Inc., a New York corporation, and its affiliated company Pen-Tab Industries of
California, Inc., a Delaware corporation, which were controlled under common
ownership. Intercompany accounts and transactions have been eliminated in
combination. Effective July 1, 1996, the two companies were merged into a new
Virginia corporation with no change in ownership, and accordingly, the
historical book values of the companies assets and liabilities were carried
forward to the new company. In connection with the merger, the Company
recorded a charge to retained earnings of $295 relating to the cancellation of
treasury stock previously held by the two companies, and eliminated the
treasury stock and related additional capital balances.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Method of Accounting
The accompanying financial statements are prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. The
1994, 1995 and 1996 fiscal years refer to the fifty-two week periods ended
December 31, 1994, December 30, 1995 and December 28, 1996, respectively.
Revenue Recognition
Sales are recognized upon product shipment (FOB shipping point).
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash equivalents.
The Company had unexpended proceeds from the Industrial Development Revenue
Bonds of approximately $376 at December 30, 1995. These amounts were
contractually restricted for payment of project costs and were included in
cash and cash equivalents at such date.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the last-in first-out (LIFO) method, except as noted below.
Prior to January 1, 1994, Pen-Tab Industries, Inc., a New York corporation
and Pen-Tab Industries of California, Inc., a Delaware corporation, determined
inventory cost using the first-in, first-out (FIFO) method
F-7
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
and last-in, first-out (LIFO) methods, respectively. Effective January 1,
1994, Pen-Tab Industries, Inc. changed its method of valuing inventory to
last-in, first-out (LIFO) method. The cumulative effect of this accounting
change and the pro forma effect on the December 31, 1993 combined retained
earnings have not been separately shown because such effect cannot be
reasonably determined. Management believes the LIFO method of inventory
accounting more closely matches current costs with current revenues.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed
on the straight line method over the estimated useful lives of the related
assets. Leasehold improvements are amortized by the straight-line method over
the shorter of the estimated useful lives of the improvements or the lease
term.
Advertising Costs
The Company expenses the costs of advertising as incurred. Such costs
amounted to approximately $273, $512 and $2,430, respectively, for fiscal
1994, 1995, and 1996.
Income Taxes
Provisions for income taxes are based upon earnings reported for financial
statement purposes and may differ from amounts currently payable or receivable
because certain amounts may be recognized for financial reporting purposes in
different periods than they are for income tax purposes. Deferred income taxes
result from temporary differences between the financial statement amounts of
assets and liabilities and their respective tax bases. Also see Note 6.
Fair Value of Financial Instruments
The Company considers the recorded value of its monetary assets and
liabilities, which consist primarily of cash, cash equivalents, accounts
receivable, accounts payable and long-term bank debt, to approximate the fair
value of the respective assets and liabilities at December 30, 1995 and
December 28, 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3.UNAUDITED PRO FORMA DATA
Pro Forma
As described further in Note 6, the Company was taxed as an "S" corporation
during fiscal 1996. Upon completion of the recapitalization described in Note
13, Pen-Tab Holdings will terminate its "S" corporation status. The pro forma
December 28, 1996 balance sheet and related statement of income and retained
earnings for fiscal 1996 reflect adjustments to deferred tax liabilities and
the Company's income tax provision, respectively, had Holdings been taxed as a
"C" corporation for the respective period.
The Company's pro forma current deferred tax liability consists primarily of
the tax effect of the difference in the LIFO reserve for financial reporting
purposes versus its value for tax purposes. The Company's pro forma long-term
deferred tax liability consists primarily of the tax effect of the accumulated
difference between the financial reporting basis and tax basis of property,
plant and equipment. The actual deferred tax liabilities which will be
recorded upon termination of the Companys "S" corporation election will be
adjusted to reflect the effect
F-8
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of operations of the Company for the period from December 28, 1996 through the
date immediately preceding the termination of the "S" corporation status.
Adjusted Pro Forma Financial Data
Adjusted Pro forma financial data is provided for Pen-Tab Industries, Inc.
giving effect to the issuance of $75,000 aggregate principal amount of Notes,
transfer via dividend of $34,187 from Pen-Tab Industries, Inc. to Holdings,
the payment of estimated debt issuance costs of $3,000, the repayment of
amounts borrowed under the Existing Credit Facility as of December 28, 1996
and the payment of $5,500 dividend distribution to shareholders as of February
3, 1997.
The repurchase of Class A and Class B common stock described in Note 13 has
not been given effect to the adjusted pro forma financial data, as such
transaction does not affect the financial statement of Pen-Tab Industries,
Inc.
4.INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Raw materials.................................. $ 6,454 $ 7,445
Work-in-process................................ 272 192
Finished goods................................. 7,934 7,101
-------- -------
$ 14,660 $14,738
======== =======
</TABLE>
It is estimated that inventories would have been $963 higher than reported
on December 28, 1996, and $4,583 higher than reported on December 30, 1995, if
the quantities valued on LIFO basis were instead valued on the first-in-first-
out (FIFO) basis. For purposes of comparability, had LIFO inventories been
reported at values approximating current cost as would have resulted from
using the FIFO method and if no other assumptions were made as to changes in
income, income before taxes would have been approximately $3,430 higher and
$3,620 lower in fiscal 1995 and 1996, respectively.
During fiscal years 1994 and 1995, inventory quantities were reduced causing
a liquidation of LIFO inventory layers which were carried at the lower costs
that prevailed in prior years. The effect of the liquidation in such years was
to decrease cost of goods sold in such years by approximately $877 and $1,032,
respectively.
5.LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 30, DECEMBER 28,
1995 1996
------------ ------------
<S> <C> <C>
Collateralized loans payable to a bank
(Existing Credit Facility).................... $19,369 $15,782
Industrial development revenue bonds........... 7,500 7,500
Promissory note payable........................ 673 568
Other.......................................... 458 360
------- -------
28,000 24,210
Less: current portion.......................... 193 16,037
------- -------
$27,807 $ 8,173
======= =======
</TABLE>
F-9
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company has collateralized loans payable to a bank under a Loan and
Security Agreement (the "Existing Credit Facility") expiring on March 21,
1997, which provides for loans based on specified percentages of accounts
receivable, inventory, and property, plant and equipment up to an aggregate
maximum of $57,000. The interest rate for borrowing is at LIBOR plus a sliding
scale spread. Except as noted below, all assets of the Company are pledged as
collateral for balances owing under the Existing Credit Facility.
On February 4, 1997 the Company repaid the outstanding obligation on the
Loan and Security Agreement and entered into a new Credit Agreement with the
Bank of America Illinois (The Credit Agreement). The Credit Agreement, which
expires on February 4, 1998, provides for advances based upon a borrowing base
comprised of specified percentages of eligible accounts receivable, inventory,
and net fixed assets, up to an aggregate maximum of $35,000. The interest rate
for borrowing is at bank prime rate plus a sliding scale spread or, at Pen-
Tab's option, at LIBOR plus a sliding scale spread. The Credit Agreement
contains customary representations and warranties and events of default and
requires compliance with certain covenants by the Company, including, among
other things: (i) maintenance of certain financial ratios and compliance with
certain financial tests and limitations, (ii) limitations on the payment of
capital expenditures, dividends, incurrence of additional indebtedness and
granting of certain liens and (iii) restrictions on mergers, acquisitions,
asset sales and investments. The Company is also required to reduce the
principle balance of any loans outstanding to zero for a period of sixty days
beginning September 30 of each fiscal year.
The industrial development revenue bonds represent 20 year tax-exempt bonds
issued through the Town of Front Royal and the County of Warren, Virginia on
April 1, 1995. Interest is paid monthly, and is calculated using a floating
rate determined every 7 days with reference to a tax-exempt bond index (3.1%
as of December 28, 1996 plus a bank of letter of credit fee of 1.5%). The
industrial development revenue bonds are subject to a mandatory sinking fund
redemption commencing April 1, 1998, under which Pen-Tab is required to make
17 annual installments of $400, with a final installment of $700 due in 2015.
Repayment is collateralized by a bank standby letter of credit and a first
security interest in Pen-Tabs land and buildings in Front Royal, Virginia. The
bonds may be redeemed at the option of Pen-Tab, in whole or in part, on any
interest payment date.
During fiscal 1995, Pen-Tab purchased certain production machinery in
exchange for a promissory note in the amount of $767. The promissory note is
repayable in 10 semi-annual installments and bears interest at 8% per year. At
December 28, 1996 a balance of $568 was outstanding of which $147 in principle
is due 1997. Repayment of the note is collateralized by a first security
interest in the machinery purchased.
6.INCOME TAX PROVISION (BENEFIT)
Pen-Tab Industries, Inc., a New York corporation, was taxed as a "C"
corporation under the Internal Revenue Code during fiscal 1994, and
accordingly was subject to federal and New York state income taxes. For fiscal
1995 and 1996, the stockholders of Pen-Tab Industries, Inc. elected to be
treated as an "S" corporation for federal income tax purposes under which
income, losses, deductions and credits were allocated to and reported by the
company's stockholders based on their respective ownership interests.
Accordingly, no provision for income taxes was required for such years, except
for New York state income taxes in 1995.
The stockholders of Pen-Tab Industries of California, Inc. elected to be
taxed as an "S" Corporation for all years presented. Accordingly, no tax
provision for federal or state income taxes was required for Pen-Tab
Industries of California, Inc. during such years, except for a 1 1/2%
California state tax imposed on "S" corporations.
F-10
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Significant components of the provision for income taxes for fiscal 1994,
1995 and 1996 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---- ----- -----
<S> <C> <C> <C>
Current.................................................. $656 $ 402 $ 160
Deferred*................................................ 169 (745) (351)
---- ----- -----
Income tax provision (benefit)........................... $825 $(343) $(191)
==== ===== =====
</TABLE>
--------
* During fiscal 1995, the Company recognized a federal income tax benefit
related to the change from "C" corporation status to "S" corporation
status under which a deferred tax credit of approximately $745 was
recognized into income. The net tax benefit represents the difference
between the deferred tax credit recognized and state income taxes
payable for the year.
7.DEFINED CONTRIBUTION PLAN
The Company sponsors a 401(k) plan in which nonunion full-time employees
meeting certain age and employment requirements are eligible for
participation. Participating employees can contribute between 2% and 15% of
their annual compensation. During fiscal 1995 and 1994, the Company matched
employee contributions at a rate of 20% of the employees' annual contributions
up to 1% of the employees annual compensation. During fiscal 1996, the Company
matched employee contributions at a rate of 50% of the employee's annual
contributions up to 2 1/2% of the employee's annual compensation. Total
expense under the plan amounted to $48, $32 and $42 in fiscal 1994, 1995 and
1996, respectively.
The Company also contributes to a union sponsored multi-employer defined
contribution pension plan. All union employees meeting certain employment
requirements are covered. Total expense under the union sponsored plan
amounted to $87, $94, and $21 in fiscal 1994, 1995 and 1996, respectively.
8.LEASES AND COMMITMENTS
The Company rents certain office, manufacturing and warehouse facilities in
California and Chicago under leases which expire in May 2002 and December
2009, respectively. The Company also leases certain machinery and equipment
under agreements which expire in the year 2000.
Future minimum lease payments under noncancellable operating leases are as
follows, as of December 28, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER
--------------------------
<S> <C>
1997............................................................. $ 998
1998............................................................. 998
1999............................................................. 998
2000............................................................. 1,039
2001............................................................. 983
Thereafter....................................................... 2,622
------
Total............................................................ $7,638
======
</TABLE>
Rent expense was approximately $1,445, $1,469 and $1,148 in fiscal 1994,
1995 and 1996, respectively, and included payments of $383 in fiscal 1994 and
1995 to a related party (company controlled by shareholders) for the Company's
New York premises.
The Company is required to obtain a consent from a third party for the
assignment of one of its contracts to its wholly owned subsidiary Pen-Tab
Industries, Inc. The Company is in the process of obtaining such consent, and
believes that there will be no material effect on the Company's operations or
financial position relating to this requirement.
F-11
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 30, 1995 and December 28, 1996, the Company had standby letters
of credit outstanding in the amounts of $277 and $457 issued by a bank on
behalf of Pen-Tab in connection with a worker's compensation insurance
program. See also Note 5.
The Company has entered into employment agreements with two executives which
contain provisions with respect to annual compensation, bonuses, termination
and severance arrangements.
9.RELATED PARTY TRANSACTIONS
General and administrative expenses during fiscal 1994 and 1995 include $100
paid to a related party (company controlled by shareholders) for management
and other services. See also Note 8.
The shareholders of Holdings have entered into a Shareholders Agreement
which contains certain provisions with respect to the equity interests and
corporate governance of Holdings and Pen-Tab Industries, Inc. following the
recapitalization. Pursuant to this agreement, the disposition of Common Stock
and Preferred Stock is restricted. The agreement also contains certain
participation rights, approval rights and rights of first offer exercisable by
shareholders in the event of certain sales or proposed sales of equity
interests by any shareholder.
10.RELOCATION EXPENSES
During fiscal 1995, the Company relocated its headquarters and its east
coast manufacturing facilities from Glendale, New York to Front Royal,
Virginia. The non-recurring charges associated therewith are reported as
relocation expenses in the statements of income and retained earnings.
11.MAJOR CUSTOMERS--PAPER PRODUCTS SEGMENT
During fiscal 1994, there were three customers each in excess of 10%
revenues for the year. Such customers collectively accounted for 51.0% of the
Company's sales.
During fiscal 1995, there were three customers each in excess of 10% of
revenues for the year. Such customers collectively accounted for 50.8% of the
Company's sales.
During fiscal 1996, there were two customers each in excess of 10% of
revenues for the year. Such customers collectively accounted for 37.4% of the
Company's sales.
F-12
<PAGE>
PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12.SEGMENT INFORMATION
As described in Note 1, the Company operates in two business segments
consisting of paper products, and vinyl packaging products. The following
table provides certain financial data regarding these two segments.
<TABLE>
<CAPTION>
VINYL
PAPER PACKAGING
PRODUCTS PRODUCTS TOTAL
-------- --------- --------
<S> <C> <C> <C>
1996
Net sales.......................................... $95,898 $10,467 $106,365
Operating earnings................................. 13,981 1,579 15,560
Identifiable assets................................ 40,981 2,523 43,504
Depreciation and amortization...................... 2,134 218 2,352
Capital expenditures............................... 794 96 890
------- ------- --------
1995
Net sales.......................................... $84,280 $12,528 $ 96,808
Operating earnings................................. 6,322 1,071 7,393
Identifiable assets................................ 40,782 3,023 43,805
Depreciation and amortization...................... 2,650 110 2,760
Capital expenditures............................... 9,230 92 9,322
------- ------- --------
1994
Net sales.......................................... $78,556 $11,916 $ 90,472
Operating earnings................................. 5,558 987 6,545
Identifiable assets................................ 38,291 3,420 41,711
Depreciation and amortization...................... 2,155 162 2,317
Capital expenditures............................... 1,344 27 1,371
------- ------- --------
</TABLE>
For the purposes of the segment information provided above, operating
earnings are defined as net sales less related cost of goods sold, selling,
general and administration expenses and relocation expenses.
13.SUBSEQUENT EVENTS
On February 4, 1997, the Company issued $75 million 10 7/8% Senior
Subordinated Notes due 2007 and effected a recapitalization pursuant to which
the Company repurchased approximately 748 shares of Class A common stock and
122 shares of Class B common stock from management shareholders for
approximately $48,197, converted an additional 20 shares of Class A common
stock and 358 shares of Class B common stock into redeemable preferred stock,
and sold 37 shares of Class A common stock, 3 shares of Class B common stock
and 125,875 shares of redeemable preferred stock to outside investors for
proceeds of approximately $15,010. In connection therewith, the Company and
its shareholders entered in a Registration Agreement pursuant to which the
Company may be required, at its own cost and subject to certain limitations,
to register its common stock under the Securities Act.
The Company's shareholders concurrently approved an amendment to the
Company's articles of incorporation to increase the number of authorized
shares to 8,352,500, consisting of 6,000,000 shares of Class A Common Stock,
par value $.01 per share, 2,000,000 shares of Class B Common Stock, par value
$.01 per share, and 352,500 shares of redeemable preferred stock. Following
completion of the above transactions, the Company's shareholders approved a
stock split pursuant to which each share of Pen-Tab Holdings, Inc. Class A
Common Stock and Class B Common Stock then outstanding was converted into
60,937.50 shares of such common stock. Share amounts disclosed in these
financial statements have not been adjusted to give effect to the stock split,
which occurred after completion of the above transactions.
The Company also established a stock option plan pursuant to which key
employees may be granted non-qualified stock options to purchase up to 527,777
shares of Class A Common Stock. Effective February 4, 1997, the Company
granted options to purchase 197,916.375 shares of Class A Common Stock
pursuant to such stock option plan.
F-13
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pen-Tab is incorporated under the laws of the State of Delaware. Section 145
of the General Corporation Law of the State of Delaware, inter alia, ("Section
145") provides that a Delaware corporation may indemnify any persons who were,
are or are threatened to be made, parties to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of such
corporation), by reason of the fact that such person is or was an officer,
director, employee or agent of such corporation, or is or was serving at the
request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such person acted in good faith and in a
manner he reasonably believed to be in or not opposed to the corporation's
best interests and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that his conduct was illegal. A Delaware
corporation may indemnify any persons who are, were or are threatened to be
made, a party to any threatened, pending or completed action or suit by or in
the right of the corporation by reason of the fact that such person was a
director, officer, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer, employee or agent
of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or agent is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses which such officer or director has actually
and reasonably incurred.
The Company's Certificate of Incorporation provides for the indemnification
of directors and officers of the Company to the fullest extent permitted by
the General Corporation Law of the State of Delaware, as it currently exists
or may hereafter be amended.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The Company maintains and has in effect insurance policies covering all of
the Company's directors and officers against certain liabilities for actions
taken in such capacities, including liabilities under the Securities Act of
1933.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<C> <S>
(A)EXHIBITS.
2.1 Recapitalization Agreement dated as of January 9, 1997 by and among
Citicorp Venture Capital, Ltd., Pen-Tab Industries, Inc., Alan Hodes
and Michael Greenberg.**
3.1 Certificate of Incorporation of Pen-Tab Industries, Inc.**
3.2 By-laws of Pen-Tab Industries, Inc.**
4.1 Indenture dated as of February 1, 1997 between Pen-Tab Industries,
Inc. and United States Trust Company of New York.**
4.2 Purchase Agreement dated as of January 30, 1997 among Pen-Tab
Industries, Inc., J.P. Morgan Securities Inc. and Bear, Stearns & Co.
Inc.**
4.3 Registration Rights Agreement dated as of February 1, 1997 among Pen-
Tab Industries, Inc., J.P. Morgan Securities Inc. and Bear, Stearns
& Co. Inc.**
4.4 First Supplemental Indenture, dated as of May 7, 1997, between Pen-
Tab Industries, Inc. and United States Trust Company of New York.*
5.1 Opinion and consent of Kirkland & Ellis.*
8.1 Opinion of Kirkland & Ellis as to federal income tax consequences.*
10.1 Second Amended and Restated Loan and Security Agreement dated as of
February 4, 1997 among Pen-Tab Industries, Inc., Pen-Tab Holdings,
Inc. (formerly known as Pen-Tab Industries, Inc.) and Bank of America
Illinois.**
10.2 Form of Notice of Borrowing.**
10.3 Form of Amended and Restated Revolving Note.**
10.4 Amended and Restated Trademark Agreement dated as of February 4, 1997
among Pen-Tab Industries, Inc., Pen-Tab Holdings, Inc. and Bank of
America Illinois.**
10.5 Pledge Agreement dated as of February 4, 1997 made by Pen-Tab
Holdings, Inc. in favor of Bank of America Illinois.**
10.6 Indenture of Trust dated as of April 1, 1996 among The Fairfax County
Economic Development Authority and The First National Bank of
Maryland.**
10.7 Loan Agreement dated April 1, 1996 between the Fairfax County
Economic Development Authority and Forman Development Associates
Limited Partnership.**
10.8 Shareholders Agreement dated as of February 4, 1997 by and among Pen-
Tab Holdings, Inc., Citicorp Venture Capital, Ltd., Alan Hodes,
Michael Greenberg and each other executive of Pen-Tab Holdings, Inc.
or its subsidiaries who acquires Class A Common Stock from the
Company.**
10.9 Registration Rights Agreement dated as of February 4, 1997 by and
among Pen-Tab Industries, Inc., Citicorp Venture Capital, Ltd., Alan
Hodes, Michael Greenberg.**
10.10 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Alan Hodes.**
10.11 Pen-Tab Holdings, Inc. 1997 Stock Option Plan and Form of Agreement
Evidencing a Grant of a Nonqualified Stock Option under 1997 Stock
Option Plan.**
10.12 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Michael Greenberg.*
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges.**
21.1 Subsidiaries of Pen-Tab Industries, Inc.**
23.1 Consent of Ernst & Young LLP, independent auditors.*
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1 Powers of Attorney (included in signature page).**
25.1 Statement of Eligibility of Trustee on Form T-1.**
27.1 Financial Data Schedule.**
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- --------
* Filed herewith.
** Previously filed.
II-2
<PAGE>
(B) FINANCIAL
STATEMENT
SCHEDULES.
Not Applicable.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering; and
(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(5) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the provisions described
under Item 20 or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Front Royal, State of Virginia, on May 8, 1997.
PEN-TAB INDUSTRIES, INC.
By:
*
------------------------------------
Alan Hodes
Chief Executive Officer and
President
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints William Leary, his true and lawful attorney-in-
fact and agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities (including his
capacity as a director and/or officer of Pen-Tab Industries, Inc.), to sign
any or all amendments (including post-effective amendments) to this
registration statement and any subsequent registration statement filed
pursuant to Rule 462(b) under the Securities Act of 1933, and to file the
same, with all exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-
fact and agent full power and authority to do and perform each and every act
and thing requisite and necessary to be done in and about the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement and power of attorney have been signed by
the following persons on May 8, 1997 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C>
*
_________________ Chief Executive Officer,
Alan Hodes President and Director
(principal executive officer)
/s/ William Leary
_________________ Vice President, Chief Financial and
William Leary Administrative Officer
(principal financial officer
and accounting officer)
*
_________________ Corporate Controller
Richard Rocco
*
_________________ Director
Deborah Hodes
*
_________________ Director
Thomas McWilliams
*
_________________ Director
David Howe
*
_________________ Director
James Stevens
/s/ William Leary
*By: ___________________________
William Leary
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. DESCRIPTION NO.
------- ----------- ----
<C> <S> <C>
2.1 Recapitalization Agreement dated as of January 9, 1997 by and
among Citicorp Venture Capital, Ltd., Pen-Tab Industries, Inc.,
Alan Hodes and Michael Greenberg.**
3.1 Certificate of Incorporation of Pen-Tab Industries, Inc.**
3.2 By-laws of Pen-Tab Industries, Inc.**
4.1 Indenture dated as of February 1, 1997 between Pen-Tab
Industries, Inc. and United States Trust Company of New York.**
4.2 Purchase Agreement dated as of January 30, 1997 among Pen-Tab
Industries, Inc., J.P. Morgan Securities Inc. and Bear, Stearns
& Co. Inc.**
4.3 Registration Rights Agreement dated as of February 1, 1997
among Pen-Tab Industries, Inc., J.P. Morgan Securities Inc. and
Bear, Stearns & Co. Inc.**
4.4 First Supplemental Indenture, dated as of May 7, 1997, between
Pen-Tab Industries, Inc. and United States Trust Company of New
York.*
5.1 Opinion and consent of Kirkland & Ellis.*
8.1 Opinion of Kirkland & Ellis as to federal income tax
consequences.*
10.1 Second Amended and Restated Loan and Security Agreement dated
as of February 4, 1997 among Pen-Tab Industries, Inc., Pen-Tab
Holdings, Inc. (formerly known as Pen-Tab Industries, Inc.) and
Bank of America Illinois.**
10.2 Form of Notice of Borrowing.**
10.3 Form of Amended and Restated Revolving Note.**
10.4 Amended and Restated Trademark Agreement dated as of February
4, 1997 among Pen-Tab Industries, Inc., Pen-Tab Holdings, Inc.
and Bank of America Illinois.**
10.5 Pledge Agreement dated as of February 4, 1997 made by Pen-Tab
Holdings, Inc. in favor of Bank of America Illinois.**
10.6 Indenture of Trust dated as of April 1, 1996 among The Fairfax
County Economic Development Authority and The First National
Bank of Maryland.**
10.7 Loan Agreement dated April 1, 1996 between the Fairfax County
Economic Development Authority and Forman Development
Associates Limited Partnership.**
10.8 Shareholders Agreement dated as of February 4, 1997 by and
among Pen-Tab Holdings, Inc., Citicorp Venture Capital, Ltd.,
Alan Hodes, Michael Greenberg and each other executive of Pen-
Tab Holdings, Inc. or its subsidiaries who acquires Class A
Common Stock from the Company.**
10.9 Registration Rights Agreement dated as of February 4, 1997 by
and among Pen-Tab Industries, Inc., Citicorp Venture Capital,
Ltd., Alan Hodes, Michael Greenberg.**
10.10 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-
Tab Industries, Inc. and Alan Hodes.**
10.11 Pen-Tab Holdings, Inc. 1997 Stock Option Plan and Form of
Agreement Evidencing a Grant of a Nonqualified Stock Option
under 1997 Stock Option Plan.**
10.12 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-
Tab Industries, Inc. and Michael Greenberg.*
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges.**
21.1 Subsidiaries of Pen-Tab Industries, Inc.**
23.1 Consent of Ernst & Young LLP, independent auditors.*
23.2 Consent of Kirkland & Ellis (included in Exhibit 5.1).*
24.1 Powers of Attorney (included in signature page).**
25.1 Statement of Eligibility of Trustee on Form T-1.**
27.1 Financial Data Schedule.**
99.1 Form of Letter of Transmittal.*
99.2 Form of Notice of Guaranteed Delivery.*
99.3 Form of Tender Instructions.*
</TABLE>
- --------
* Filed herewith.
** Previously filed.
<PAGE>
EXHIBIT 4.4
-----------
================================================================================
PEN-TAB INDUSTRIES,INC.
as Issuer,
10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
---------------------------------
---------------
FIRST
SUPPLEMENTAL INDENTURE
Dated as of May 7, 1997
---------------
---------------
UNITED STATES TRUST COMPANY OF NEW YORK
---------------
Trustee
================================================================================
<PAGE>
FIRST SUPPLEMENTAL INDENTURE dated as of May 7, 1997 between Pen-Tab
Industries, Inc., a Delaware corporation (the "Company"), as issuer and United
States Trust Company of New York, as Trustee (the "Trustee"), to the INDENTURE,
dated as of February 1, 1997, between the Company and the Trustee (the
"Indenture") under which the Company's 10 7/8% Senior Subordinated Notes Due
2007 (the "Notes") are outstanding. Each capitalized term not otherwise defined
herein shall have the meaning assigned to it in the Indenture.
WHEREAS, the Company and the Trustee desire to correct a defect on page
A-4 of the Indenture;
WHEREAS, the execution and delivery of this First Supplemental Indenture
has been authorized by a resolution of the Board of Directors of the Company;
WHEREAS, concurrent with the execution hereof, the Company has delivered
an Officers' Certificate and has caused its special counsel, Kirkland & Ellis,
to deliver to the Trustee an Opinion of Counsel, each to the effect that this
First Supplemental Indenture complies with Article 10 and Section 10.01 of the
Indenture and that all conditions precedent provided for in the Indenture
relating to this First Supplemental Indenture have been complied with; and
WHEREAS, all conditions and requirements of the Indenture necessary to
make this First Supplemental Indenture a valid, binding and legal instrument in
accordance with its terms have been performed and fulfilled by the parties
hereto and the execution and delivery thereof have been in all respects duly
authorized by the parties hereto.
NOW, THEREFORE, in consideration of the above premises, each party
agrees, for the benefit of the other and for the equal and ratable benefit of
the Holders of the Notes, as follows:
1. Section 5 of the form of Note on page A-4 of the Indenture is hereby
amended by deleting "104.625%" opposite the year 2003 in the table of optional
redemption prices and inserting in place thereof "103.625%."
2. In accordance with the terms of Article 10 and Section 10.05 of the
Indenture, the Trustee may require each Holder of Notes to deliver such Notes to
the Trustee and may place appropriate notations on such Notes reflecting the
amendment outlined in paragraph 1 above.
3. This First Supplemental Indenture may be executed in one or more
counterparts, any one of which need not contain the signatures of more than one
party, but all such counterparts taken together shall constitute one and the
same agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Supplemental Indenture to be executed as of the day and year first above
written.
PEN-TAB INDUSTRIES, INC.
By: /s/ William Leary
--------------------------------
Its: Vice President, Chief Financial
and Administrative Officer
UNITEDS STATES TRUST COMPANY OF NEW YORK
as Trustee
By: /s/ Gerard F. Ganey
--------------------------------
Its: Senior Vice President
2
<PAGE>
EXHIBIT 5.1
-----------
[LETTERHEAD OF KIRKLAND & ELLIS]
To Call Writer Direct:
212 446-4800
May __, 1997
Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, VA 22630
Re: Series B 10 7/8% Senior Subordinated Notes due 2007
---------------------------------------------------
Ladies and Gentlemen:
We are acting as special counsel to Pen-Tab Industries, Inc., a
Delaware corporation (the "Company"), in connection with the proposed
-------
registration by the Company of up to $75,000,000 in aggregate principal amount
of the Company's Series B 10 7/8% Senior Subordinated Notes due 2007 (the
"Exchange Notes"), pursuant to a Registration Statement on Form S-4 filed with
--------------
the Securities and Exchange Commission (the "Commission") on May __, 1997 under
----------
the Securities Act of 1933, as amended (the "Securities Act") (such Registration
--------------
Statement, as amended or supplemented, is hereinafter referred to as the
"Registration Statement"), for the purpose of effecting an exchange offer (the
- -----------------------
"Exchange Offer") for the Company's 10 7/8% Senior Subordinated Notes due 2007
-------------
(the "Old Notes"). The Exchange Notes are to be issued pursuant to the Indenture
---------
(the "Indenture"), dated as of February 1, 1997, between the Company and United
---------
States Trust Company of New York, as Trustee, in exchange for and in replacement
of the Company's outstanding Old Notes, of which $75,000,000 in aggregate
principal amount is outstanding.
In that connection, we have examined originals, or copies certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments as we have deemed necessary for the purposes of this
opinion, including (i) the corporate and organizational documents of the
Company, (ii) minutes and records of the corporate proceedings of the Company
with respect to the issuance of the Exchange Notes, (iii) the Registration
Statement and exhibits thereto and (iv) the Registration Rights Agreement, dated
as of February 1, 1997, among the Company, J.P. Morgan Securities Inc. and Bear,
Stearns & Co. Inc.
<PAGE>
Pen-Tab Industries, Inc.
May __, 1997
Page 2
For purposes of this opinion, we have assumed the authenticity of all
documents submitted to us as originals, the conformity to the originals of all
documents submitted to us as copies and the authenticity of the originals of all
documents submitted to us as copies. We have also assumed the genuineness of
the signatures of persons signing all documents in connection with which this
opinion is rendered, the authority of such persons signing on behalf of the
parties thereto other than the Company, and the due authorization, execution and
delivery of all documents by the parties thereto other than the Company. As to
any facts material to the opinions expressed herein which we have not
independently established or verified, we have relied upon statements and
representations of officers and other representatives of the Company and others.
Based upon and subject to the foregoing qualifications, assumptions
and limitations and the further limitations set forth below, we are of the
opinion that:
(1) The Company is a corporation existing and in good standing under
the General Corporation Law of the State of Delaware.
(2) The sale and issuance of the Exchange Notes has been validly
authorized by the Company.
(3) When, as and if (i) the Registration Statement shall have become
effective pursuant to the provisions of the Securities Act, (ii) the Indenture
shall have been qualified pursuant to the provisions of the Trust Indenture Act
of 1939, as amended, (iii) the Old Notes shall have been validly tendered to the
Company and (iv) the Exchange Notes shall have been issued in the form and
containing the terms described in the Registration Statement, the Indenture, the
resolutions of the Company's Board of Directors (or authorized committee
thereof) authorizing the foregoing and any legally required consents, approvals,
authorizations and other order of the Commission and any other regulatory
authorities to be obtained, the Exchange Notes when issued pursuant to the
Exchange Offer will be legally issued, fully paid and nonassessable and will
constitute valid and binding obligations of the Company.
Our opinions expressed above are subject to the qualifications that we
express no opinion as to the applicability of, compliance with, or effect of (i)
any bankruptcy, insolvency, reorganization, fraudulent transfer, fraudulent
conveyance, moratorium or other similar law
<PAGE>
Pen-Tab Industries, Inc.
May __, 1997
Page 3
affecting the enforcement of creditors' rights generally, (ii) general
principles of equity (regardless of whether enforcement is considered in a
proceeding in equity or at law), (iii) public policy considerations which may
limit the rights of parties to obtain certain remedies and (iv) any laws except
the laws of the State of New York and the General Corporation Law of the State
of Delaware. We advise you that issues addressed by this letter may be governed
in whole or in part by other laws, but we express no opinion as to whether any
relevant difference exists between the laws upon which our opinions are based
and any other laws which may actually govern. For purposes of the opinion in
paragraph 1, we have relied exclusively upon recent certificates issued by the
Delaware Secretary of State and such opinion is not intended to provide any
conclusion or assurance beyond that conveyed by such certificates. We have
assumed without investigation that there has been no relevant change or
development between the respective dates of such certificates and the date of
this letter.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement. We also consent to the reference to our firm under the
heading "Legal Matters" in the Registration Statement. In giving this consent,
we do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of the rules and regulations of
the Commission.
We do not find it necessary for the purposes of this opinion, and
accordingly we do not purport to cover herein, the application of the securities
or "Blue Sky" laws of the various states to the issuance of the Exchange Notes.
This opinion is limited to the specific issues addressed herein, and
no opinion may be inferred or implied beyond that expressly stated herein. We
assume no obligation to revise or supplement this opinion should the present
laws of the States of Delaware or New York be changed by legislative action,
judicial decision or otherwise.
This opinion is furnished to you in connection with the filing of the
Registration Statement, and is not to be used, circulated, quoted or otherwise
relied upon for any other purposes.
Yours very truly,
/S/ Kirkland & Ellis
KIRKLAND & ELLIS
<PAGE>
EXHIBIT 8.1
[Letterhead of Kirkland & Ellis]
To Call Writer Direct
212-446-4800
May __, 1997
Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Re: Offer by Pen-Tab Industries, Inc. to Exchange its Series B 10 7/8%
------------------------------------------------------------------
Senior Subordinated Notes Due 2007 for any and all of its 10 7/8%
-----------------------------------------------------------------
Senior Subordinated Notes Due 2007
-----------------------------------
We have acted as special counsel to Pen-Tab Industries, Inc. (the
"Company") in connection with its offer (the "Exchange Offer") to Exchange its
- -------- --------------
Series B 10 7/8% Senior Subordinated Notes Due 2007 (the "Exchange Notes") for
--------------
any and all of its 10 7/8% Senior Subordinated Notes Due 2007 (the "Notes").
-----
You have requested our opinion as to certain United States federal
income tax consequences of the Exchange Offer. In preparing our opinion, we have
reviewed and relied upon Amendment No. 1 to the Company's Registration Statement
on Form S-4 (File No. 333-24519), filed with the Securities and Exchange
Commission on May __, 1997 (the "Registration Statement"), and such other
----------------------
documents as we deemed necessary.
On the basis of the foregoing, it is our opinion that the exchange of
the Notes for Exchange Notes pursuant to the Exchange Offer will not be treated
as an "exchange" for United States federal income tax purposes.
The opinions set forth above are based upon the applicable provisions
of the Internal Revenue Code of 1986, as amended; the Treasury Regulations
promulgated or proposed thereunder; current positions of the Internal Revenue
Service (the "IRS") contained in published revenue rulings, revenue procedures,
---
and announcements; existing judicial decisions; and other applicable
authorities. No tax rulings have been sought from the IRS with respect to any
of the matters discussed herein. Unlike a ruling from the IRS, opinions of
counsel are not binding on the IRS. Hence, no assurance can be given that the
opinions stated in this letter will not be successfully challenged by the IRS or
by a court. We express no opinion concerning any United States federal income
tax consequences of the Exchange Offer except as expressly set forth above.
<PAGE>
Pen-Tab Industries
May __, 1997
Page 2
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to this firm and the summarization
of this opinion under the section titled "Certain Federal Income Tax
Consequences" in the Registration Statement.
Very truly yours,
/s/ Kirkland & Ellis
Kirkland & Ellis
<PAGE>
EXHIBIT 10.12
EMPLOYMENT AGREEMENT
--------------------
This EMPLOYMENT AGREEMENT is dated as of February ___, 1997, by and among
Pen-Tab Holdings, Inc., a Virginia corporation (the "Company"), Pen-Tab
-------
Industries, Inc., a Delaware corporation ("Pen-Tab"), and Michael Greenberg (the
-------
"Executive").
---------
WHEREAS, the Company, Pen-Tab and the Executive desire to enter into an
agreement regarding the employment of the Executive as Executive Vice President
of the Company and Pen-Tab; and
WHEREAS, as an inducement to CVC to enter into the Recapitalization
Agreement and consummate the transactions contemplated therein, the Executive
has agreed to the provisions of this Agreement, including, without limitation,
Sections 3, 4 and 6.
NOW, THEREFORE, the parties hereto agree as follows:
1. DEFINITIONS. As used herein, the following terms shall have the
-----------
following meanings.
"Affiliate" means, as to any Person, any other Person which directly or
---------
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the direction of
management or policies (whether through ownership of securities or partnership
or other ownership interests, by contract or otherwise).
"Board" means the Company's board of directors.
-----
"Business Day" means any day other than a Saturday or Sunday or a day on
------------
which commercial banks are required or authorized to close in New York, New
York.
"Cause" means (i) a breach of the Executive's covenants under this
-----
Agreement and Sections 4, 5, and 9 of the Shareholders Agreement, the last
sentence of Section 3 of the Shareholders Agreement and Sections 2, 3, 4, 5, 7
and 8 of the Registration Rights Agreement by and among the Company, the
Executive and certain other parties of even date herewith, which breach shall
not be cured within ten (10) Business Days after written notice thereof, or,
(ii) the commission by the Executive of a felony, a crime involving moral
turpitude or other act causing material harm to the standing and reputation of
the Company or any of its Subsidiaries, or (iii) the Executive's repeated
failure to comply with the lawful and reasonable (with respect to Executive's
position as Executive Vice President of the Company and Pen-Tab) written
directives of the President and Chief Executive Officer of the Company or the
Board which failure shall not be cured within ten (10) Business Days after
written notice thereof.
<PAGE>
"CVC" means Citicorp Venture Capital, Ltd., a New York corporation.
---
"Disability" means the inability, due to illness, accident, injury,
----------
physical or mental incapacity or other disability, of the Executive to carry out
effectively his duties and obligations to the Company or to participate
effectively and actively in the management of the Company or a Subsidiary of the
Company for a period of at least 120 consecutive days or for shorter periods
aggregating at least 150 days (whether or not consecutive) during any twelve-
month period, as determined in the reasonable judgment of the Board.
"GAAP" means U.S. generally accepted accounting principles, as in effect
----
from time to time and as adopted by the Company with the consent of its
independent public accountants, consistently applied.
"Good Reason Event" means (i) the failure of the Company or Pen-Tab to make
-----------------
the payments described herein within 5 Business Days of the applicable due date,
(ii) the written request by the board of directors of the Company or Pen-Tab
that the Executive relocate his primary residence or relocate Executive's
primary location from which he performs his services to a location which is more
than ten (10) miles from the Company's current location in the State of
Illinois, or (iii) a written directive from the Board of directors of the
Company or Pen-Tab that results in a substantial reduction of the Executive's
job responsibility, (other than during periods when the Executive is unable to
fulfill his job responsibilities due to injury, illness or other incapacity or
disability and the period of such incapacity does not constitute a Disability
hereunder).
"Person" means an individual, a partnership, a corporation, an association,
------
a limited liability company, a joint stock company, a trust, a joint venture, an
unincorporated organization or a governmental entity or any department, agency
or political subdivision thereof.
"Recapitalization Agreement" means the Recapitalization Agreement dated as
--------------------------
of January 9, 1997 by and among CVC, the Company and the shareholders of the
Company.
"Shareholders Agreement" means the Shareholders Agreement dated as of the
----------------------
date hereof by and among the Company, the Executive, CVC and certain other
parties thereto.
"Subsidiary" means, with respect to any Person, any corporation,
----------
partnership, limited liability company, association or other business entity of
which (i) if a corporation, a majority of the total voting power of securities
entitled (without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof is at the time owned or
controlled, directly or indirectly, by that Person or one or more of the other
Subsidiaries of that Person or a combination thereof, or (ii) if a partnership,
limited liability company, association or other business entity, a majority of
the partnership or other similar ownership interest thereof is at the time owned
or controlled, directly or indirectly, by any Person or one or more Subsidiaries
of that Person or a combination thereof. For purposes hereof, a Person or
Persons shall be deemed to have a majority
2
<PAGE>
ownership interest in a partnership, limited liability company, association or
other business entity if such Person or Persons shall be allocated a majority of
partnership, limited liability company, association or other business entity
gains or losses or shall be or control the managing director or general partner
of such partnership, limited liability company, association or other business
entity.
"Termination Year" means that fiscal year of the Company during which the
----------------
Employment Period ends pursuant to the terms of Section 2(d) hereof.
2. EMPLOYMENT.
----------
(a) Employment. Each of the Company and Pen-Tab agrees to employ the
----------
Executive, and the Executive hereby accepts employment with the Company and
Pen-Tab, upon the terms and conditions set forth in this Agreement for the
period beginning on the date hereof and ending as provided in Section 2(d)
(the "Employment Period").
-----------------
(b) Position and Duties.
-------------------
(i) Commencing on the date hereof and continuing during the
Employment Period, the Executive shall serve as Executive Vice President of
the Company and Pen-Tab under the supervision and direction of the
Company's and Pen-Tab's President and Chief Executive Officer and
respective boards of directors.
(ii) The Executive shall devote his best efforts and his full
business time and attention (except for permitted vacation periods and
reasonable periods of illness other than Disability) to the business and
affairs of the Company, Pen-Tab and their Subsidiaries.
(c) Base Salary and Benefits.
------------------------
(i) Base Salary. During the Employment Period, the Executive's
-----------
base salary shall be $228,800 per annum (the "Initial Base Salary"), which
-------------------
salary shall be paid by Pen-Tab in regular installments in accordance with
Pen-Tab's general payroll practices and shall be subject to customary
withholding. During the Employment Period, effective on each anniversary
of the date hereof, Executive's Initial Base Salary shall be adjusted to an
amount equal to Executive's Initial Base Salary multiplied by a fraction
-------------
(i) the numerator of which is the Index for the calendar month in which
such anniversary falls and (ii) the denominator of which is the Index for
January, 1997 (the Initial Base Salary as may be adjusted shall be referred
to herein as the "Base Salary"). For purposes of this Agreement, "Index"
-----------
in any
3
<PAGE>
particular month shall mean the United States Department of Labor All
Cities Consumer Price Index, as published by the United States Department
of Labor, Bureau of Labor Statistics. If the Index is not published by the
Bureau of Labor Statistics or another governmental agency at any time, then
such calculation shall be made using the most closely comparable statistics
on the purchasing power of the consumer dollar as published by a
responsible financial authority selected in good faith by the Board.
(ii) Bonus Plan. For each fiscal year during the Employment
----------
Period, the Executive will be eligible to receive a bonus of up to 50% of
his Base Salary, the terms and conditions of which shall be established by
the Board.
(iii) Benefits. In addition to the Base Salary, the
--------
Executive shall be entitled, during the Employment Period, to all benefits
set forth on Schedule A hereto (the "Benefits").
---------- --------
(iv) Expenses. Upon the request of the Executive, the Company
--------
shall reimburse the Executive for all reasonable expenses incurred by him
in the course of performing his duties under this Agreement which are
consistent with the Company's and its Subsidiaries' policies in effect from
time to time with respect to travel, entertainment and other business
expenses, subject to the requirements of the Company and its Subsidiaries
with respect to reporting and documentation of such expenses.
(d) Term. The Employment Period shall end on February 4, 2002,
----
subject to earlier termination (x) by reason of the Executive's death or
Disability, (y) by resolution of the Board with Cause (it being understood
and agreed that the employment of Executive may not be terminated without
Cause), or (z) upon the Executive's voluntary resignation with or without a
Good Reason Event. Notwithstanding any provision in this Agreement to the
contrary, this Agreement shall terminate and be of no further force and
effect upon the consummation of an initial public offering registered under
the Securities Act.
(i) If the Employment Period is terminated on or before February
4, 2002:
(A) by the Company other than for Cause, or as a result of the
Executive's voluntary resignation within ten (10) Business Days of a
Good Reason Event, the Executive shall be entitled to receive (payable
in equal or substantially equal consecutive monthly installments) (1)
the stated Base Salary from the date of termination through the period
ending on the anniversary date hereof, and (2) all vested benefits to
which Executive is
4
<PAGE>
entitled under the terms of any benefit plan or arrangement of the
Company or Pen-Tab which is applicable to Executive or in which he is
a participant.
(B) as a result of the Executive's death, Disability or voluntary
resignation (other than within ten (10) Business Days following a Good
Reason Event), or by the Company for Cause, the Executive shall be
entitled to all previously earned and accrued but unpaid Base Salary,
bonus payments and Benefits up to the date of such termination but
shall not be entitled to any further Base Salary, bonus payments or
Benefits for that year or any future year, or to any other severance
compensation of any kind, nature or amount; provided, however, that
nothing herein shall reduce, eliminate or restrict the disability
benefits to which Executive is entitled under the terms of any
applicable benefit plan or arrangement of the Company or Pen-Tab which
is applicable to Executive or in which he is a participant.
(ii) Following the termination of the Employment Period:
(A) the Executive agrees that: (1) the Executive shall be
entitled to the payments provided for in Sections 2(d)(i)(A), if any,
if and only if Executive has not breached as of the date of
termination of the Employment Period the provisions of Sections 3, 4
and 6 hereof and does not breach such sections at any time during the
period for which such payments are to be made and (2) the Company's
obligation to make such payments will terminate upon the occurrence of
any such breach during any such severance period which breach shall
not be terminated or cured within ten (10) Business Days after written
notice thereof.
(B) any payments pursuant to Sections 2(d)(i)(A) shall be paid by
Pen-Tab in regular installments in accordance with Pen-Tab's general
payroll practices and shall be subject to customary withholding, and
following such payments none of the Company or any of its Subsidiaries
shall have any further obligation to the Executive pursuant to this
Section 2(d) except as provided by law.
(iii) Notwithstanding any other provisions of this Agreement, if
all or any portion of the payments or benefits provided under Section
2(d)(i)(A) either alone or together with other payments or benefits which
the Executive receives or is then entitled to
5
<PAGE>
receive from the Company and any of its Subsidiaries would constitute a
"parachute payment" within the meaning of Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"), such payments or benefits
----
provided to the Executive under Section 2(d)(i)(A) shall be reduced to the
extent necessary so that no portion thereof shall be subject to the excise
tax imposed by Section 4999 of the Code; but only if, by reason of such
reduction, the Executive's net after tax benefit shall exceed the net after
tax benefit if such reduction were not made. "Net after tax benefit" for
purposes of this Section 2(d)(iii) shall mean the sum of (w) the total
amount payable to the Executive under this Section 2, plus (x) all other
----
payments and benefits which the Executive receives or is then entitled to
receive from the Company and any of its Subsidiaries that would constitute
a "parachute payment" within the meaning of Section 280G of the Code, less
----
(y) the amount of federal income taxes payable with respect to the payment
and benefits described in (w) and (x) above, calculated at the maximum
marginal income tax rate for each year in which such payments and benefits
shall be paid to the Executive (based upon the rate in effect for such year
as set forth in the Code at the time of the first payment of the
foregoing), less (z) the amount of excise taxes imposed with respect to the
----
payments and benefits described in (w) and (x) above by Section 4999 of the
Code.
(iv) The Executive hereby agrees that except as expressly
provided herein, no severance compensation of any kind, nature or amount
shall be payable to the Executive and except as expressly provided herein,
the Executive hereby irrevocably waives any claim for severance
compensation.
(v) Subject to the provisions of Section 2(d)(i)(B) above, all of
the Executive's rights to Benefits hereunder (if any) for any period
subsequent to the effective date of termination of the Employment Period
shall cease upon the termination of the Employment Period other than
Executive's rights under any retirement plan of the Company or Pen-Tab in
which Executive is a participant. Within thirty (30) days after
Executive's employment shall terminate, the amount to which he is entitled
under any such retirement plan shall be distributed to Executive and, in
the event Executive shall be terminated without Cause or following a Good
Reason Event, then Executive shall have a 100% vested and nonforfeitable
interest in such retirement benefits.
(vi) If the employment of Executive hereunder shall terminate
pursuant to Section 2(d)(i)(A) above, then Executive shall have no duty
whatsoever to mitigate damages, and any income, earnings or other
compensation earned from self employment or employment with any company
subsequent to the date of such termination of employment shall not reduce
or offset any of the payments described in Sections 2(d)(i)(A) hereof.
3. CONFIDENTIAL INFORMATION. The Executive acknowledges that the
------------------------
information and data disclosed to, developed by or obtained by him while
employed by the Company or any of its
6
<PAGE>
Subsidiaries concerning the business or affairs of the Company or any Subsidiary
(the unauthorized disclosure of which would be adverse to the Company and its
Subsidiaries, taken as a whole) (including without limitation the Company's
technology, methods of doing business and supplier and customer information)
(collectively, "Confidential Information") are the property of the Company or
------------------------
such Subsidiary and that the continued success of the Company and its
Subsidiaries depends in large part on keeping this information from becoming
known to competitors of the Company and its Subsidiaries. Therefore, the
Executive agrees that, during the Employment Period and for all times
thereafter, except as required by law or court order, he shall not disclose to
any unauthorized person or use for his own account any Confidential Information
without the prior written consent of the Board, unless and to the extent that
the aforementioned matters become generally known to and available for use by
the public or Persons within the industry in which the Company or Pen-Tab
competes other than as a result of the Executive's acts or omissions to act, or
in the event any such information is disclosed (other than by Executive) by any
person who is not bound by a similar nondisclosure agreement; provided, however,
that, subject to Section 5(b) below, nothing herein shall be deemed to limit,
restrict or prohibit the use or disclosure by Executive of any non-confidential
general industry knowledge or contacts gained or obtained by Executive from his
prior expertise and experience. The Executive further agrees to use his
reasonable best efforts and diligence to safeguard the Confidential Information
and to protect it against disclosure, misuse, espionage, loss or theft. The
Executive shall deliver to the Company at the termination of such Executive's
employment, or at any other time the Company may request, all memoranda,
correspondence, notes, plans, records, reports, manuals, photographs, computer
tapes and software and other documents and data (and copies thereof) relating to
the Confidential Information, the Work Product (as defined below) or the
business of the Company or any Subsidiary which he may then possess or have
under his control. If the Company requests, the Executive agrees to provide
written confirmation that the Executive has returned all such materials to the
Company or one of its Subsidiaries.
4. WORK PRODUCT. The Executive agrees that all inventions, innovations,
------------
improvements, developments, methods, processes, programs, designs, analyses,
drawings, reports, and all similar or related information which relates to the
Company's or any of its Subsidiaries' actual or anticipated business or research
and development or existing or future products or services and which are
conceived, developed, contributed to or made by the Executive (either solely or
jointly with others) while employed by the Company or any of its Subsidiaries
("Work Product") shall be the sole and exclusive property of the Company or such
- --------------
Subsidiary. The Executive will promptly disclose such Work Product to the
President and Chief Executive Officer or to the Board and perform all actions
requested by the President and Chief Executive Officer or the Board (whether
during or after the Employment Period) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
5. RIGHTS OF FORMER EMPLOYERS AND OTHERS.
-------------------------------------
(a) No Undisclosed Restrictions. The Executive represents and
---------------------------
warrants that, unless he has informed the Company or its Subsidiaries to
the contrary in a writing attached to this Agreement, the performance of
his duties as Executive Vice
7
<PAGE>
President of the Company will not place the Executive in breach of any
existing agreement, including, but not limited to, any confidentiality
agreement or restrictive covenant with a former employer or other third
party.
(b) Confidential Information of Others. The Executive agrees that he
----------------------------------
shall not disclose to the Company or its Subsidiaries, nor induce the
Company or its Subsidiaries to use, any confidential or proprietary
information of others that the Executive may have learned as a result of
any prior employment or other relationships.
6. NONCOMPETE, NONSOLICITATION.
---------------------------
(a) The Executive acknowledges that in the course of his employment
with the Company and its Subsidiaries he has become familiar, and he will
become familiar, with the Company's and its Subsidiaries' trade secrets and
with other Confidential Information and that his services have been and
will be of special, unique and extraordinary value to the Company and its
Subsidiaries. Therefore, the Executive agrees that, during the Employment
Period and (i) if the Employment Period terminates on February 4, 2002,
---
then for a period of twelve (12) months thereafter, (ii) if the Employment
Period is terminated pursuant to Section 2(d)(i)(A), then for a period
ending on the earlier of (x) February 4, 2002 and (y) the second
anniversary of the date of termination, or (iii) if the Employment Period
is terminated pursuant to Section 2(d)(i)(B), other than as a result of the
Executive's death, then for a period of twenty-four (24) months thereafter
(the "Noncompete Period"), he shall not directly or indirectly own,
-----------------
operate, lease, manage, control, participate in, consult with, advise,
permit his name to be used by, provide services for, or in any manner
engage in any business (including by himself or in association with any
person, firm, corporate or other business organization or through any other
entity) that manufactures any product or provides any services that may be
used as substitute for the product, or service, of the Company, its
Subsidiaries or any business in competition with the businesses of the
Company or its Subsidiaries as such businesses exist or are in process on
the date of the termination of the Employment Period, within any
geographical area in which the Company or any of its Subsidiaries engages
or plans to engage in such businesses as of the date of termination of the
Employment Period. Nothing herein shall prohibit the Executive from being
a passive owner of not more than 5% of the outstanding stock of a
corporation which is publicly traded, and which is a direct competitor of
the Company or any of its Subsidiaries, so long as the Executive has no
active participation in the business of such corporation. Anything herein
to the contrary notwithstanding, the Noncompete Period and the
noncompetition restrictions set forth herein shall immediately terminate
and be of no further force or effect, without notice or further act by any
party hereto or any other person, upon the first to occur of (i) a default
by the Company or Pen-Tab in the payment, following ten (10) Business Days
of the date
8
<PAGE>
when due, of any amount payable to Executive under Section 2(d)(i)(A)
above, or (ii) the Company or Pen-Tab shall be insolvent or shall become
bankrupt.
(b) During the Noncompete Period, the Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any
employee of the Company or any Subsidiary either to leave the employ of the
Company or such Subsidiary, or to interfere with the business or operations
of the Company or its Subsidiaries, (ii) hire any person who was an
employee of the Company or any Subsidiary at any time during or after the
Executive's employment period other than in connection with a general
hiring solicitation or advertisement which is not specifically targeted to
employees of the Company or any Subsidiary, or (iii) induce or attempt to
induce any customer, supplier, distributor, franchisee, licensee or other
business relation of the Company or any Subsidiary to cease doing business
with the Company or such Subsidiary.
(c) The Executive agrees and acknowledges that: (i) the covenants set
forth in this Section 6 are reasonable in geographical and temporal scope
and in all other respects, (ii) the Company would not have entered into
this Agreement but for the covenants of the Executive contained herein,
(iii) the covenants contained herein have been made in order to induce the
Company to enter into this Agreement, and (iv) that CVC would not have
entered into the Recapitalization Agreement but for the covenants of the
Executive contained herein.
(d) If, at the time of enforcement of this Section 6, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall
be substituted for the stated duration, scope or area and that the court
shall be allowed to revise the restrictions contained herein to cover the
maximum period, scope and area permitted by law.
(e) The Executive recognizes and affirms that in the event of his
breach of any provision of this Section 6, money damages would be
inadequate and the Company would have no adequate remedy at law.
Accordingly, the Executive agrees that in the event of a breach or a
threatened breach by the Executive of any of the provisions of this Section
6, the Company, in addition and supplementary to other rights and remedies
existing in its favor, may apply to any court of law or equity of competent
jurisdiction for specific performance and/or injunctive or other relief in
order to enforce or prevent any violations of the provisions hereof
(without posting a bond or other security).
7. NOTICES. All notices, demands or other communications to be given or
-------
delivered under or by reason of the provisions of this Agreement will be in
writing and will be deemed to have been given when delivered personally, mailed
by certified or registered mail, return receipt requested and postage prepaid,
or sent via a nationally recognized overnight courier, or sent via
9
<PAGE>
facsimile followed by delivery by reputable overnight courier service. Such
notices, demands and other communications will be sent to the address indicated
below:
To the Company or Pen-Tab:
-------------------------
Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attention: Mr. Alan Hodes
Telecopy No.: (540) 622-2008
With copies, which shall not constitute notice, to:
--------------------------------------------------
Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601
Attention: Stephen A. Landsman, Esq.
Telecopy No.: (312) 236-7516
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: Mr. Thomas F. McWilliams
Telecopy No.: (212) 888-2940
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
To CVC:
------
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: Mr. Thomas F. McWilliams
Telecopy No.: (212) 888-2940
10
<PAGE>
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Kirkland & Ellis
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900
To the Executive:
----------------
Pen-Tab Industries, Inc.
2011 West Hasting Street
Chicago, Illinois 60608
Attention: Michael Greenberg
Telecopy No.: (312) 243-0606
With a copy, which shall not constitute notice, to:
--------------------------------------------------
Rudnick & Wolfe
203 North LaSalle Street
Chicago, Illinois 60601
Attention: Stephen A. Landsman, Esq.
Telecopy No.: (312) 236-7516
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party.
8. MISCELLANEOUS.
-------------
(a) Severability. Whenever possible, each provision of this Agreement
------------
will be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be
invalid, illegal or unenforceable in any respect under any applicable law
or rule in any jurisdiction, such invalidity, illegality or
unenforceability will not affect any other provision or any other
jurisdiction, but this Agreement will be reformed, construed and enforced
in such jurisdiction as if such invalid, illegal or unenforceable provision
had never been contained herein.
(b) Complete Agreement. This Agreement, the Shareholders Agreement,
------------------
the Option Agreement and the Recapitalization Agreement embody the complete
agreement and understanding among the parties and supersede and preempt any
prior understandings, agreements or representations by or among the
parties, written or oral, which may have related to the subject matter
hereof in any way, including,
11
<PAGE>
without limitation, the letter agreement dated October 29, 1996 by and
among the Company, CVC, the Executive and certain other parties.
(c) Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which is deemed to be an original and all of which
taken together constitute one and the same agreement.
(d) Successors and Assigns. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by the
Executive, the Company, and their respective successors and assigns;
provided, that the rights and obligations of the Executive under this
Agreement shall not be assignable.
(E) GOVERNING LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION,
-------------
VALIDITY AND INTERPRETATION OF THIS AGREEMENT AND THE EXHIBITS HERETO WILL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS OF THE
STATE OF VIRGINIA, WITHOUT GIVING EFFECT TO ANY CHOICE OF LAW OR CONFLICT
OF LAW PROVISION OR RULE (WHETHER OF THE STATE OF NEW YORK OR ANY OTHER
JURISDICTION) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY
JURISDICTION OTHER THAN THE STATE OF VIRGINIA.
(f) Remedies. Each of the parties to this Agreement will be entitled
--------
to enforce its rights under this Agreement specifically, to recover damages
and costs (including reasonable attorneys' fees) caused by any breach of
any provision of this Agreement and to exercise all other rights existing
in its favor. The parties hereto agree and acknowledge that money damages
may not be an adequate remedy for any breach of the provisions of this
Agreement and that any party may in its sole discretion apply to any court
of law or equity of competent jurisdiction (without posting any bond or
deposit) for specific performance and/or other injunctive relief in order
to enforce or prevent any violations of the provisions of this Agreement.
12
<PAGE>
(g) Amendment and Waiver. The provisions of this Agreement may be
--------------------
amended and waived only with the prior written consent of the Company, the
Executive and the Investor.
(h) Time is of the Essence. Time is of the essence for each and every
----------------------
provision of this Agreement.
(i) WAIVER OF RIGHT TO JURY TRIAL. EACH OF THE COMPANY, THE EXECUTIVE
AND PEN-TAB HEREBY WAIVERS, TO THE EXTENT PERMITTED BY APPLICABLE LAW,
TRIAL BY JURY IN ANY LITIGATION IN ANY COURT WITH RESPECT TO, IN CONNECTION
WITH, OR ARISING OUT OF THIS AGREEMENT, ANY OTHER AGREEMENT CONTEMPLATED
HEREBY OR THEREBY OR THE VALIDITY, PROTECTION, INTERPRETATION, COLLECTION
OR ENFORCEMENT THEREOF.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
PEN-TAB HOLDINGS, INC.
By:__________________________
Name:
Title:
PEN-TAB INDUSTRIES, INC.
By:__________________________
Name:
Title:
MICHAEL GREENBERG
_______________________________
13
<PAGE>
ACKNOWLEDGMENT
State of New York ) ss.:
County of New York )
On the ____ day of _________ in the year 1997, before me personally
came _____________, who, stated that he resides in ______________, ____________,
and that he is _____________ of Pen-Tab Holdings, Inc.
-------------------------------------------
Notary Public
My commission expires:
State of New York ) ss.:
County of New York )
On the ____ day of _________ in the year 1997, before me personally
came _____________, who, stated that he resides in ______________, ____________,
and that he is _____________ of Pen-Tab Industries, Inc.
--------------------------------------------
Notary Public
My commission expires:
State of New York ) ss.:
County of New York )
On the ____ day of _________ in the year 1996, before me personally
came _____________, who, stated that he resides in ______________, ____________,
that he is ______________.
-------------------------------------------
Notary Public
My commission expires:
14
<PAGE>
SCHEDULE A
----------
EMPLOYEE BENEFITS
-----------------
Health & Welfare benefit plans:
The Executive is a participant in Pen-Tab Industries. - Group Health
Insurance (Health Insurance with Oxford Insurance Company), Group Life
Insurance (2 times salary - Policy with Phoenix Home Life Mutual Insurance
Company), Pen-Tab Industries, Inc. Employee Savings & Protection Plan, and
Long Term Disability Insurance (Policy with Reliance Standard Life
Insurance Company)
Vacation: 4 weeks
Car: Use of Company leased car
[PLEASE CONFIRM THAT THE ABOVE BENEFITS ARE ACCURATELY STATED]
15
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated March 4, 1997, in Pre-effective Amendment Number 1
to the Registration Statement (Form S-4 No. 333-34519) and related Prospectus
of Pen-Tab Industries, Inc. for the Offer to Exchange its Series B 10 7/8%
Senior Subordinated Notes due 2007 for any and all of its outstanding 10 7/8%
Senior Subordinated Notes due 2007.
/s/ Ernst & Young LLP
Vienna, Virginia
May 6, 1997
<PAGE>
EXHIBIT 99.1
LETTER OF TRANSMITTAL
TO TENDER FOR EXCHANGE
10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
OF
PEN-TAB INDUSTRIES, INC.
PURSUANT TO THE PROSPECTUS DATED , 1997
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P. M., NEW
YORK CITY TIME, ON , 1997 UNLESS EXTENDED (THE "EXPIRATION DATE").
PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS
If you desire to accept the Exchange Offer, this Letter of Transmittal should
be completed, signed, and submitted to the Exchange Agent:
By Overnight Courier: By Hand: By Registered Or
Certified Mail:
United States Trust United States Trust United States Trust
Company of New York Company of New York Company of New York
770 Broadway, 13th Floor 111 Broadway, Lower Level P.O. Box 844
New York, New York 10003 Attn: Corporate Trust Attn: Corporate Trust
Attn: Corporate Trust Services New York, Services
Services New York 10006 Cooper Station
New York, New York
10276-0844
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
FOR ANY QUESTIONS REGARDING THIS LETTER OF TRANSMITTAL OR FOR ANY ADDITIONAL
INFORMATION, YOU MAY CONTACT THE EXCHANGE AGENT BY TELEPHONE AT 800-548-6565,
OR BY FACSIMILE AT 212-420-6152.
The undersigned hereby acknowledges receipt of the Prospectus dated
, 1997 (the "Prospectus") of Pen-Tab Industries, Inc., a Delaware
corporation (the "Issuer"), and this Letter of Transmittal (the "Letter of
Transmittal"), that together constitute the Issuer's offer (the "Exchange
Offer") to exchange $1,000 in principal amount of its Series B 10 7/8% Senior
Subordinated Notes due 2007 (the "Exchange Notes"), which have been registered
under the Securities Act of 1933, as amended (the "Securities Act"), pursuant
to a Registration Statement, for each $1,000 in principal amount of its
outstanding 10 7/8% Senior Subordinated Notes due 2007 (the "Notes"), of which
$75,000,000 aggregate principal amount is outstanding. Capitalized terms used
but not defined herein have the meanings ascribed to them in the Prospectus.
The undersigned hereby tenders the Notes described in Box 1 below (the
"Tendered Notes") pursuant to the terms and conditions described in the
Prospectus and this Letter of Transmittal. The undersigned is the registered
owner of all the Tendered Notes and the undersigned represents that it has
received from each beneficial owner of the Tendered Notes ("Beneficial
Owners") a duly completed and executed form of "Instruction to Registered
Holder and/or Book-Entry Transfer Facility Participant from Beneficial Owner"
<PAGE>
accompanying this Letter of Transmittal, instructing the undersigned to take
the action described in this Letter of Transmittal.
Subject to, and effective upon, the acceptance for exchange of the Tendered
Notes, the undersigned hereby exchanges, assigns, and transfers to, or upon
the order of, the Issuer, all right, title, and interest in, to, and under the
Tendered Notes.
Please issue the Exchange Notes exchanged for Tendered Notes in the name(s)
of the undersigned. Similarly, unless otherwise indicated under "Special
Delivery Instructions" below (Box 3), please send or cause to be sent the
certificates for the Exchange Notes (and accompanying documents, as
appropriate) to the undersigned at the address shown below in Box 1.
The undersigned hereby irrevocably constitutes and appoints the Exchange
Agent as the true and lawful agent and attorney in fact of the undersigned
with respect to the Tendered Notes, with full power of substitution (such
power of attorney being deemed to be an irrevocable power coupled with an
interest), to (i) deliver the Tendered Notes to the Issuer or cause ownership
of the Tendered Notes to be transferred to, or upon the order of, the Issuer,
on the books of the registrar for the Notes and deliver all accompanying
evidences of transfer and authenticity to, or upon the order of, the Issuer
upon receipt by the Exchange Agent, as the undersigned's agent, of the
Exchange Notes to which the undersigned is entitled upon acceptance by the
Issuer of the Tendered Notes pursuant to the Exchange Offer, and (ii) receive
all benefits and otherwise exercise all rights of beneficial ownership of the
Tendered Notes, all in accordance with the terms of the Exchange Offer.
The undersigned understands that tenders of Notes pursuant to the procedures
described under the caption "The Exchange Offer" in the Prospectus and in the
instructions hereto will constitute a binding agreement between the
undersigned and the Issuer upon the terms and subject to the conditions of the
Exchange Offer, subject only to withdrawal of such tenders on the terms set
forth in the Prospectus under the caption "The Exchange Offer-Withdrawal of
Tenders." All authority herein conferred or agreed to be conferred shall
survive the death or incapacity of the undersigned and any Beneficial
Owner(s), and every obligation of the undersigned or any Beneficial Owners
hereunder shall be binding upon the heirs, representatives, successors, and
assigns of the undersigned and such Beneficial Owner(s).
The undersigned hereby represents and warrants that the undersigned has full
power and authority to tender, exchange, assign, and transfer the Tendered
Notes and that the Issuer will acquire good and unencumbered title thereto,
free and clear of all liens, restrictions, charges, encumbrances, and adverse
claims when the Tendered Notes are acquired by the Issuer as contemplated
herein. The undersigned and each Beneficial Owner will, upon request, execute
and deliver any additional documents reasonably requested by the Issuer or the
Exchange Agent as necessary or desirable to complete and give effect to the
transactions contemplated hereby.
The undersigned hereby represents and warrants that the information set
forth in Box 2 is true and correct.
By accepting the Exchange Offer, the undersigned hereby represents and
warrants that (i) the Exchange Notes to be acquired by the undersigned and any
Beneficial Owner(s) in connection with the Exchange Offer are being acquired
by the undersigned and any Beneficial Owner(s) in the ordinary course of
business of the undersigned and any Beneficial Owner(s), (ii) the undersigned
and each Beneficial Owner are not participating, do not intend to participate,
and have no arrangement or understanding with any person to participate, in
the distribution of the Exchange Notes, (iii) except as otherwise disclosed in
writing herewith, neither the undersigned nor any Beneficial Owner is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Issuer,
and (iv) the undersigned and each Beneficial Owner acknowledge and agree that
any person participating in the Exchange Offer with the intention or for the
purpose of distributing the Exchange Notes must comply with the registration
and prospectus delivery requirements of the Securities Act of 1933, as amended
(together with the rules and regulations promulgated thereunder, the
"Securities Act"), in connection with a secondary resale of the Exchange Notes
acquired by such person and cannot rely on the position of the Staff of the
Securities and Exchange Commission (the "Commission") set forth in the no-
action letters that are discussed in
2
<PAGE>
the section of the Prospectus entitled "The Exchange Offer." In addition, by
accepting the Exchange Offer, the undersigned hereby (i) represents and
warrants that, if the undersigned or any Beneficial Owner of the Notes is a
Participating Broker-Dealer, such Participating Broker-Dealer acquired the
Notes for its own account as a result of market-making activities or other
trading activities and has not entered into any arrangement or understanding
with the Company or any affiliate of the Company (within the meaning of Rule
405 under the Securities Act) to distribute the New Notes to be received in
the Exchange Offer, and (ii) acknowledges that, by receiving New Notes for its
own account in exchange for Notes, where such Notes were acquired as a result
of market-making activities or other trading activities, such Participating
Broker-Dealer will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Notes.
[_]CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED HEREWITH.
[_]CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT AND COMPLETE
"USE OF GUARANTEED DELIVERY" BELOW (BOX 4).
[_]CHECK HERE IF TENDERED NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER
MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH THE BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE "USE OF BOOK-ENTRY TRANSFER" BELOW (BOX 5).
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL
CAREFULLY BEFORE COMPLETING THE BOXES
BOX 1
DESCRIPTION OF NOTES TENDERED (Attach additional signed pages, if necessary)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
AGGREGATE
NAME(S) AND ADDRESS(ES) OF REGISTERED NOTE PRINCIPAL AGGREGATE
HOLDER(S), EXACTLY AS NAME(s) CERTIFICATE AMOUNT PRINCIPAL
APPEAR(S) ON NOTE CERTIFICATE(S ) NUMBER(S) OF REPRESENTED BY AMOUNT
(PLEASE FILL IN, IF BLANK) NOTES* CERTIFICATE(S) TENDERED**
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
----------------------------------------------------
TOTAL
- -------------------------------------------------------------------------------------------
</TABLE>
*Need not be completed by persons tendering by book-entry transfer.
** The minimum permitted tender is $1,000 in principal amount of Notes.
All other tenders must be in integral multiples of $1,000 of
principal amount. Unless otherwise indicated in this column, the
principal amount of all Note Certificates identified in this Box 1 or
delivered to the Exchange Agent herewith shall be deemed tendered.
See Instruction 4.
3
<PAGE>
BOX 2
BENEFICIAL OWNER(S)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<S> <C>
STATE OF PRINCIPAL RESIDENCE OF EACH PRINCIPAL AMOUNT OF TENDERED NOTES
BENEFICIAL OWNER OF TENDERED NOTES HELD FOR ACCOUNT OF BENEFICIAL OWNER
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
- ---------------------------------------- ------------------------------------
</TABLE>
BOX 3
SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 5, 6 AND 7)
TO BE COMPLETED ONLY IF EXCHANGE NOTES EXCHANGED FOR NOTES AND UNTENDERED
NOTES ARE TO BE SENT TO SOMEONE OTHER THAN THE UNDERSIGNED, OR TO THE
UNDERSIGNED AT AN ADDRESS OTHER THAN THAT SHOWN ABOVE.
Mail Exchange Note(s) and any untendered Notes to: Name(s):
---------------------------------------------------------------------------
(please print)
Address:
---------------------------------------------------------------------------
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(include Zip Code)
Tax Identification or Social Security No.:
4
<PAGE>
BOX 4
USE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 2)
TO BE COMPLETED ONLY IF NOTES ARE BEING TENDERED BY MEANS OF A NOTICE OF
GUARANTEED DELIVERY.
Name(s) of Registered Holder(s):
---------------------------------------------------------------------------
Date of Execution of Notice of Guaranteed Delivery: __________________
Name of Institution which Guaranteed Delivery: _______________________
BOX 5
USE OF BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1)
TO BE COMPLETED ONLY IF DELIVERY OF TENDERED NOTES IS TO BE MADE BY BOOK-
ENTRY TRANSFER.
Name of Tendering Institution: _______________________________________
Account Number: ______________________________________________________
Transaction Code Number: _____________________________________________
5
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
(SEE INSTRUCTIONS 1 AND 5) IN ADDITION, COMPLETE SUBSTITUTE FORM W-9
- --------------------------------------------------------------------------------
Signature Guarantee
X ____________________________
(If required by Instruction 5)
X ____________________________ Authorized Signature
(Signature of Registered X ____________________________
Holder(s) or Authorized Signatory)
Name: ________________________
(please print)
Title: _______________________
Note: The above lines must be
signed by the registered Name of Firm: ________________
holder(s) of Notes as their
name(s) appear(s) on the Notes (Must be an Eligible
or by persons(s) authorized to Institution as defined
become registered holder(s) in Instruction 2)
(evidence of which authorization
must be transmitted with this Address: _____________________
Letter of Transmittal). If
signature is by a trustee, _________________________
executor, administrator,
guardian, attorney-in-fact, _________________________
officer, or other person acting
in a fiduciary or representative (include Zip Code)
capacity, such person must set
forth his or her full title Area Code and Telephone Number:
below. See Instruction 5.
________________________
Dated: _______________________
Name(s): _____________________
__________________________
Capacity: ____________________
Street Address: ______________
__________________________
__________________________
(include Zip Code)
Area Code and Telephone Number:
________________________
Tax Identification or Social
Security Number:
________________________
BOX 7
BROKER-DEALER STATUS
- --------------------------------------------------------------------------------
[_]Check this box if the Beneficial Owner of the Notes is a Participating
Broker-Dealer and such Participating Broker-Dealer acquired the Notes
for its own account as a result of market-making activities or other
trading activities.
6
<PAGE>
PAYOR'S NAME: PEN-TAB INDUSTRIES, INC.
- --------------------------------------------------------------------------------
Name (if joint names, list first and circle the
name of the person or entity whose number you enter
in Part 1 below. See instructions if your name has
changed.)
-------------------------------------------------------------
Address
-------------------------------------------------------------
City, State and ZIP Code
SUBSTITUTE
-------------------------------------------------------------
FORM W-9
Department of the List account number(s) here (optional)
Treasury
-------------------------------------------------------------
Internal Revenue Service
PART 1--PLEASE PROVIDE YOUR TAXPAYER Social
IDENTIFICATION NUMBER ("TIN") IN THE BOX Security
AT RIGHT AND CERTIFY BY SIGNING AND Number or
DATING BELOW TIN
-------------------------------------------------------------
PART 2--Check the box if you are NOT subject to backup
withholding under the provisions of section 3406(a)(1)(C)
of the Internal Revenue Code because (1) you have not
been notified that you are subject to backup withholding
as a result of failure to report all interest or
dividends or (2) the Internal Revenue Service has
notified you that you are no longer subject to backup
withholding.
[_]
- --------------------------------------------------------------------------------
CERTIFICATION--UNDER THE PENALTIES OF
PERJURY, I CERTIFY THAT THE INFORMATION PART 3--
PROVIDED ON THIS FORM IS TRUE, CORRECT AND
COMPLETE.
Awaiting
SIGNATURE ___________ DATE ___________ TIN [_]
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE EXCHANGE
OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF
TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL
DETAILS.
7
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
1. DELIVERY OF THIS LETTER OF TRANSMITTAL AND NOTES. A properly completed
and duly executed copy of this Letter of Transmittal, including Substitute
Form W-9, and any other documents required by this Letter of Transmittal must
be received by the Exchange Agent at its address set forth herein, and either
certificates for Tendered Notes must be received by the Exchange Agent at its
address set forth herein or such Tendered Notes must be transferred pursuant
to the procedures for book-entry transfer described in the Prospectus under
the caption "Exchange Offer --Book-Entry Transfer" (and a confirmation of such
transfer received by the Exchange Agent), in each case prior to 5:00 p.m., New
York City time, on the Expiration Date. The method of delivery of certificates
for Tendered Notes, this Letter of Transmittal and all other required
documents to the Exchange Agent is at the election and risk of the tendering
holder and the delivery will be deemed made only when actually received by the
Exchange Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. Instead of delivery by mail, it
is recommended that the Holder use an overnight or hand delivery service. In
all cases, sufficient time should be allowed to assure timely delivery. No
Letter of Transmittal or Notes should be sent to the Company. Neither the
Issuer nor the registrar is under any obligation to notify any tendering
holder of the Issuer's acceptance of Tendered Notes prior to the closing of
the Exchange Offer.
2. GUARANTEED DELIVERY PROCEDURES. Holders who wish to tender their Notes
but whose Notes are not immediately available, and who cannot deliver their
Notes, this Letter of Transmittal or any other documents required hereby to
the Exchange Agent prior to the Expiration Date must tender their Notes
according to the guaranteed delivery procedures set forth below, including
completion of Box 4. Pursuant to such procedures: (i) such tender must be made
by or through a firm which is a member of a recognized Medallion Program
approved by the Securities Transfer Association Inc. (an "Eligible
Institution") and the Notice of Guaranteed Delivery must be signed by the
holder; (ii) prior to the Expiration Date, the Exchange Agent must have
received from the holder and the Eligible Institution a properly completed and
duly executed Notice of Guaranteed Delivery (by mail or hand delivery) setting
forth the name and address of the holder, the certificate number(s) of the
Tendered Notes and the principal amount of Tendered Notes, stating that the
tender is being made thereby and guaranteeing that, within five New York Stock
Exchange trading days after the Expiration Date, this Letter of Transmittal
together with the certificate(s) representing the Notes and any other required
documents will be deposited by the Eligible Institution with the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal,
as well as all other documents required by this Letter of Transmittal and the
certificate(s) representing all Tendered Notes in proper form for transfer,
must be received by the Exchange Agent within five New York Stock Exchange
trading days after the Expiration Date. Any holder who wishes to tender Notes
pursuant to the guaranteed delivery procedures described above must ensure
that the Exchange Agent receives the Notice of Guaranteed Delivery relating to
such Notes prior to 5:00 p.m., New York City time, on the Expiration Date.
Failure to complete the guaranteed delivery procedures outlined above will
not, of itself, affect the validity or effect a revocation of any Letter of
Transmittal form properly completed and executed by an Eligible Holder who
attempted to use the guaranteed delivery process.
3. BENEFICIAL OWNER INSTRUCTIONS TO REGISTERED HOLDERS. Only a holder in
whose name Tendered Notes are registered on the books of the registrar (or the
legal representative or attorney-in-fact of such registered holder) may
execute and deliver this Letter of Transmittal. Any Beneficial Owner of
Tendered Notes who is not the registered holder must arrange promptly with the
registered holder to execute and deliver this Letter of Transmittal on his or
her behalf through the execution and delivery to the registered holder of the
Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner form accompanying this Letter of
Transmittal.
4. PARTIAL TENDERS. Tenders of Notes will be accepted only in integral
multiples of $1,000 in principal amount. If less than the entire principal
amount of Notes held by the holder is tendered, the tendering holder
8
<PAGE>
should fill in the principal amount tendered in the column labeled "Aggregate
Principal Amount Tendered" of the box entitled "Description of Notes Tendered"
(Box 1) above. The entire principal amount of Notes delivered to the Exchange
Agent will be deemed to have been tendered unless otherwise indicated. If the
entire principal amount of all Notes held by the holder is not tendered, then
Notes for the principal amount of Notes not tendered and Exchange Notes issued
in exchange for any Notes tendered and accepted will be sent to the Holder at
his or her registered address, unless a different address is provided in the
appropriate box on this Letter of Transmittal, as soon as practicable
following the Expiration Date.
5. SIGNATURES ON THE LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES. If this Letter of Transmittal is signed by the
registered holder(s) of the Tendered Notes, the signature must correspond with
the name(s) as written on the face of the Tendered Notes without alteration,
enlargement or any change whatsoever.
If any of the Tendered Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal. If any Tendered
Notes are held in different names, it will be necessary to complete, sign and
submit as many separate copies of the Letter of Transmittal as there are
different names in which Tendered Notes are held.
If this Letter of Transmittal is signed by the registered holder(s) of
Tendered Notes, and Exchange Notes issued in exchange therefor are to be
issued (and any untendered principal amount of Notes is to be reissued) in the
name of the registered holder(s), then such registered holder(s) need not and
should not endorse any Tendered Notes, nor provide a separate bond power. In
any other case, such registered holder(s) must either properly endorse the
Tendered Notes or transmit a properly completed separate bond power with this
Letter of Transmittal, with the signature(s) on the endorsement or bond power
guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of any Tendered Notes, such Tendered Notes must be
endorsed or accompanied by appropriate bond powers, in each case, signed as
the name(s) of the registered holder(s) appear(s) on the Tendered Notes, with
the signature(s) on the endorsement or bond power guaranteed by an Eligible
Institution.
If this Letter of Transmittal or any Tendered Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations, or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and, unless waived by
the Issuer, evidence satisfactory to the Issuer of their authority to so act
must be submitted with this Letter of Transmittal.
Endorsements on Tendered Notes or signatures on bond powers required by this
Instruction 5 must be guaranteed by an Eligible Institution.
Signatures on this Letter of Transmittal must be guaranteed by an Eligible
Institution unless the Tendered Notes are tendered (i) by a registered holder
who has not completed the box set forth herein entitled "Special Delivery
Instructions" (Box 3) or (ii) by an Eligible Institution.
6. SPECIAL DELIVERY INSTRUCTIONS. Tendering holders should indicate, in the
applicable box (Box 3), the name and address to which the Exchange Notes
and/or substitute Notes for principal amounts not tendered or not accepted for
exchange are to be sent, if different from the name and address of the person
signing this Letter of Transmittal. In the case of issuance in a different
name, the taxpayer identification or social security number of the person
named must also be indicated.
7. TRANSFER TAXES. The Issuer will pay all transfer taxes, if any,
applicable to the exchange of Tendered Notes pursuant to the Exchange Offer.
If, however, a transfer tax is imposed for any reason other than the transfer
and exchange of Tendered Notes pursuant to the Exchange Offer, then the amount
of any such transfer taxes
9
<PAGE>
(whether imposed on the registered holder or on any other person) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with this Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
Except as provided in this Instruction 7, it will not be necessary for
transfer tax stamps to be affixed to the Tendered Notes listed in this Letter
of Transmittal.
8. TAX IDENTIFICATION NUMBER. Federal income tax law requires that the
holder(s) of any Tendered Notes which are accepted for exchange must provide
the Issuer (as payor) with its correct taxpayer identification number ("TIN"),
which, in the case of a holder who is an individual, is his or her social
security number. If the Issuer is not provided with the correct TIN, the
Holder may be subject to backup withholding and a $50 penalty imposed by the
Internal Revenue Service. (If withholding results in an over-payment of taxes,
a refund may be obtained.) Certain holders (including, among others, all
corporations and certain foreign individuals) are not subject to these backup
withholding and reporting requirements. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
To prevent backup withholding, each holder of Tendered Notes must provide
such holder's correct TIN by completing the Substitute Form W-9 set forth
herein, certifying that the TIN provided is correct (or that such holder is
awaiting a TIN), and that (i) the holder has not been notified by the Internal
Revenue Service that such holder is subject to backup withholding as a result
of failure to report all interest or dividends or (ii) the Internal Revenue
Service has notified the holder that such holder is no longer subject to
backup withholding. If the Tendered Notes are registered in more than one name
or are not in the name of the actual owner, consult the "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
information on which TIN to report.
The Issuer reserves the right in its sole discretion to take whatever steps
are necessary to comply with the Issuer's obligation regarding backup
withholding.
9. VALIDITY OF TENDERS. All questions as to the validity, form, eligibility
(including time of receipt), acceptance and withdrawal of Tendered Notes will
be determined by the Issuer in its sole discretion, which determination will
be final and binding. The Issuer reserves the right to reject any and all
Notes not validly tendered or any Notes the Issuer's acceptance of which
would, in the opinion of the Issuer or their counsel, be unlawful. The Issuer
also reserves the right to waive any conditions of the Exchange Offer or
defects or irregularities in tenders of Notes as to any ineligibility of any
holder who seeks to tender Notes in the Exchange Offer. The interpretation of
the terms and conditions of the Exchange Offer (including this Letter of
Transmittal and the instructions hereto) by the Issuer shall be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Notes must be cured within such time as the Issuer
shall determine. Neither the Issuer, the Exchange Agent nor any other person
shall be under any duty to give notification of defects or irregularities with
respect to tenders of Notes, nor shall any of them incur any liability for
failure to give such notification. Tenders of Notes will not be deemed to have
been made until such defects or irregularities have been cured or waived. Any
Notes received by the Exchange Agent that are not properly tendered and as to
which the defects or irregularities have not been cured or waived will be
returned by the Exchange Agent to the tendering holders, unless otherwise
provided in this Letter of Transmittal, as soon as practicable following the
Expiration Date.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to amend,
waive or modify any of the conditions in the Exchange Offer in the case of any
Tendered Notes.
11. NO CONDITIONAL TENDER. No alternative, conditional, irregular, or
contingent tender of Notes or transmittal of this Letter of Transmittal will
be accepted.
10
<PAGE>
12. MUTILATED, LOST, STOLEN OR DESTROYED NOTES. Any tendering Holder whose
Notes have been mutilated, lost, stolen or destroyed should contact the
Exchange Agent at the address indicated herein for further instructions.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus or this Letter
of Transmittal may be directed to the Exchange Agent at the address indicated
herein. Holders may also contact their broker, dealer, commercial bank, trust
company or other nominee for assistance concerning the Exchange Offer.
14. ACCEPTANCE OF TENDERED NOTES AND ISSUANCE OF NOTES; RETURN OF
NOTES. Subject to the terms and conditions of the Exchange Offer, the Issuer
will accept for exchange all validly tendered Notes as soon as practicable
after the Expiration Date and will issue Exchange Notes therefor as soon as
practicable thereafter. For purposes of the Exchange Offer, the Issuer shall
be deemed to have accepted tendered Notes when, as and if the Issuer has given
written or oral notice (immediately followed in writing) thereof to the
Exchange Agent. If any Tendered Notes are not exchanged pursuant to the
Exchange Offer for any reason, such unexchanged Notes will be returned,
without expense, to the undersigned at the address shown in Box 1 or at a
different address as may be indicated herein under "Special Delivery
Instructions" (Box 3).
15. WITHDRAWAL. Tenders may be withdrawn only pursuant to the procedures set
forth in the Prospectus under the caption "The Exchange Offer."
11
<PAGE>
EXHIBIT 99.2
NOTICE OF GUARANTEED DELIVERY
WITH RESPECT TO
10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
OF
PEN-TAB INDUSTRIES, INC.
Pursuant to the Prospectus Dated , 1997
This form must be used by a holder of 10O% Senior Subordinated Notes due
2007 (the "Notes") of Pen-Tab Industries, Inc., a Delaware corporation (the
"Company"), who wishes to tender Notes to the Exchange Agent pursuant to the
guaranteed delivery procedures described in "The Exchange Offer--Guaranteed
Delivery Procedures" of the Company's Prospectus, dated , 1997
(the "Prospectus") and in Instruction 2 to the related Letter of Transmittal.
Any holder who wishes to tender Notes pursuant to such guaranteed delivery
procedures must ensure that the Exchange Agent receives this Notice of
Guaranteed Delivery prior to the Expiration Date of the Exchange Offer.
Capitalized terms used but not defined herein have the meanings ascribed to
them in the Prospectus or the Letter of Transmittal.
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW
YORK CITY TIME, ON , 1997 UNLESS EXTENDED (THE
"EXPIRATION DATE").
IBJ Schroder Bank & Trust Company
(the "Exchange Agent")
By Overnight Courier: By Hand: By Registered or
Certified Mail:
United States Trust 111 Broadway Lower United States Trust
Company of New York Level Attn: Corporate Company of New York
770 Broadway, Trust Services United States Trust
13th Floor New York, New York Company of New York
New York, New York 10006 P.O. Box 844 Attn:
10003 Corporate Trust Services
Attn: Corporate Trust Cooper Station
Services New York, New York
10276-0844
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL
NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
This form is not to be used to guarantee signatures. If a signature on a
Letter of Transmittal is required to be guaranteed by an "Eligible
Institution" under the instructions thereto, such signature guarantee must
appear in the applicable space provided in the signature box on the Letter of
Transmittal.
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, receipt of which is hereby acknowledged, the principal amount of
Notes set forth below pursuant to the guaranteed delivery procedures set forth
in the Prospectus and in Instruction 2 of the Letter of Transmittal.
The undersigned hereby tenders the Notes listed below:
CERTIFICATE NUMBER(S) (IF KNOWN)
OF NOTES OR ACCOUNT NUMBER AT THE AGGREGATE PRINCIPAL AGGREGATE PRINCIPAL
BOOK-ENTRY FACILITY AMOUNT REPRESENTED AMOUNT TENDERED
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2
<PAGE>
PLEASE SIGN AND COMPLETE
- --------------------------------------------------------------------------------
Signature of Registered Holder(s)
or Authorized Signatory: _____
----------------------------------- Date: _________________ , 1996
----------------------------------- Address: _____________________
Name(s) of Registered Holder(s): __ -----------------------------------
----------------------------------- Area Code and Telephone No. __
-----------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s)
exactly as their name(s) appear on certificates for Notes or on a security
position listing as the owner of Notes, or by person(s) authorized to
become Holder(s) by endorsements and documents transmitted with this
Notice of Guaranteed Delivery. If signature is by a trustee, executor,
administrator, guardian, attorney-in-fact, officer or other person acting
in a fiduciary or representative capacity, such person must provide the
following information.
Please print name(s) and address(es)
Name(s): _____________________________________________________________
---------------------------------------------------------------------------
Capacity: ____________________________________________________________
Address(es): _________________________________________________________
---------------------------------------------------------------------------
3
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm which is a member of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., or is a commercial bank or trust company having an office or
correspondent in the United States, or is otherwise an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended, guarantees deposit with the Exchange
Agent of the Letter of Transmittal (or facsimile thereof), together with
the Notes tendered hereby in proper form for transfer (or confirmation of
the book-entry transfer of such Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility described in the prospectus under the
caption "The Exchange Offer--Guaranteed Delivery Procedures" and in the
Letter of Transmittal) and any other required documents, all by 5:00 p.m.,
New York City time, on the fifth New York Stock Exchange trading day
following the Expiration Date.
Name of Firm _________________ _______________________________
(Authorized Signature)
Address ______________________
----------------------------------- Name _________________________
(Include Zip Code) Please Print)
Area Code and Tel. No. _______ Title ________________________
Dated __________________ , 1996
DO NOT SEND SECURITIES WITH THIS FORM. ACTUAL SURRENDER OF SECURITIES MUST
BE MADE PURSUANT TO, AND BE ACCOMPANIED BY, AN EXECUTED LETTER OF TRANSMITTAL.
4
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. Delivery of this Notice of Guaranteed Delivery. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other
documents required by this Notice of Guaranteed Delivery must be received by
the Exchange Agent at its address set forth herein prior to the Expiration
Date. The method of delivery of this Notice of Guaranteed Delivery and any
other required documents to the Exchange Agent is at the election and sole
risk of the holder, and the delivery will be deemed made only when actually
received by the Exchange Agent. If delivery is by mail, registered mail with
return receipt requested, properly insured, is recommended. As an alternative
to delivery by mail, the holders may wish to consider using an overnight or
hand delivery service. In all cases, sufficient time should be allowed to
assure timely delivery. For a description of the guaranteed delivery
procedures, see Instruction 2 of the Letter of Transmittal.
2. Signatures on this Notice of Guaranteed Delivery. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Notes
referred to herein, the signature must correspond with the name(s) written on
the face of the Notes without alteration, enlargement, or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant
of the Book-Entry Transfer Facility whose name appears on a security position
listing as the owner of the Notes, the signature must correspond with the name
shown on the security position listing as the owner of the Notes.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Notes listed or a participant of the Book-Entry
Transfer Facility, this Notice of Guaranteed Delivery must be accompanied by
appropriate bond powers, signed as the name of the registered holder(s)
appears on the Notes or signed as the name of the participant shown on the
Book-Entry Transfer Facility's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation, or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing and submit with the Letter of Transmittal evidence
satisfactory to the Company of such person's authority to so act.
3. Requests for Assistance or Additional Copies. Questions and requests for
assistance and requests for additional copies of the Prospectus may be
directed to the Exchange Agent at the address specified in the Prospectus.
Holders may also contact their broker, dealer, commercial bank, trust company,
or other nominee for assistance concerning the Exchange Offer.
5
<PAGE>
EXHIBIT 99.3
INSTRUCTIONS TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
PEN-TAB INDUSTRIES, INC.
10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
To Registered Holder and/or Participant of the Book-Entry Transfer Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated
, 1997 (the "Prospectus") of Pen-Tab Industries, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to action to be taken by you relating to the Exchange
Offer with respect to the 10O% Senior Subordinated Notes due 2007 (the
"Notes") held by you for the account of the undersigned.
The aggregate face amount of the Notes held by you for the account of the
undersigned is (FILL IN AMOUNT):
$ of the 10O% Senior Subordinated Notes due 2007
With respect to the Exchange Offer, the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[_]TO TENDER the following Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF NOTES TO BE TENDERED, IF ANY): $
[_]NOT TO TENDER any Notes held by you for the account of the undersigned.
If the undersigned instruct you to tender the Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representation and warranties contained in
the Letter of Transmittal that are to be made with respect to the undersigned
as a beneficial owner, including but not limited to the representations that
(i) the undersigned's principal residence is in the state of (FILL IN STATE)
, (ii) the undersigned is acquiring the Exchange Notes in the ordinary
course of business of the undersigned, (iii) the undersigned is not
participating, does not participate, and has no arrangement or understanding
with any person to participate in the distribution of the Exchange Notes, (iv)
the undersigned acknowledges that any person participating in the Exchange
Offer for the purpose of distributing the Exchange Notes must comply with the
registration and prospectus delivery requirements of the Securities Act of
1933, as amended (the "Act"), in connection with a secondary resale
transaction of the Exchange Notes acquired by such person and cannot rely on
the position of the Staff of the Securities and Exchange Commission set forth
in no-action letters that are discussed in the section of the Prospectus
entitled "The Exchange Offer--Resales of the Exchange Notes," and (v) the
undersigned is not an "affiliate," as defined in Rule 405 under the Act, of
the Company; (b) to agree, on behalf of the undersigned, as set forth in the
Letter of Transmittal; and (c) to take such other action as necessary under
the Prospectus or the Letter of Transmittal to effect the valid tender of such
Notes.
SIGN HERE
Name of Beneficial Owner(s): __________________________________________
Signature(s): _________________________________________________________
Names (please print): _________________________________________________
Address: ______________________________________________________________
----------------------------------------------------------------------
----------------------------------------------------------------------
Telephone Number: _____________________________________________________
Taxpayer Identification or Social Security Number: ____________________
Date: _________________________________________________________________
