PEN TAB INDUSTRIES INC, S-4, 1997-04-04

PEN TAB INDUSTRIES INC
S-4, 1997-04-04

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 4, 1997

REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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. [_]

CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
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<S> <C> <C> <C> <C>
Series B 10 7/8% Senior $75,000,000 $1,000 principal $75,000,000 $22,727.27
Subordinated Notes due amount
2007..................
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(f)(2) based upon the book value of the securities
as of March 31, 1997.

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 APRIL 4, 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

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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........................... 34
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business............................ 36
Management.......................... 43
Security Ownership.................. 45
Certain Transactions................ 46
Description of Credit Agreement..... 46
Description of Exchange Notes....... 47
The Exchange Offer.................. 70
Certain Federal Income Tax Consider-
ations............................. 79
Plan of Distribution................ 79
Legal Matters....................... 80
Experts............................. 80
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
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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 "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. 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
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. 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
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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.
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.

. 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."

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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 Pursuant to the Purchase Agreement, the Company and
AGREEMENT............... 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

8
<PAGE>

Notes were acquired by such Participating Broker-
Dealer 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 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.

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."

9
<PAGE>

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 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."

10
<PAGE>

WITHDRAWAL RIGHTS....... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.

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."

11
<PAGE>

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 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 The Company and the Trustee, with the consent of the
INDENTURE............... 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."

12
<PAGE>

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.

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
Interest expense, net............. 2,410 2,883 2,346 8,913
Other (income) expense, net (c)... (3) 1,851 (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
Net cash provided by operating ac-
tivities......................... $ 5,576 $10,926 $ 13,356 $ 4,104
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 $ 68,535
Long-term debt (including
current portion).......... 26,890 28,000 24,210 83,428
Stockholders' equity (defi-
cit)...................... $ 8,770 $11,044 $15,052 $(21,478)
</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) Other (income) expense for fiscal 1995 includes relocation expenses of
$1,906 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 expense includes 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.
Adjusted for income taxes, the Company's historical net income for fiscal
1995 and 1996 would have been $2,617 and $8,262, respectively, had the
Company 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.
(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 $21.5
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 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 its senior management
team. Although the Company believes it could replace key employees in an
orderly fashion should the need arise, the loss of such key personnel could
have a material adverse effect on the Company. The Company maintains key-
person insurance for its President and Executive Vice President. 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

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
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 $ 22,142
======= ========
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).......... -- (34,187)
------- --------
Total stockholders' equity (deficit)... $15,052 $(21,478)
======= ========
</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
Interest expense, net............ 1,900 2,097 2,410 2,883 2,346
Other (income) expense, net (b).. (104) 50 (3) 1,851 (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
Net cash provided by operating
activities...................... $ 2,847 $ 369 $ 5,576 $10,926 $ 13,356
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.
(b) Other (income) expense for fiscal 1995 includes relocation expense of
$1,906, relating to the relocation of the Company's headquarters and east
coast manufacturing facilities from New York to Virginia. See Notes

23
<PAGE>

to audited Financial Statements appearing elsewhere in this Prospectus.
Relocation expenses includes 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. Adjusted for income
taxes, the Company's historical net income for fiscal 1995 and 1996 would
have been $2,617 and $8,262, respectively, had the Company 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.
(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; and (v) the payment of $1.0 million in expenses relating to
the Transactions via dividend distribution to Holdings. 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."

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) $22,142
(15,782)(e)
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 (49,969) 48,154
------- ------ ------- ------- -------- -------
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 $(49,969) $68,535
======= ====== ======= ======= ======== =======
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) (34,187)
------- ------ ------- ------- -------- -------
Total stockholder's
equity (deficit)....... 15,052 (2,343) 12,709 -- (34,187) (21,478)
------- ------ ------- ------- -------- -------
Total liabilities and
equity................. $43,504 $ -- $43,504 $75,000 $(49,969) $68,535
======= ====== ======= ======= ======== =======
</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.

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
Income from operations..................... 7.2 9.6 14.6
Interest expense, net...................... 2.7 3.0 2.2
Other (income) expense, net................ -- 1.9 --
----- ----- -----
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.

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.

Other expense. 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 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 repayment of long term debt and dividends to shareholders 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.

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 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.

33
<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.

34
<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."

35
<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 the strongest 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

. 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.

36
<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.

. 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

. 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

37
<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.

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 the recognized 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

38
<PAGE>

develop a range 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. 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.

39
<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 and Target Stores accounted for
approximately 21.8% and 15.6% of the Company's net sales for fiscal 1996,
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 the 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 the 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.

40
<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).

41
<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

42
<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.

43
<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 employment
agreements provide for (i) payment of a base salary indexed to inflation, (ii)
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 (iii) certain fringe
benefits. Each employment agreement

44
<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. 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>
PERCENTAGE OF PERCENTAGE OF
OUTSTANDING OUTSTANDING
NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK(1) PREFERRED STOCK
------------------------------------ --------------- ---------------
<S> <C> <C>
Citicorp Venture Capital, Ltd. .............. 49.0%(2) 35.7%(3)
399 Park Avenue
New York, New York 10043
Alan Hodes................................... 42.1 55.3(4)
Michael Greenberg............................ 6.9 9.0(5)
James Stevens................................ 2.0 --
----- -----
100.0% 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) Consists of both Class A Common Stock and Class B Common Stock. All other
percentages of outstanding Common Stock consist solely of Class A Common
Stock.
(3) Represents 125,875 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 85,937.5 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; and 108,818.36 shares of Series 3 Junior
Preferred Stock, which have a dividend rate of 12%, mature 2008 and rank
in priority to the Common Stock.
(5) Represents 14,062.5 shares of Series 1 Senior Preferred Stock and
17,806.64 shares of Series 3 Junior Preferred Stock.

45
<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.

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 relating to the Credit Agreement is
qualified in its entirety by reference to the complete text of the documents
entered into or to be 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). 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 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).

46
<PAGE>

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 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 in their entirety 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

47
<PAGE>

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

48
<PAGE>

entitled, but for the subordination provisions of the Indenture, shall be made
by the Company or by any receiver, 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.

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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
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.

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<PAGE>

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 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,

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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. 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

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<PAGE>

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 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.

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.

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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 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

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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 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.

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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 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.

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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 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.

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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.

"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).

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"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.

"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

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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 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.

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
in its entirety 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 sole judgment of the Company, 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 sole judgment
of the Company, 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 sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.

If the Company determines in its sole 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.

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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, 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.

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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."

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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.

79
<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.

80
<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) (UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 836 $ 111 $ 111
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
Inventories............................ 14,660 14,738 14,738
Prepaid expenses and other current as-
sets.................................. 297 577 577
------- ------- -------
Total current assets.................... 24,962 26,123 26,123
Property, plant and equipment, at cost:
Machinery and equipment................ 20,799 20,296 20,296
Furniture and fixtures................. 912 1,069 1,069
Leasehold improvements................. 133 150 150
Land and building...................... 6,832 6,893 6,893
------- ------- -------
28,676 28,408 28,408
Less: accumulated depreciation and amor-
tization............................... 10,450 11,641 11,641
------- ------- -------
18,226 16,767 16,767
Other assets............................ 617 614 614
------- ------- -------
Total assets............................ $43,805 $43,504 $43,504
======= ======= =======
</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) (UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 1,748 $ 2,774 $ 2,774
Accrued expenses and other current lia-
bilities.............................. 3,013 1,468 1,468
Deferred income taxes.................. -- -- 474
Current portion of long-term debt...... 193 16,037 16,037
------- ------- -------
Total current liabilities............... 4,954 20,279 20,753
------- ------- -------
Long-term debt.......................... 27,807 8,173 8,173
Deferred income taxes................... -- -- 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 California, 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 In-
dustries of California, Inc. .......... 4,807 -- --
------- ------- -------
Total stockholders' equity............. 11,044 15,052 12,709
------- ------- -------
Total liabilities and stockholders' eq-
uity................................... $43,805 $43,504 $43,504
======= ======= =======
</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
Other:
Interest expense--net............................. 2,410 2,883 2,346
Relocation expenses............................... -- 1,906 --
Other (income) expense--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 pro-
vided 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
Net changes (decrease) in long-term debt............. (3,537) (7,157) (3,790)
Proceeds from issuance of industrial development rev-
enue 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

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.

The pro forma data does not give effect to the recapitalization transactions
described in Note 13, including the issuance of $75 million Senior
Subordinated Notes and repurchase of Class A and Class B common stock, which
would substantially change the pro forma financial data.

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>

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.

F-9
<PAGE>

PEN-TAB HOLDINGS, INC. (FORMERLY PEN-TAB INDUSTRIES, INC.)

NOTES TO FINANCIAL STATEMENTS--(CONTINUED)

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 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................................. 8,228 1,071 9,299
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 and selling,
general and administration 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.

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.
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 Form of Employment Agreement by and among Pen-Tab Holdings, Inc.,
Pen-Tab Industries, Inc. and each of Alan Hodes and Michael
Greenberg.
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.
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>

* To be filed by amendment.

<TABLE>
<S> <C>
(B)FINANCIAL STATEMENT SCHEDULES.
</TABLE>

Not Applicable.

II-2
<PAGE>

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) If the registrant is a foreign private issuer, to file a post-
effective amendment to the registration statement to include any financial
statements required by Rule 3-19 of the chapter at the start of any delayed
offering or throughout a continuous offering. Financial statements and
information otherwise required by Section 10(a)(3) of the Act need not be
furnished, provided, that the registrant includes in the prospectus, by
means of a post-effective amendment, financial statements required pursuant
to this paragraph (a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of
those financial statements. Notwithstanding the foregoing, with respect to
registration statements on Form F-3, a post-effective amendment need not be
filed to include financial statements and information required by Section
10(a)(3) of the Act or Rule 3-19 of this chapter if such financial
statements and information are contained in periodic reports filed with or
furnished to the Commission by the registrant pursuant to section 13 or
section 15(d) of the Securities Exchange Act of 1934 that are incorporated
by reference in the Form F-3.

(5) That for purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.

(6) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.

(7) 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.

(8) 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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Front Royal, State of
Virginia, on April 3, 1997.

PEN-TAB INDUSTRIES, INC.

By: /s/ Alan Hodes
------------------------------------
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
Registration Statement and power of attorney have been signed by the following
persons on April 3, 1997 in the capacities indicated:

<TABLE>
<CAPTION>
SIGNATURE CAPACITY
--------- --------
<S> <C> <C>
/s/ Alan Hodes
- ---------------------- 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)

/s/ Richard Rocco
- ---------------------- Corporate Controller
Richard Rocco

/s/ Deborah Hodes
- ---------------------- Director
Deborah Hodes

/s/ Thomas McWilliams
- ---------------------- Director
Thomas McWilliams

/s/ David Howe
- ---------------------- Director
David Howe

/s/ James Stevens
- ---------------------- Director
James Stevens
</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.
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 Form of Employment Agreement by and among Pen-Tab Holdings,
Inc., Pen-Tab Industries, Inc. and each of Alan Hodes and
Michael Greenberg.
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.
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>

* To be filed by amendment.

<PAGE>

________________________________________________________________________________

RECAPITALIZATION AGREEMENT

BY AND AMONG

CITICORP VENTURE CAPITAL, LTD.,

PEN-TAB INDUSTRIES, INC.,

ALAN HODES,

AND

MICHAEL GREENBERG

________________________________________________________________________________

January __, 1997
<PAGE>

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Recapitalization.............................................................. 1
1A. Authorization.............................................................. 1
1B. Investment Transaction..................................................... 2
1C. Subordinated Note Offering................................................. 3
1D. Redemption Transaction..................................................... 3
1E. Exchange Transaction....................................................... 3
1F. Closing.................................................................... 3
1G. Final Cash Redemption Price; Adjustments................................... 4

Section 2. Conditions of the Purchaser's Obligations at the Closing...................... 6
2A. Representations and Warranties; Covenants.................................. 6
2B. Amendment of Articles of Incorporation..................................... 6
2C. Amendment of Bylaws........................................................ 6
2D. Shareholders Agreement..................................................... 6
2E. Registration Rights Agreement.............................................. 6
2F. Employment Agreements...................................................... 6
2G. Noncompetition............................................................. 7
2H. Stock Option Plan.......................................................... 7
2I. Opinion of the Company's and the Shareholders's Counsel.................... 7
2J. Sale of Series 2 Senior Preferred Stock and Common Stock to the Purchaser
.......................................................................... 7
2K. Redemption of Redemption Shares and Exchange of Exchange Shares from
the Shareholders........................................................... 7
2L. Resignation of Directors................................................... 7
2M. Release of Liens........................................................... 7
2N. Financing.................................................................. 7
2O. Indebtedness............................................................... 7
2P. Litigation................................................................. 7
2Q. Filings.................................................................... 8
2R. Third Party Consents and Approvals......................................... 8
2S. Governmental Consents and Approvals........................................ 8
2T. Material Adverse Change.................................................... 8
2U. Compliance with Applicable Laws............................................ 8
2V. Expenses................................................................... 8
2W. Proceedings................................................................ 8
2X. Closing Documents.......................................................... 9
2Y. Waiver..................................................................... 9
</TABLE>

i
<PAGE>

<TABLE>
<S> <C> <C>
Section 3. Conditions of the Obligations of the Company and the Shareholders at the
Closing.............................................................................. 10
3A. Representations and Warranties; Covenants.................................. 10
3B. Shareholders Agreement..................................................... 10
3C. Registration Rights Agreement.............................................. 10
3D. Employment Agreements...................................................... 10
3E. Litigation................................................................. 10
3F. Governmental Consents and Approvals........................................ 10
3G. Purchase of the Series 2 Senior Preferred Stock and the Common Stock by
the Purchaser.............................................................. 10
3H. Opinion of the Purchaser's Special Counsel................................. 10
3I. Proceedings................................................................ 10
3J. Closing Documents.......................................................... 11
3K. Senior Notes............................................................... 11
3L. Waiver..................................................................... 11

Section 4. Pre-Closing Covenants and Agreements.......................................... 11
4A. General.................................................................... 11
4B. Maintenance of Business.................................................... 11
4C. Third Party Notices and Consents........................................... 11
4D. Governmental Notices and Consents.......................................... 11
4E. Operation of Business...................................................... 12
4F. Full Access................................................................ 12
4G. Compliance with Agreements and Laws........................................ 12
4H. Payment of Obligations..................................................... 13
4I. Notice of Material Developments............................................ 13
4J. Exclusivity................................................................ 13
4K. Tax Matters................................................................ 14
4L. Actions with Respect to Redemption Shares and Exchange Shares.............. 14
4M. Real Estate Matters........................................................ 14
4N. Formation of Subsidiary.................................................... 14

Section 5. Representations and Warranties of the Company and the Shareholders............ 15
5A. Organization, Corporate Power and Licenses................................. 15
5B. Capital Stock and Related Matters.......................................... 15
5C. Subsidiaries; Investments.................................................. 16
5D. Authorization; No Breach................................................... 16
5E. Financial Statements....................................................... 17
5F. Absence of Undisclosed Liabilities......................................... 17
5G. Accounts Receivable........................................................ 18
5H. Inventory.................................................................. 18
5I. Product Warranty........................................................... 18
</TABLE>

ii
<PAGE>

<TABLE>
<S> <C> <C>
5J. No Material Adverse Effect................................................. 18
5K. Indebtedness............................................................... 18
5L. Absence of Certain Developments............................................ 19
5M. Assets..................................................................... 20
5N. Tax Matters................................................................ 20
5O. Contracts and Commitments.................................................. 23
5P. Small Business Matters..................................................... 25
5Q. Intellectual Property Rights............................................... 25
5R. Litigation, etc............................................................ 26
5S. Brokerage.................................................................. 27
5T. Insurance.................................................................. 27
5U. Employees.................................................................. 27
5V. ERISA...................................................................... 28
5W. Compliance with Laws; Permits.............................................. 29
5X. Environmental and Safety Matters........................................... 30
5Y. Affiliate Transactions..................................................... 31
5Z. Suppliers and Customers.................................................... 31
5AA. Real Property.............................................................. 32
5AB. FIRPTA..................................................................... 33
5AC. Closing Date............................................................... 33

Section 6. Representations and Warranties of the Shareholders............................ 34
6A. Power and Authority........................................................ 34
6B. Authorization; No Breach................................................... 34
6C. Title to Shares............................................................ 34
6D. Brokerage.................................................................. 35
6E. Litigation, etc............................................................ 35
6F. Company Transactions....................................................... 35
6G. Investment Representations................................................. 35
6H. Closing Date............................................................... 36

Section 7. Representations and Warranties of the Purchaser............................... 36
7A. Organization, Power and Authority.......................................... 36
7B. Authorization; No Breach................................................... 36
7C. Brokerage.................................................................. 37
7D. Investment Representations................................................. 37
7E. Closing Date............................................................... 38

Section 8. Indemnification and Other Agreements.......................................... 38
8A. Survival of Representations and Warranties................................. 38
8B. General Indemnification.................................................... 38
8C. Certain Tax Matters........................................................ 42
</TABLE>

iii
<PAGE>

<TABLE>
<S> <C> <C>
8D. Press Release and Announcements............................................ 43
8E. Confidentiality............................................................ 43

Section 9. Financial Statements and Other Information.................................... 43
9A. Deliveries................................................................. 43
9B. SBIC Regulatory Provisions................................................. 44

Section 10. Definitions.................................................................. 46

Section 11. Termination.................................................................. 54
11A. Conditions of Termination.................................................. 54
11B. Effect of Termination...................................................... 54

Section 12. Miscellaneous................................................................ 54
12A. Fees and Expenses.......................................................... 54
12B. Remedies................................................................... 55
12C. Consent to Amendments; Waivers............................................. 55
12D. Successors and Assigns..................................................... 55
12E. Severability............................................................... 56
12F. Counterparts............................................................... 56
12G. Descriptive Headings; Interpretation....................................... 56
12H. Entire Agreement........................................................... 56
12I. No Third-Party Beneficiaries............................................... 56
12J. Cooperation on Tax Matters................................................. 56
12K. Schedules and Exhibits..................................................... 57
12L. Governing Law.............................................................. 57
12M. Notices.................................................................... 57
12N. Jurisdiction and Venue..................................................... 59
12O. Waiver of Right to Jury Trial.............................................. 60
12P. No Strict Construction..................................................... 60
</TABLE>
<PAGE>

EXHIBITS AND SCHEDULES
Exhibits:

Exhibit A - Articles of Incorporation
Exhibit B - Closing Balance Sheet Procedures
Exhibit C - Bylaws
Exhibit D - Shareholders Agreement
Exhibit E - Registration Rights Agreement
Exhibit F - Form of Employment Agreement
Exhibit G - Stock Option Plan
Exhibit H - Opinion of the Company's and the Shareholders' Counsel
Exhibit I - Opinion of the Purchasers' Special Counsel
Exhibit J - Provisions Regarding the Senior Notes

Disclosure Schedules:

Purchaser Schedule
Shareholder Schedule
Purchaser Expenses Schedule
Contracts Schedule
Foreign Qualifications Schedule
Capitalization Schedule
Subsidiaries Schedule
Restrictions Schedule
Financial Statements Schedule
Disclosed Liabilities Schedule
Product Warranty Schedule
Indebtedness Schedule
Developments Schedule
Liens Schedule
Taxes Schedule
Intellectual Property Schedule
Litigation Schedule
Brokerage Schedule
Insurance Schedule
Employees Schedule
Employee Benefits Schedule
Compliance Schedule
Permits Schedule
Environmental Schedule
Affiliate Transactions Schedule
Suppliers and Customers Schedule
Real Property Schedule

v
<PAGE>

RECAPITALIZATION AGREEMENT
--------------------------

This RECAPITALIZATION AGREEMENT (this "Agreement") is made as of
---------
January __, 1997, by and among Pen-Tab Industries, Inc., a Virginia corporation
(the "Company"), Alan Hodes ("Hodes"), Michael Greenberg ("Greenberg") and
------- ----- ---------
Citicorp Venture Capital, Ltd., a New York corporation (the "Purchaser"). Hodes
---------
and Greenberg are sometimes referred to herein collectively as the
"Shareholders" and individually as a "Shareholder." The Purchaser, the Company
------------ -----------
and the Shareholders are sometimes collectively referred to herein as the
"Parties" and individually as a "Party." Capitalized terms used herein and not
- -------- -----
otherwise defined herein have the meanings given to such terms in Section 10
below.

WHEREAS, the Company desires to reconstitute its capital structure
through the sale of newly issued securities, the repurchase of certain of its
outstanding equity securities and the exchange of certain of its outstanding
equity securities for newly issued securities, in each case on the terms and
subject to the conditions set forth herein;

WHEREAS, the Company intends to form a Subsidiary ("OpCo") into which
----
the Company will contribute all of its assets and liabilities and the Company
shall cause OpCo to sell newly issued debt securities;

WHEREAS, the Shareholders desire the Company to repurchase certain
equity securities of the Company held by the Shareholders and desire the Company
to exchange certain equity securities of the Company held by the Shareholders
for newly issued securities of the Company, in each case on the terms and
subject to the conditions set forth herein;

WHEREAS, the Purchaser desires to purchase newly issued equity
securities of the Company on the terms and subject to the conditions set forth
herein;

NOW, THEREFORE, in consideration of the mutual covenants, agreements
and understandings herein contained, the Parties hereby agree as follows:

Section

1. Recapitalization.
----------------

1A. Authorization.
-------------

(i) The Company shall, and the Shareholders shall cause the Company
to, authorize the filing under the laws of the State of Virginia of the amended
and restated articles of incorporation of the Company (as amended, the "Articles
--------
of Incorporation"), which Articles of Incorporation shall be identical to the
- ----------------
currently existing articles of incorporation of the Company except with respect
to the amendment to Article IV thereof in the form of Exhibit A attached hereto
---------
or as may otherwise be mutually agreed upon by the parties. The Articles of
Incorporation shall be duly filed by the Company on or prior to the Closing Date
and shall be in full force and effect under the laws of the State of Virginia as
of the Closing.
<PAGE>

(ii) The Company shall, and the Shareholders shall cause the Company
to, authorize the issuance to the Purchaser of (a) 125,875 shares of the
Company's 12% Series 2 Senior Preferred Stock, par value $1.00 per share (the
"Series 2 Senior Preferred Stock), (b) 36.69703 shares of its Class A Common
-------------------------------
Stock, par value $.01 per share (the "Class A Common Stock"), and (c) 3.05681
--------------------
shares of its Class B Common Stock, par value $.01 per share (the "Class B
Common Stock"), each having the rights and preferences set forth in Exhibit A
---------
attached hereto.

(iii) The Company shall, and the Shareholders shall cause the Company
to, cause the authorization, issuance and sale by OpCo of its Senior
Subordinated Notes in the aggregate principal amount of up to $65 million (the
"Senior Notes"), and upon the receipt of the net proceeds of such sale, OpCo
------------
shall make a distribution of $38 million to the Company.

(iv) The Company shall, and the Shareholders shall cause the Company
to, authorize the repurchase of 747.57692 shares of the Class A Common Stock,
and 122.33077 shares of the Class B Common Stock from the Shareholders
(collectively, the "Redemption Shares") for an aggregate redemption price set
-----------------
forth herein. The number of Redemption Shares to be redeemed by each
Shareholder is set forth on the Shareholder Schedule attached hereto.
--------------------

(v) The Company shall, and the Shareholders shall cause the Company
to, authorize the issuance to the Shareholders of (a) an aggregate of 100,000
shares of the Company's 10% Series 1 Senior Preferred Stock, par value $1.00 per
share (the "Series 1 Senior Preferred Stock"), having the rights and preferences
-------------------------------
set forth in Exhibit A attached hereto, (b) an aggregate of 126,625 shares of
---------
the Company's 12% Series 3 Junior Preferred Stock, par value $1.00 per share
(the "Series 3 Junior Preferred Stock"), and (c) an aggregate of 5.37115 shares
--------------------------------
of Class A Common Stock, in exchange for 19.59936 shares of Class A Common Stock
and 357.66923 shares of Class B Common Stock held by the Shareholders (the
"Exchange Shares"), having the rights and preferences set forth in Exhibit A
- ---------------- ---------
attached hereto. The number of shares of Series 1 Senior Preferred Stock,
number of shares of Series 3 Junior Preferred Stock and number of shares of
Class A Common Stock to be issued in exchange to each Shareholder and the number
of Exchange Shares to be exchanged by each Shareholder is set forth on the
Shareholder Schedule attached hereto.
- --------------------

(vi) Following the Redemption Transaction and Exchange Transaction
(as such terms are defined below), Hodes shall retain 32.82372 shares of Class A
Common Stock. A second amendment to the certificate of incorporation will be
filed to effect 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.

1B. Investment Transaction. On the basis of the representations,
----------------------
warranties, covenants and agreements and subject to the satisfaction or waiver
of the conditions set forth in Section 2 below, each of the Purchaser and the
Company agrees to and shall consummate, and the Shareholders shall cause the
Company to consummate, at the Closing, the following transaction (the
"Investment Transaction"): the Company shall sell to the Purchaser, and the
----------------------
Purchaser shall purchase from the Company, the number of shares of Series 2
Senior Preferred Stock, Class A Common Stock and Class B Common Stock set forth
opposite the Purchaser's name on the Purchaser Schedule attached hereto upon
------------------
payment of immediately available funds in the amount set

2
<PAGE>

forth opposite the Purchaser's name on the Purchaser Schedule attached hereto,
------------------
payable in the manner set forth in Section 1F(i) below. The aggregate purchase
price for such shares of Series 2 Senior Preferred Stock shall be equal to
$12,587,500 and the aggregate purchase price for such shares of Class A Common
Stock and Class B Common Stock shall be equal to $2,422,500 (such amounts
collectively, the "Stock Purchase Price").
--------------------

1C. Subordinated Note Offering. On the basis of the representations,
---------------------------
warranties, covenants and agreements and subject to the satisfaction or waiver
of the conditions set forth in Section 2 below, the Company and the Shareholders
agree to cause OpCo to sell to the Noteholders Senior Notes at the Closing on
terms and conditions satisfactory to the Purchaser and, with respect to the
provisions set forth on Exhibit J attached hereto, the Shareholders (the
---------
"Subordinated Note Offering").
--------------------------

1D. Redemption Transaction. On the basis of the representations,
----------------------
warranties, covenants and agreements and subject to the satisfaction or waiver
of the conditions set forth in Section 3 below, each of the Company and each
Shareholder agrees that the Company shall, at the Closing, repurchase from each
Shareholder the number of Redemption Shares set forth opposite such
Shareholder's name on the Shareholder Schedule attached hereto and shall pay to
--------------------
such Shareholder (in the manner set forth in Section 1F(iv) below) such
Shareholder's Redemption Percentage of the Final Cash Redemption Price (the
"Redemption Transaction").
- -----------------------

1E. Exchange Transaction. On the basis of the representations,
--------------------
warranties, covenants and agreements and subject to the satisfaction or waiver
of the conditions set forth in Section 3 below, each of the Company and each
Shareholder agrees to and shall consummate, and the Shareholders shall cause the
Company to consummate, at the Closing, the following transaction (the "Exchange
--------
Transaction"): the Company shall deliver to each Shareholder, and each
- -----------
Shareholder shall receive from the Company, the number of shares of Series 1
Senior Preferred Stock, the number of shares of Series 3 Junior Preferred Stock
and the number of shares of Class A Common Stock set forth opposite such
Shareholder's name on the Shareholder Schedule attached hereto in exchange for
--------------------
the number of Exchange Shares set forth opposite such Shareholder's name on the
Shareholder Schedule attached hereto.
- --------------------

1F. Closing. The closing of each of the Investment Transaction, the
-------
Subordinated Note Offering, the Redemption Transaction and the Exchange
Transaction (the "Closing") shall take place at the offices of Kirkland & Ellis,
-------
153 East 53rd Street, New York, New York, or at such other place as may be
mutually agreeable to each of the Parties, at 10:00 a.m., local time, on
February __, 1997, or, if any of the conditions to Closing set forth in Section
2 and Section 3 below have not been satisfied or waived by the Party entitled to
the benefit thereof on or prior to such date, on the third business day
following satisfaction or waiver of such conditions, but in no event later than
February 28, 1997 (the "Closing Date"). At the Closing:
------------

(i) The Purchaser shall deliver to the Company the Stock
Purchase Price as set forth on the Purchaser Schedule attached hereto, by wire
------------------
transfer of immediately available funds to an account designated in writing by
the Company.

3
<PAGE>

(ii) The Company shall deliver to the Purchaser stock
certificates evidencing the shares of the Series 2 Senior Preferred Stock, the
Class A Common Stock and the Class B Common Stock to be issued to the Purchaser
as set forth on the Purchaser Schedule attached hereto, registered in the
------------------
Purchaser's name, upon payment of the Stock Purchase Price in the manner
described in clause (i) above.

(iii) The Company shall cause OpCo to deliver to the
Noteholders the Senior Notes upon payment of the purchase price therefor by the
Noteholders, and OpCo shall make a distribution to the Company of $38.0 million.

(iv) The Company shall pay to each Shareholder by wire
transfer of immediately available funds to an account designated in writing by
such Shareholder, an amount equal to such Shareholder's Redemption Percentage of
the Estimated Cash Redemption Price.

(v) Each Shareholder shall deliver to the Company the stock
certificates evidencing the Redemption Shares held by such Shareholder, upon
payment of the Estimated Cash Redemption Price in the manner described in clause
(iv) above, duly endorsed in blank or accompanied by duly executed stock powers.

(vi) The Company shall deliver to each Shareholder the stock
certificates evidencing the shares of Series 1 Senior Preferred Stock, shares of
Series 3 Junior Preferred Stock and Class A Common Stock to be issued to such
Shareholder as set forth opposite such Shareholder's name on the Shareholder
-----------
Schedule attached hereto, registered in such Shareholder's name, upon receipt by
- --------
the Company of the Exchange Shares to be delivered by such Shareholder
hereunder.

(vii) Each Shareholder shall deliver to the Company the stock
certificates evidencing the Exchange Shares held by such Shareholder, upon
delivery of the Series 1 Senior Preferred Stock, Series 3 Junior Preferred Stock
and Class A Common Stock to be delivered to such Shareholder in the manner
described in clause (vi) above, duly endorsed in blank or accompanied by duly
executed stock powers.

1G. Final Cash Redemption Price; Adjustments.
----------------------------------------

(i) The price for the Redemption Shares (the "Final Cash
----------
Redemption Price") shall be equal to $53,010,000 minus (1) the amount, if any,
- ---------------- -----
by which $15.3 million (the "Targeted Net Worth") exceeds the Net Worth of the
------------------
Company as shown on the Closing Balance Sheet (as defined in Section 1G(iii)
below and as prepared in accordance with the provisions thereof) (the "Closing
-------
Net Worth") or plus (2) the amount, if any, by which the Closing Net Worth
- --------- ----
exceeds the Targeted Net Worth.

(ii) At the Closing, the Company shall pay to the Shareholders
in the manner described in clause (iv) of Section 1F above an amount (the
"Estimated Cash Redemption Price") equal to the Final Cash Redemption Price as
-------------------------------
estimated in good faith by the Purchaser and the Shareholders on the basis of
the balance sheet of the Company as at December 31, 1996, adjusted to reflect
the effect of any dividends or distributions to the shareholders of the Company

4
<PAGE>

with respect to their stock after December 31, 1996 and prior to the Closing
Date, (the "Estimated Closing Balance Sheet"), prepared by the Company (with the
-------------------------------
participation of Ernst & Young LLP) in accordance with the provisions of Section
1G(iii) below and delivered by the Purchaser to the Shareholders and the Company
not less than three days prior to the Closing.

(iii) Within 60 days following Closing Date, the Shareholders
shall deliver to the Purchaser the consolidated balance sheet of the Company and
its Subsidiaries as of the opening of business on the Closing Date prepared by
the Company in accordance with the procedures set forth herein and on Exhibit B
---------
attached hereto (the "Closing Balance Sheet") and, accompanied by a report
---------------------
thereon by Ernst & Young LLP, setting forth the Closing Net Worth as of the
opening of business on the Closing Date. The Closing Balance Sheet shall
include all known adjustments required in a year-end closing of the books and
shall include all adjustments required as a result of the December 31, 1996
audit of the Company and, except as otherwise provided in this Section 1G (or
set forth on Exhibit B) or in the definition of "Net Worth," shall be prepared
---------
in accordance with GAAP consistently applied. The Company and the Purchaser
shall cooperate as reasonably requested in connection with the preparation of
the Closing Balance Sheet. During the 30-day period immediately following the
Purchaser's receipt of the Closing Balance Sheet, the Purchaser shall be
permitted to review the Company's books and records and the working papers
(including, without limitation, all records and work papers relating to the 1996
year end physical inventory) of the Company or any of its representatives and
advisors related to the preparation of the Closing Balance Sheet and the
determination of the Closing Net Worth. The Closing Balance Sheet shall become
final and binding upon the Parties 30 days following the Purchaser's receipt
thereof, unless the Purchaser shall give written notice of its disagreement (a
"Notice of Disagreement") to the Shareholders prior to such date. Any Notice of
- -----------------------
Disagreement shall specify in reasonable detail the nature and dollar amount of
any disagreement so asserted. Any determination expressly set forth on the
Closing Balance Sheet or in the report setting forth the Closing Net Worth which
is not objected to in the Notice of Disagreement shall be deemed final and
binding upon the Parties upon delivery of the Notice of Disagreement. If a
timely Notice of Disagreement is received by the Shareholders, then the Closing
Balance Sheet (as revised in accordance with clause (x) or (y) below) and the
related determination of the Closing Net Worth and the Final Cash Redemption
Price shall become final and binding upon the Parties on the first to occur of
(x) the date the Parties resolve in writing any differences they have with
respect to the matters specified in the Notice of Disagreement and (y) the date
all matters in dispute are finally resolved in writing by the Accounting Firm
(which final resolution shall be delivered not more than 45 days following
submission of such disputed matters). During the 20 days following delivery of
a Notice of Disagreement, the Parties shall seek in good faith to resolve in
writing any differences which they may have with respect to the matters
specified in the Notice of Disagreement. At the end of such 20-day period, the
Parties shall submit to a mutually satisfactory independent nationally
recognized "big-six" accounting firm (the "Accounting Firm") for review and
---------------
resolution of all matters which remain in dispute and which were properly
included in the Notice of Disagreement, and the Accounting Firm shall make a
final determination of the Closing Net Worth and the Final Cash Redemption Price
in accordance with the guidelines and procedures set forth in this Agreement.
If the Parties are unable to mutually agree on the Accounting Firm, the
Purchaser and the Shareholders shall select the Accounting Firm by lot (after
excluding Ernst & Young LLP, Deloitte & Touche and, if so requested, one
additional big-six accounting firm selected by each of

5
<PAGE>

the Purchaser and the Shareholders). The fees and expenses of the Accounting
Firm shall be borne by the Company.

(iv) If the Estimated Cash Redemption Price is greater than
the Final Cash Redemption Price, the Shareholders shall, and if the Final Cash
Redemption Price is greater than the Estimated Cash Redemption Price, the
Company shall, within three business days after the Closing Balance Sheet
becomes final and binding on the Parties, make payment by wire transfer to the
Company or the Shareholders, as the case may be, in immediately available funds
of the amount of such difference, together with interest thereon at a rate per
annum equal to 8% (the "Applicable Rate"), calculated on the basis of the actual
---------------
number of days elapsed over 360, from the Closing Date to the date of payment.

Section 1. Conditions of the Purchaser's Obligations at the Closing.
--------------------------------------------------------
The obligation of the Purchaser to take the actions set forth in Sections 1B, 1C
and 1F above is subject to the satisfaction as of the Closing of the following
conditions:

2A. Representations and Warranties; Covenants. The representations
-----------------------------------------
and warranties contained in Sections 5 and 6 hereof shall be true and correct in
all material respects at and as of the Closing as though then made and as though
the Closing Date was substituted for the date of this Agreement throughout such
representations and warranties, and the Company and the Shareholders shall have
performed in all material respects all of the covenants required to be performed
by the Company and the Shareholders hereunder prior to the Closing.

2B. Amendment of Articles of Incorporation. The Articles of
--------------------------------------
Incorporation shall have been amended and restated in the form of Exhibit A
---------
attached hereto, shall be in full force and effect under the laws of the State
of Virginia as of the Closing as so amended and restated and shall not have been
further amended or modified.

2C. Amendment of Bylaws. The Company's Bylaws (the "Bylaws") shall
------------------- ------
have been amended and restated in the form of Exhibit C attached hereto, shall
---------
be in full force and effect as of the Closing as so amended and restated and
shall not have been further amended or modified.

2D. Shareholders Agreement. The Company and the Shareholders shall
----------------------
have entered into a shareholders agreement in the form of Exhibit D attached
---------
hereto (the "Shareholders Agreement"), and the Shareholders Agreement shall be
----------------------
in full force and effect as of the Closing and shall not have been amended or
modified.

2E. Registration Rights Agreement. The Company and the Shareholders
-----------------------------
shall have entered into a registration rights agreement in the form of Exhibit E
---------
attached hereto (the "Registration Rights Agreement"), and the Registration
-----------------------------
Rights Agreement shall be in full force and effect as of the Closing and shall
not have been amended or modified.

2F. Employment Agreements. The Company and each of Hodes and
---------------------
Greenberg shall have entered into employment agreements substantially in the
form of Exhibit F attached hereto (the "Employment Agreements"), and the
--------- ---------------------
Employment Agreements shall be in full force and effect as of the Closing and
shall not have been amended or modified.

6
<PAGE>

2G. Noncompetition. The Company and each of Hodes and Greenberg
--------------
shall have entered into the noncompetition arrangements set forth in the
Employment Agreements.

2H. Stock Option Plan. The Company shall have established a stock
-----------------
option plan in the form of Exhibit G attached hereto (the "Stock Option Plan"),
--------- -----------------
and the Stock Option Plan shall be in full force and effect as of the Closing
and shall not have been amended or modified.

2I. Opinion of the Company's and the Shareholders's Counsel. The
-------------------------------------------------------
Purchaser shall have received from Rudnick & Wolfe, counsel for the Company and
the Shareholders, an opinion with respect to the matters set forth in Exhibit H
---------
attached hereto, which shall be addressed to the Purchaser (and, if requested by
the Purchaser, the Bank), and dated as of the Closing Date.

2J. Sale of Series 2 Senior Preferred Stock and Common Stock to the
---------------------------------------------------------------
Purchaser. The Company shall have simultaneously sold to the Purchaser the
- ---------
Series 2 Senior Preferred Stock, the Class A Common Stock and the Class B Common
Stock.

2K. Redemption of Redemption Shares and Exchange of Exchange Shares
---------------------------------------------------------------
from the Shareholders. The Shareholders shall have simultaneously (i) delivered
- ---------------------
to the Company the Redemption Shares and (ii) delivered to the Company the
Exchange Shares, in each case in the manner set forth in Section 1F above.

2L. Resignation of Directors. The Company and the Purchaser shall
------------------------
have received the resignation of each of Greenberg and Michael Hodes as a
director of the Company.

2M. Release of Liens. The Company shall have obtained releases of
----------------
all material Liens (other than any Permitted Liens) relating to the assets and
properties of the Company and its Subsidiaries.

2N. Financing. OpCo and the Company, taking into account the funds
---------
to be paid by the Purchaser in accordance with Section 1F, shall have received
cash proceeds sufficient to pay the Estimated Cash Redemption Price, pay all
fees and expenses incurred in connection with the transactions contemplated
hereby and provide OpCo with its working capital, all on terms and conditions
satisfactory to the Purchaser.

2O. Indebtedness. The Purchaser shall have received a written
------------
consent and waiver from the Trustee under the IRB Financing to the consummation
of the transactions contemplated hereby, and there shall not otherwise exist,
any event of default or event which, with the giving of notice or lapse of time
or both, would be an event of default under the IRB Financing.

2P. Litigation. No suit, action or other proceeding, or injunction,
----------
order, decree or judgment relating thereto, shall be threatened or shall be
pending before any Tribunal in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with the transactions contemplated
hereby or that would reasonably be expected to have a Material Adverse Effect,
and no injunction, judgment, order, decree or ruling with respect thereto shall
be in effect.

7
<PAGE>

2Q. Filings. The Company or its Subsidiaries shall have made all
-------
filings required to be made by the Company or its Subsidiaries and shall have
obtained all permits and other authorizations required to be obtained by the
Company and its Subsidiaries under all applicable Laws (including foreign,
federal and state securities laws) to consummate the transactions contemplated
by this Agreement in compliance with such laws.

2R. Third Party Consents and Approvals. The Company or its
----------------------------------
Subsidiaries shall have received or obtained all third party and shareholder
consents and approvals that are necessary for the consummation of the
transactions contemplated hereby or that are required in order to prevent a
breach of or default under, a termination or modification of, or acceleration of
the terms of, any instrument, contract, lease, license or other agreement
required to be listed or described on the attached Contracts Schedule
------------------
(collectively, the "Third Party Approvals"), in each case on terms and
---------------------
conditions reasonably satisfactory to the Purchaser.

2S. Governmental Consents and Approvals. The Parties shall have
-----------------------------------
received or obtained all consents and approvals of all Government Entities
necessary for the consummation of the transactions contemplated hereby, in each
case on terms and conditions satisfactory to the Purchaser (collectively, the
"Governmental Approvals").
----------------------

2T. Material Adverse Change. Since September 30, 1996, there shall
-----------------------
have been no fact, event or circumstance which would reasonably be expected to
have a Material Adverse Effect.

2U. Compliance with Applicable Laws. The consummation of the
-------------------------------
transactions contemplated hereby shall not be prohibited by any applicable Laws
and shall not subject the Purchaser, the Company or any of its Subsidiaries to
any penalty, liability or other onerous condition under or pursuant to any
applicable Laws, the Investment Transaction and the Subordinated Note Offering
shall be permitted by the Laws of the jurisdictions and Government Entities to
which the Purchaser, the Company or any of its Subsidiaries are subject and the
Redemption Transaction and the Exchange Transaction shall be permitted by the
Laws of the jurisdictions and Government Entities to which the Company is
subject. For purposes of this Section 2U, and all other provisions of this
Agreement, the parties agree that, without further notice or action of any kind,
the distribution, redemption and shareholder payment transactions contemplated
hereby are deemed to be in full compliance with the laws of the State of
Virginia and Delaware (with respect to OpCo).

2V. Expenses. At the Closing, the Company shall have reimbursed the
--------
Purchaser for its fees and expenses set forth on the Purchaser Expenses Schedule
---------------------------
attached hereto as provided in Section 12A below.

2W. Proceedings. All corporate and other proceedings taken or
-----------
required to be taken by the Company or its Subsidiaries and the Shareholders at
or prior to the Closing in connection with the transactions contemplated hereby
shall have been taken and all documents incident thereto shall be reasonably
satisfactory in form and substance to the Purchaser and its special counsel.

8
<PAGE>

2X. Closing Documents. At the Closing, the Company shall have
-----------------
delivered to the Purchaser all of the following documents:

(i) a certificate of an officer of the Company, dated the
Closing Date, stating that the conditions specified in Section 1 and
Sections 2A through 2W (other than Sections 2H, 2I, 2L, 2N and 2W),
inclusive, have been satisfied in all material respects;

(ii) certified copies of (a) the resolutions duly adopted by the
board of directors of the Company or any of its Subsidiaries, as
applicable, authorizing the execution, delivery and performance of this
Agreement and each of the other agreements contemplated hereby (including
the Stock Option Plan), the adoption of the Articles of Incorporation
referred to in Section 2B, the amendment and restatement of the Bylaws
referred to in Section 2C, the Investment Transaction, the Subordinated
Note Offering, the Redemption Transaction and the Exchange Transaction and
(b) the resolutions duly adopted by the Shareholders adopting the Articles
of Incorporation referred to in Section 2B and the Stock Option Plan;

(iii) certified copies of the Articles of Incorporation and the
Bylaws, each as in effect at the Closing and certified copies of the
articles of incorporation and bylaws of any Subsidiary of the Company;

(iv) copies of all Third Party Approvals and Governmental
Approvals (including all blue sky law filings and waivers of all preemptive
rights and rights of first refusal);

(v) good standing certificates of the Company and each of its
Subsidiaries from their respective jurisdictions of incorporation and each
jurisdiction in which the Company or such Subsidiary is qualified to do
business as a foreign corporation, in each case dated a recent date prior
to the Closing Date;

(vi) copies of (a) duly completed and executed SBA Forms 480, 652
and 1031 (Parts A and B), (b) a business plan showing the financial
projections (including balance sheets and income and cash flow statements)
for a five-year period of the Company and its Subsidiaries, (c) a written
statement from the Company and its Subsidiaries regarding the intended use
of proceeds from the Investment Transaction and Subordinated Note Offering
and (d) a list of the officers, directors and shareholders of the Company
and any of its Subsidiaries after giving effect to the transactions
contemplated hereby; and

(vii) proof of termination of the Subscription and Stockholders
Agreement dated October 5, 1982 by and among Alan Hodes, Serena Hodes,
Meyer Cohen and Michael Greenberg.

2Y. Waiver. Any condition specified in this Section 2 may be
------
waived if consented to in writing by the Purchaser.

Section 3. Conditions of the Obligations of the Company and the
----------------------------------------------------
Shareholders at the Closing. The obligation of the Company and each of the
- ---------------------------
Shareholders to take the actions set forth

9
<PAGE>

in Sections 1A through 1F above at or prior to the Closing is subject to the
satisfaction as of the Closing of the following conditions:

3A. Representations and Warranties; Covenants. The representations
-----------------------------------------
and warranties contained in Section 7 hereof shall be true and correct in all
material respects at and as of the Closing as though then made and as though the
Closing Date was substituted for the date of this Agreement throughout such
representations and warranties, and the Purchaser shall have performed in all
material respects all of the covenants required to be performed by the Purchaser
prior to the Closing.

3B. Shareholders Agreement. The Purchaser shall have entered into
----------------------
the Shareholders Agreement, and the Shareholders Agreement shall be in full
force and effect as of the Closing.

3C. Registration Rights Agreement. The Purchaser shall have entered
-----------------------------
into the Registration Rights Agreement, and the Registration Rights Agreement
shall be in full force and effect as of the Closing.

3D. Employment Agreements. The Company and each of Hodes and
---------------------
Greenberg shall have entered into the Employment Agreements, and the Employment
Agreements shall be in full force and effect as of the Closing and shall not
have been amended or modified.

3E. Litigation. No suit, action or other proceeding, or injunction,
----------
order, decree or judgment relating thereto, shall be threatened or shall be
pending before any Tribunal in which it is sought to restrain or prohibit or to
obtain damages or other relief in connection with the transactions contemplated
hereby and no injunction, judgment, order, decree or ruling with respect thereto
shall be in effect.

3F. Governmental Consents and Approvals. The Parties shall have
-----------------------------------
received or obtained all Governmental Approvals.

3G. Purchase of the Series 2 Senior Preferred Stock and the Common
--------------------------------------------------------------
Stock by the Purchaser. The Purchaser shall have simultaneously purchased the
- ----------------------
Series 2 Senior Preferred Stock and the Common Stock and the Company shall have
received payment therefor in full, in the manner set forth in Section 1F above.

3H. Opinion of the Purchaser's Special Counsel. The Shareholders
------------------------------------------
shall have received from Kirkland & Ellis, special counsel to the Purchaser, an
opinion with respect to the matters set forth in Exhibit I attached hereto,
---------
which shall be addressed to the Shareholders and dated as of the Closing Date.

3I. Proceedings. All corporate and other proceedings required to be
-----------
taken by the Purchaser at or prior to the Closing in connection with the
transactions contemplated hereby shall have been taken and all documents
incident thereto shall be reasonably satisfactory in form and substance to the
Company and the Shareholders and their counsel.

10
<PAGE>

3J. Closing Documents. At the Closing, the Purchaser shall have
-----------------
delivered to the Company and each of the Shareholders a certificate of an
officer of the Purchaser, dated the Closing Date, stating that the conditions
specified in Section 3A through 3K (other than Section 3I), inclusive shall have
been fully satisfied.

3K. Senior Notes. The Shareholders shall be satisfied that the
------------
indenture governing the Senior Notes shall be consistent with the material
provisions set forth on Exhibit J attached hereto.
---------

3L. Waiver. Any condition specified in this Section 3 may be waived
------
if consented to in writing by the Company and the Shareholders.

Section 4. Pre-Closing Covenants and Agreements. Each of the Parties
------------------------------------
agrees as follows with respect to the period between the date of this Agreement
and the Closing:

4A. General. Each of the Parties shall use its commercially
-------
reasonable best efforts to take all action and to do all things necessary,
proper or advisable in order to consummate and make effective the transactions
contemplated by this Agreement (including satisfaction, but not waiver, of the
conditions set forth in Sections 2 and 3 above and execution and delivery of
the agreements and instruments contemplated hereby to be executed and delivered
at the Closing).

4B. Maintenance of Business. Each of the Company and its
-----------------------
Subsidiaries shall, and the Shareholders shall cause the Company to, (i)
maintain its assets in good operating condition and repair, (ii) maintain
insurance comparable to that in effect on the date of the Latest Balance Sheet,
(iii) maintain inventory and supplies at customary operating levels consistent
with current practices, and replace in accordance with past custom and practice
any inoperable, worn out or obsolete assets with modern assets of comparable
quality, (iv) maintain its books, accounts and records in accordance with past
custom and practice as used in the preparation of the Latest Balance Sheet and
the financial statements described in Section 5E below and (v) maintain in full
force and effect the existence of all Intellectual Property Rights.

4C. Third Party Notices and Consents. The Parties shall use their
--------------------------------
respective commercially reasonable best efforts to (i) give required notices to
third parties, (ii) obtain any required third party consents and (iii) take any
actions reasonably required by any third party, in each case in connection with
the matters contemplated by this Agreement.

4D. Governmental Notices and Consents. Each of the Parties shall
---------------------------------
give any notices to, make any filings with, and use its commercially reasonable
best efforts to obtain, any authorizations, consents and approvals of all
Government Entities necessary or desirable in connection with the matters
contemplated by this Agreement.

4E. Operation of Business. Each of the Company and its Subsidiaries
---------------------
shall, and the Shareholders shall, use their respective commercially reasonable
best efforts to cause the Company to operate its business only in the usual and
ordinary course of business consistent with past custom and practice and use
their respective commercially reasonable best efforts to preserve the goodwill
and organization of its business and the relationships with its customers,
suppliers,

11
<PAGE>

employees and other Persons having business relations with the Company. Without
limiting the generality of the foregoing, prior to the Closing, without the
prior written consent of the Purchaser, each of the Company and its Subsidiaries
shall not:

(i) except as expressly contemplated by this Agreement, take or
omit to take any action that would require disclosure under Section 5M
below or that would otherwise result in a material breach of any of the
representations, warranties or covenants made by the Company or the
Shareholders in this Agreement;

(ii) take any action or omit to take any action which act or
omission would reasonably be expected to have a Material Adverse Effect;

(iii) enter into any supply contracts for a period of more than
one (1) year or otherwise purchase or commit to purchase paper in excess of
the Company's forecasted needs for the 120-day period following the date
hereof; or

(iv) make any Restricted Payment or make any distribution to the
Shareholders, except as otherwise provided below in this Section 4E.

Notwithstanding the foregoing, nothing in this Section 4E shall
prohibit the Company from (i) taking any other action or omitting to take any
other action as required or as specifically contemplated by this Agreement or
(ii) making any distribution to the Shareholders for tax payments so long as the
Company delivers to the Purchaser prior written notice of any such distribution;
provided, that any such distribution shall have been made prior to the Closing
Date.

4F. Full Access. The Company shall, and the Shareholders shall cause
-----------
the Company to, afford, and cause its officers, directors, employees, attorneys,
accountants and other agents to afford, to the Purchaser and its accounting,
legal and other representatives and potential lenders, as well as their
respective officers, employees, affiliates and other agents, full and complete
access at all reasonable times to the personnel of the Company and its
Subsidiaries and to business, financial, legal, tax, compensation and other data
and information concerning the Company, its Subsidiaries and its affairs and
operations.

4G. Compliance with Agreements and Laws. Each of the Company and its
-----------------------------------
Subsidiaries shall, and the Shareholders shall cause the Company to, (i) comply
with all material obligations pursuant to any contract or agreement, whether
oral or written, express or implied and (ii) comply in all material respects
with all applicable Laws. Without limiting the generality of the foregoing,
each of the Company and its Subsidiaries shall, and the Shareholders shall cause
the Company to, comply in all material respects with all Environmental and
Safety Requirements and all permits, licenses or other authorizations issued
thereunder; respond in accordance with applicable law to any Release or
threatened Release of any hazardous material, substance or waste in a manner
which complies in all material respects with all Environmental and Safety
Requirements; and provide such documents or information, or conduct at its own
cost such studies or assessments, relating to matters arising under
Environmental and Safety Requirements as the Purchaser may reasonably request.

12
<PAGE>

4H. Payment of Obligations. Each of the Company and its Subsidiaries
----------------------
shall, and the Shareholders shall cause the Company to, pay and discharge when
payable all Taxes, assessments and governmental charges imposed upon its
properties or upon the income or profits therefrom (in each case before the same
becomes delinquent and before penalties accrue thereon other than with respect
to any Taxes, assessments or charges which are being contested in good faith and
by appropriate proceedings and for which adequate reserves have been
established) and all claims for labor, materials or supplies.

4I. Notice of Material Developments. Each Party shall give prompt
-------------------------------
written notice to the other Parties of (i) any variances in any of its
representations or warranties contained in Sections 5, 6 or 7 below, as the case
may be, (ii) any breach of any covenant hereunder by such Party and (iii) any
other material development affecting the ability of such Party to consummate the
transactions contemplated by this Agreement. After the Purchaser has received
any such notice from the Company or the Shareholders, the Purchaser shall have
twenty (20) business days to terminate this Agreement if the subject of such
notice would reasonably be expected to result in a Material Adverse Effect
either individually or in the aggregate. Unless the Purchaser exercises such
right within twenty (20) days of its receipt of such notice, the written notice
pursuant to this Section 4I will be deemed to have amended the Schedules, to
have qualified the representations and warranties contained in Sections 5 or 6
with respect to such notice, and to have cured any misrepresentation or breach
of warranty that otherwise might have existed hereunder by reason of such
development; provided, that the Company and the Shareholders agree to use their
commercially reasonable best efforts to cure any such misrepresentation or
breach prior to the Closing Date notwithstanding the acceptance of the Purchaser
or the deemed amendment to the representations, warranties, Schedules or
Exhibits as a result of this Section 4I. Additionally, if the Purchaser
receives any such notice after February 14, 1996, the Purchaser may, at its
option, elect to extend the termination date set forth in Section 1F and Section
11A(iii) by ten (10) days, and the Schedules will not be deemed amended, the
representations and warranties will not be deemed qualified and such breach will
not be deemed cured until the Purchaser accepts such notice in writing.

4J. Exclusivity. None of the Company, the Shareholders or any of
-----------
their respective Affiliates, representatives, officers, employees, directors or
agents shall, directly or indirectly, (i) submit, solicit, initiate, encourage,
entertain, negotiate, accept or discuss, directly or indirectly, any proposal or
offer from any Person or enter into any agreement or accept any offer relating
to any (a) reorganization, liquidation, dissolution or recapitalization of the
Company, (b) merger or consolidation involving the Company, (c) purchase or sale
of any assets or capital stock (other than a purchase or sale of inventory in
the ordinary course of business consistent with past custom and practice) of the
Company, or (d) similar transaction or business combination involving the
Company or the assets of the Company (each of the foregoing actions described in
clauses (a) through (d), a "Company Transaction"), (ii) furnish any information
-------------------
with respect to, assist or participate in or facilitate in any other manner any
effort or attempt by any Person to do or seek to do any of the foregoing or
(iii) enter into any agreement, arrangement or understanding requiring the
Company or the Shareholders to abandon, terminate or fail to consummate any of
the transactions contemplated hereby. The Company and the Shareholders agree to
notify the Purchaser immediately if any Person makes any proposal, offer,
inquiry or contact with respect to a Company Transaction. In the event that any
of the Company or the Shareholders breaches the provisions of this Section 4J
and the transactions contemplated hereby are not consummated for any reason
(other

13
<PAGE>

than as a direct result of a breach of this Agreement by the Purchaser in the
absence of any breach of this Agreement by the Company or the Shareholders), the
Company and/or the Shareholders shall promptly reimburse the Purchaser and its
Affiliates for all out-of-pocket fees and expenses incurred before or after the
date of this Agreement by the Purchaser and its Affiliates related to the
transactions contemplated hereby, including fees and expenses of legal counsel,
accountants and other consultants and advisors retained by the Purchaser in
connection with the transactions contemplated hereby.

4K. Tax Matters. Except as expressly contemplated by this Agreement,
-----------
without the prior written consent of the Purchaser, none of the Shareholders or
the Company shall make or change any election, change an annual accounting
period, adopt or change any accounting method, file any amended Tax Return,
enter into any closing agreement, settle any Tax claim or assessment relating to
the Company, surrender any right to claim a refund of Taxes, consent to any
extension or waiver of the limitation period applicable to any Tax claim or
assessment relating to the Company, or take any other similar action, or omit to
take any action relating to the filing of any Tax Return or the payment of any
Tax, if such election, adoption, change, amendment, agreement, settlement,
surrender, consent or other action or omission would have the effect of
increasing the present or future Tax liability or decreasing any present or
future Tax asset of the Company or the Purchaser.

4L. Actions with Respect to Redemption Shares and Exchange Shares.
-------------------------------------------------------------
Each of the Shareholders agrees that he shall not sell, redeem, convert, assign,
exchange, transfer, pledge or otherwise dispose of any interest in his
Redemption Shares and Exchange Shares (or any other shares of Common Stock),
except as expressly contemplated by this Agreement.

4M. Real Estate Matters. The Company shall use its commercially
-------------------
reasonable best efforts to obtain an estoppel letter (an "Estoppel Letter") with
---------------
respect to each parcel of Leased Real Property from the landlord, lessor,
sublessor or licensor for such property in form and content reasonably
satisfactory to the Purchaser.

4N. Formation of Subsidiary. At least one day prior to the Closing,
-----------------------
the Company shall, and the Shareholders shall cause the Company to (i) amend the
certificate of incorporation of the Company to change the name of the Company
from Pen-Tab Industries, Inc. to Pen-Tab Holdings, Inc. and (ii) incorporate a
Delaware subsidiary called Pen-Tab Industries Inc. (also referred to herein as
OpCo) of which the Company shall be the sole shareholder. The Company shall
transfer all assets and liabilities of the Company into OpCo at least one day
prior to the Closing, and the documentation of such transfer shall be reasonably
acceptable to the Purchaser.

Section 5. Representations and Warranties of the Company and the
-----------------------------------------------------
Shareholders. As a material inducement to the Purchaser to enter into this
- ------------
Agreement and purchase the Series 2 Senior Preferred Stock and the Common Stock
hereunder, each of the Company and the Shareholders hereby represents and
warrants, separately and not jointly (and subject to the last sentence of
Section 8B(i)) to the Purchaser as follows:

5A. Organization, Corporate Power and Licenses. Each of the Company
------------------------------------------
and its Subsidiaries is a corporation duly organized, validly existing and in
good standing under the Laws

14
<PAGE>

of its state of incorporation and is qualified to do business in every
jurisdiction in which the failure to be so qualified would not reasonably be
expected to have a Material Adverse Effect, which such jurisdictions are set
forth on the Foreign Qualifications Schedule attached hereto. Each of the
-------------------------------
Company and its Subsidiaries possesses all requisite corporate power and
authority necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement. The copies of the charter
documents and bylaws which have been furnished to the Purchaser reflect all
amendments made thereto at any time prior to the date of this Agreement and are
correct and complete.

5B. Capital Stock and Related Matters.
---------------------------------

(i) As of immediately prior to the Closing, the authorized capital
stock of the Company consists of 1,000 shares of Class A Common Stock of which
800 shares are issued and outstanding and 1,000 shares of Class B Common Stock
of which 480 shares are issued and outstanding. All of such shares of capital
stock are held beneficially and of record by the Shareholders (free and clear of
all Encumbrances). As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall consist of (a) 100,000 shares of Series 1
Senior Preferred Stock, all of which shall be issued and outstanding, (b)
125,875 shares of Series 2 Senior Preferred Stock, all of which shall be issued
and outstanding, (c) 126,625 shares of Series 3 Junior Preferred Stock, all of
which shall be issued and outstanding, (d) 6,000,000 shares of Class A Common
Stock, of which 4,563,725.5 shares shall be issued and outstanding and (e)
2,000,000 shares of Class B Common Stock of which 186,274.5 shares shall be
issued and outstanding. The Capitalization Schedule attached hereto, sets forth
-----------------------
the capitalization of each of the Company's Subsidiaries and the name of each
Person holding any equity securities of the Company, any securities convertible
or exchangeable for any equity securities of the Company and any options or
other rights to purchase equity securities of the Company and the amount and
type of such securities or options or rights held by such Persons as of the
Closing Date and immediately thereafter. None of the Company or any of its
Subsidiaries has outstanding (1) any stock or securities convertible or
exchangeable for any shares of its capital stock or containing any profit
participation features, nor any rights or options to subscribe for or to
purchase its capital stock or (2) any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or phantom
stock or similar plans or rights, other than, as of the Closing Date and
immediately thereafter, as set forth on the Capitalization Schedule attached
-----------------------
hereto. None of the Company or any of its Subsidiaries is subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, other than as expressly provided in this Agreement
and the Articles of Incorporation. As of the Closing and immediately thereafter,
all of the outstanding shares of the Company's (and each of its Subsidiaries')
capital stock shall be validly issued, fully paid and nonassessable.

(ii) Except in connection with the transactions contemplated hereby or
in the Shareholders Agreement, there are no statutory or contractual preemptive
rights or rights of first refusal with respect to the issuance of the Series 2
Senior Preferred Stock, the Series 1 Senior Preferred Stock, the Series 3 Junior
Preferred Stock or the Common Stock hereunder. The Company has not violated any
applicable federal or state securities laws in connection with the offer, sale
or issuance of any of its capital stock or the offer, sale or issuance of any of
its debt securities. The offer, sale and issuance of the Series 1 Senior
Preferred Stock, the Series 2 Senior Preferred Stock,

15
<PAGE>

the Series 3 Junior Preferred Stock, and the Common Stock hereunder does not
require registration under the Securities Act or any applicable state securities
laws. Except for the Shareholders Agreement and the Registration Rights
Agreement to be executed and delivered at the Closing and other agreements
between the parties as set forth on the Capitalization Schedule, there are no
-----------------------
agreements between the Company's shareholders or among any other Person with
respect to the voting, transfer or registration of the Company's capital stock.

5C. Subsidiaries; Investments. Except as set forth on the
-------------------------
Subsidiaries Schedule, none of the Company or any of its Subsidiaries owns or
- ---------------------
holds the right to acquire any shares of stock or any other security or interest
in any other Person. Except as set forth on the Subsidiaries Schedule attached
---------------------
hereto, the Company has never had any Subsidiaries.

5D. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement and all other agreements and instruments
contemplated hereby to which the Company or any Subsidiary of the Company is a
party, the Investment Transaction, the Subordinated Note Offering, the
Redemption Transaction, the Exchange Transaction, the amendment and restatement
of the Articles of Incorporation and the amendment and restatement of the Bylaws
have been duly authorized by the Company and such Subsidiaries of the Company,
as applicable. This Agreement constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms, except as such enforceability
may be limited by (x) applicable insolvency, bankruptcy, reorganization,
moratorium or other similar laws affecting creditors' rights generally and (y)
applicable equitable principles (whether considered in a proceeding at law or in
equity), and all other agreements and instruments contemplated hereby to which
the Company or any Subsidiary of the Company is a party, when executed and
delivered by the Company in accordance with the terms hereof, shall each
constitute a valid and binding obligation of the Company or such Subsidiary,
enforceable in accordance with its terms, except as such enforceability may be
limited by (x) applicable insolvency, bankruptcy, reorganization, moratorium or
other similar laws affecting creditors' rights generally and (y) applicable
equitable principles (whether considered in a proceeding at law or in equity).
Except as set forth on the attached Restrictions Schedule, the execution and
---------------------
delivery by the Company of this Agreement and all other agreements and
instruments contemplated hereby to which the Company or any Subsidiary of the
Company is a party, the Investment Transaction, the Subordinated Note Offering,
the Redemption Transaction, the Exchange Transaction, the amendment and
restatement of the Articles of Incorporation, the amendment and restatement of
the Bylaws and the fulfillment of and compliance with the respective terms
hereof and thereof by the Company or such Subsidiary do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under (whether with or without the passage of time,
the giving of notice or both), (iii) result in the creation of any Lien upon the
Company's or any of its Subsidiaries' capital stock or assets pursuant to, (iv)
give any third party the right to modify, terminate or accelerate any obligation
under, (v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or other action by or notice or declaration to, or filing
with, any third party or any Government Entity pursuant to, the Articles of
Incorporation or Bylaws, or any Law to which the Company or any Subsidiary of
the Company is subject, or any order, judgment or decree or any material
agreement or instrument to which the Company is subject. None of the Company,
any Subsidiary of the Company or either of the Shareholders is a party to or
bound by any written or oral agreement or understanding with respect

16
<PAGE>

to a Company Transaction other than this Agreement, and all of them have
terminated all discussions with third parties (other than the Purchaser)
regarding Company Transactions.

5E. Financial Statements. Attached hereto as the Financial
-------------------- ---------
Statements Schedule are the following financial statements:
- -------------------

(i) the audited combined balance sheets of the Company and its
Affiliated Company (as defined therein) as of December 30, 1995 and
December 31, 1994, and the related statements of combined income and cash
flows (or the equivalent) for the respective twelve-month periods then
ended;

(ii) the unaudited balance sheet of the Company as of October 26,
1996 (the "Latest Balance Sheet"), and the related statements of income and
--------------------
cash flows (or the equivalent) for the ten-month period then ended; and

(iii) the unaudited balance sheet of the Company as of December 31,
1996 and the related statements of income and cash flows (or the
equivalent) for the twelve-month period then ended, which may be attached
hereto subsequent to the date hereof.

Except as set forth on the Financial Statements Schedule, each of the foregoing
-----------------------------
financial statements (including in all cases the notes thereto, if any) fairly
presents the financial condition, operating results and cash flows of the
Company and its Affiliated Company, if applicable, and has been prepared in
accordance with GAAP consistently applied throughout such financial statements
and the periods covered thereby, subject in the case of the unaudited financial
statements to the absence of footnote disclosure and year end adjustments which
are not individually or in the aggregate material.

5F. Absence of Undisclosed Liabilities. Except as set forth on the
----------------------------------
Disclosed Liabilities Schedule, to the Knowledge of the Company and the
- ------------------------------
Shareholders, neither the Company nor its Subsidiaries has any obligation or
liability (whether accrued, absolute, contingent, unliquidated or otherwise) of
a type and amount which would be required to be reflected, reserved against or
disclosed in financial statements of the Company in accordance with GAAP except
(a) such liabilities or obligations as are fully reflected, reserved against or
disclosed in the Latest Balance Sheet (or any footnotes thereto) or (b) such
liabilities or obligations as have been incurred in the ordinary course of
business, consistent with past custom and practice, since September 30, 1996.

5G. Accounts Receivable. All accounts receivable reflected on the
-------------------
Latest Balance Sheet and all accounts receivable to be reflected on the Closing
Balance Sheet (net of allowances for doubtful accounts as reflected thereon and
as determined in accordance with GAAP consistently applied with respect to each
such financial statement) are or shall be valid receivables arising in the
ordinary course of business consistent with past custom and practice. Nothing
herein shall be deemed to be, or interpreted as, a guarantee of collection by
the Company or any of the Shareholders.

17
<PAGE>

5H. Inventory. The inventory shown on the Latest Balance Sheet and
---------
the inventory to be shown on the Closing Balance Sheet (net of the reserves
applicable thereto as reflected thereon and as determined in accordance with
GAAP consistently applied with respect to each such financial statement (other
than the reserve applicable to the accounting of inventory on last-in-first-out
basis)), consists or shall consist of a quantity and quality usable and saleable
in the ordinary course of business consistent with past custom and practice.

5I. Product Warranty. To the Knowledge of the Company and the
----------------
Shareholders, all products manufactured, sold, leased or delivered by the
Company or any of its Subsidiaries have been in conformity in all material
respects with all applicable contractual commitments and all express and implied
warranties, and none of the Company or any of its Subsidiaries has any liability
(and, to the Knowledge of the Company and the Shareholders, there is no
reasonable basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against it giving rise to any
such liability) for replacement or repair thereof or other damages in connection
therewith in excess of past custom and practice and experience. No products
manufactured, sold, leased or delivered by the Company or any of its
Subsidiaries and no services rendered by the Company or any of its Subsidiaries
are subject to any Guarantee, warranty or other indemnity beyond the applicable
standard terms and conditions of such sale, lease or service. The attached
Product Warranty Schedule includes copies of such standard terms and conditions
- -------------------------
of sale, lease and service for the Company and any of its Subsidiaries
(containing applicable guaranty, warranty and indemnity provisions).

5J. No Material Adverse Effect. To the Knowledge of the Company and
--------------------------
the Shareholders, since September 30, 1996, there has occurred no fact, event or
circumstance which has had or would reasonably be expected to have a Material
Adverse Effect.

5K. Indebtedness. On October 26, 1996, all obligations under the
------------
Indebtedness of the Company and its Subsidiaries did not exceed $22,000,000. To
the Knowledge of the Company and the Shareholders, except as disclosed on the
Indebtedness Schedule, no default or event of default has occurred which has not
- ---------------------
either been cured or waived, and no event has occurred which with the passage of
time or the giving of notice or both would result in a default or event of
default under any document or agreement pursuant to which the Company received
the IRB Financing and all of such documents and agreements are in full force and
effect.

5L. Absence of Certain Developments. Except as expressly
-------------------------------
contemplated by this Agreement or as set forth on the attached Developments
------------
Schedule, to the Knowledge of the Company and the Shareholders, since September
- --------
30, 1996, each of the Company and its Subsidiaries has conducted its business
only in the ordinary course of business consistent with past custom and
practice, and each of the Company and its Subsidiaries has not:

(i) issued any notes, bonds or other debt securities or any capital
stock or other equity securities or any securities or rights convertible,
exchangeable or exercisable into any capital stock or other equity
securities;

(ii) incurred any Indebtedness, other than any Indebtedness incurred
in the ordinary course of business consistent with past custom and
practice;

18
<PAGE>

(iii) discharged or satisfied any material Lien or paid any material
obligation or liability, other than current liabilities paid in the
ordinary course of business consistent with past custom and practice;

(iv) declared, set aside or made any payment or distribution of
cash or other property to the Shareholders with respect to their capital
stock or other equity securities or purchased, redeemed or otherwise
acquired any shares of its capital stock or other equity securities
(including any warrants, options or other rights to acquire its capital
stock or other equity securities);

(v) mortgaged or pledged any of its properties or assets or
subjected them to any Lien, except Permitted Liens;

(vi) sold, assigned, transferred, leased, licensed or abandoned any
of its assets, tangible or intangible (including, without limitation, the
Intellectual Property Rights), except in the ordinary course of business
consistent with past custom and practice;

(vii) made or granted any bonus or any wage or salary increase to
any employee or group of employees (except as required by pre-existing
contracts described on the attached Contracts Schedule), or made or granted
------------------
any increase in any employee benefit plan or arrangement (except as
required by the plan documents), or amended or terminated any existing
employee benefit plan or arrangement or adopted any new employee benefit
plan or arrangement;

(viii) entered into any long-term paper supply contracts or otherwise
purchased or committed to purchase paper in excess of the Company's
forecasted needs for the 90-day period following the date of such contract
or such purchase or commitment;

(ix) made capital expenditures or commitments therefor that
aggregate in excess of $250,000;

(x) delayed, postponed or cancelled the payment of any accounts
payable or any other liability or obligation (other than as a result of a
good faith dispute) or agreed or negotiated with any party to extend the
payment date of any accounts payable or accelerated the collection of any
accounts or notes receivable;

(xi) except with respect to OpCo and other than the endorsement of
checks in the ordinary course of business, made any loans or advances to,
Guarantees for the benefit of, or any Investments in, any Persons or formed
any Subsidiary;

(xii) suffered any damage, destruction or casualty loss exceeding in
the aggregate $500,000, whether or not covered by insurance, or experienced
any material reductions in the coverage amount and scope of insurance
coverage;

(xiii) made any change in any method of accounting or accounting
policies, other than those required by GAAP which have been disclosed in
writing to the Purchaser, or

19
<PAGE>

made any write-down in the value of its inventory that is material or that
is other than in the ordinary course of business consistent with past
custom and practice;

(xiv) directly or indirectly engaged in any transaction or entered
into any arrangement with any officer, director, partner, shareholder or
other Affiliate of the Company;

(xv) except as contemplated hereby, amended its articles of
incorporation, bylaws or other organizational documents; or

(xvi) agreed, whether orally or in writing, to do any of the
foregoing.

5M. Assets.
------

(i) Except as set forth on the Liens Schedule attached hereto,
--------------
each of the Company and its Subsidiaries has good and valid title to, or a
valid leasehold interest in, the properties and assets, tangible or
intangible, used by it, located on its premises or shown on the Latest
Balance Sheet or acquired thereafter, free and clear of all Liens, except
for (a) properties and assets disposed of in the ordinary course of
business since the date of the Latest Balance Sheet and (b) Permitted
Liens.

(ii) Each of the Company and its Subsidiaries owns, has a valid
leasehold interest in, or has a valid license to use, all the assets,
properties and rights, whether tangible or intangible, necessary for the
conduct of its business as presently conducted and as presently proposed to
be conducted.

5N. Tax Matters.
-----------

(i) Except as set forth on the attached Taxes Schedule:
--------------

(a) each of the Company and its Subsidiaries has filed all
Tax Returns which it is required to file under applicable laws and
regulations, and all such Tax Returns are complete and correct and have
been prepared in compliance with all applicable laws and regulations;

(b) each of the Company and its Subsidiaries has paid all
Taxes due and owing by it (whether or not such Taxes are shown or required
to be shown on a Tax Return) and has withheld and paid over to the
appropriate taxing authority all Taxes which it is required to withhold
from amounts paid or owing to any employee, shareholder, creditor or other
third party;

(c) none of the Company or any of its Subsidiaries has waived
any statute of limitations with respect to any Taxes or agreed to any
extension of time for filing any Tax Return which has not been filed; and
none of the Company or any of its Subsidiaries has consented to extend to a
date later than the date hereof the period in which any Tax may be assessed
or collected by any Taxing Authority;

20
<PAGE>

(d) the accrual for Taxes on the Latest Balance Sheet would
be adequate to pay all Tax liabilities of each of the Company and its
Subsidiaries if its current tax year were treated as ending on the date of
the Latest Balance Sheet (excluding any amount recorded which is
attributable solely to timing differences between book and Tax income);

(e) since December 30, 1995, the Company and its Subsidiaries
have not incurred any liability for Taxes other than in the ordinary course
of business;

(f) the assessment of any additional Taxes for periods on or
before the Latest Balance Sheet date for which Tax Returns have been filed
by the Company and its Subsidiaries shall not exceed the recorded liability
therefor on the Latest Balance Sheet (excluding any amount recorded which
is attributable solely to timing differences between book and Tax income);

(g) the federal income Tax Returns of the Company and its
Subsidiaries have been audited and closed for all tax years through 1992;

(h) the Company has not received any written notice that any
foreign, federal, state or local tax audits or administrative or judicial
proceedings are pending or being conducted with respect to the Company or
any of its Subsidiaries;

(i) since December 31, 1991 none of the Company or any of its
Subsidiaries and none of their respective predecessors have received from
any foreign, federal, state or local taxing authority (including
jurisdictions where the Company or any of its Subsidiaries has filed Tax
Returns) any (i) written notice indicating an intent to open an audit or
other review, (ii) request for information related to Tax matters or (iii)
notice of deficiency or proposed adjustment for any amount of Tax proposed,
asserted or assessed by any taxing authority against the Company;

(j) to the Knowledge of the Company and the Shareholders,
there are no material unresolved questions or claims concerning the
Company's Tax liability (or any Tax liability of any of its Subsidiaries);

(k) to the Knowledge of the Company and the Shareholders, no
claim has ever been made by a taxing authority in a jurisdiction where the
Company (or any Subsidiary of the Company) does not file Tax Returns that
the Company (or any such Subsidiary) is or may be subject to Taxes assessed
by such jurisdiction;

(l) none of the Company or any of its Subsidiaries has ever
been a member of an Affiliated Group or filed or been included in a
combined, consolidated or unitary income Tax Return;

(m) none of the Company or any of its Subsidiaries is a party
to or bound by any Tax allocation or Tax sharing agreement;

21
<PAGE>

(n) the Company has not been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code.

(o) there are no Liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of the Company or any of its
Subsidiaries; and

(p) none of the Company or any of its Subsidiaries shall be
required to (i) as a result of a change in method of accounting for a
taxable period ending on or prior to the Closing Date, include any
adjustment in taxable income for any taxable period (or portion thereof)
ending after the Closing Date, (ii) as a result of any "closing agreement,"
as described in Section 7121 of the Code (or any corresponding provision of
state, local or foreign income Tax law), include any item of income in, or
exclude any item of deduction from, taxable income for any taxable period
(or portion thereof) ending after the Closing Date, (iii) as a result of
any sale reported on the installment method where such sale occurred on or
prior to the Closing Date, include any item of income in, or exclude any
item of deduction from, taxable income for any taxable period (or portion
thereof) ending after the Closing Date, or (iv) as a result of any prepaid
amount received on or prior to the Closing Date, include any item of income
in, or exclude any item of deduction from, taxable income for any taxable
period (or portion thereof) ending after the Closing Date.

(ii) None of the Company or any of its Subsidiaries:

(a) has made an election under Section 341(f) of the Code;
or

(b) is liable for the Taxes of another Person (1) under
Treas. Reg. (S) 1.1502-6 (or comparable provisions of state, local or
foreign law), (2) as a transferee or successor, or (3) by contract or
indemnity or otherwise.

(iii) On March 8, 1996, the Company made a valid election under
Section 1362 of the Code and any corresponding state or local tax provisions to
be an S corporation (a "Subchapter S Election") for the taxable periods after
--------------------
such date, on December 27, 1987, PEN-TAB CALIFORNIA made a valid Subchapter S
Election for the taxable periods after such date and on January 1, 1995, PEN-TAB
NEW YORK made a valid Subchapter S Election for the taxable periods after such
date. None of such elections have been terminated except as a result of the
consummation of the transactions contemplated hereby.

5O. Contracts and Commitments.
-------------------------

(i) Except as expressly contemplated by this Agreement or as set
forth on the attached Contracts Schedule, none of the Company or any of its
------------------
Subsidiaries is a party to or bound by any written or oral:

(a) pension, profit sharing, stock option, employee stock
purchase or other plan or arrangement providing for deferred or other
compensation to employees or any other employee benefit plan, arrangement
or practice, whether formal or informal;

22
<PAGE>

(b) collective bargaining agreement or any other contract
with any labor union, or severance agreements, programs, policies or
arrangements;

(c) management agreement, contract for the employment of any
officer, individual employee or other Person on a full-time, part-time,
consulting or other basis (i) providing annual cash or other compensation
in excess of $50,000, (ii) providing for the payment of any cash or other
compensation or benefits upon the consummation of the transactions
contemplated hereby or (iii) otherwise restricting its ability to terminate
the employment of any employee at anytime for any lawful reason or for no
reason without penalty or liability;

(d) contract or agreement involving any Governmental Entity;

(e) agreement or indenture relating to borrowed money or
other Indebtedness or the mortgaging, pledging or otherwise placing a Lien
on any material asset or material group of assets of the Company (or any of
its Subsidiaries) or any letter of credit arrangements;

(f) Guarantee, other than endorsements made for collection in
the ordinary course of business;

(g) lease or agreement under which the Company or any of its
Subsidiaries is (i) lessee of or holds or operates any personal property,
owned by any other party, except for any lease of personal property under
which the aggregate annual rental payments do not exceed $100,000 or (ii)
lessor of or permits any third party to hold or operate any property, real
or personal, owned or controlled by the Company or any of its Subsidiaries;

(h) contract or group of related contracts with the same
party or group of affiliated parties for the purchase or sale of raw
materials, commodities, supplies, products, equipment or other personal
property or services under which the undelivered balance as of December 31,
1996 of such products and services has a selling price in excess of
$100,000, exclusive of customer purchase orders received in the ordinary
course of business or Company purchase orders delivered in the ordinary
course of business;

(i) other contract or group of related contracts with the
same party or group of affiliated parties continuing over a period of more
than six months from the date or dates thereof, not terminable by the
Company or any of its Subsidiaries upon 30 days' or less notice without
penalty or involving more than $100,000 as to any one contract and $500,000
as to any group of related contracts but, in any event, exclusive of
customer purchase orders received in the ordinary course of business or
Company purchase orders delivered in the ordinary course of business;

(j) contract relating to the marketing, sale, advertising or
promotion of its products;

23
<PAGE>

(k) agreements relating to the ownership of, investments in
or loans and advances to any Person, including investments in joint
ventures and minority equity investments;

(l) license, royalty, indemnification or other agreement with
respect to any intangible property (including any Intellectual Property
Rights);

(m) broker, agent, sales representative, sales or
distribution agreement;

(n) power of attorney or other similar agreement or grant of
agency;

(o) contract or agreement prohibiting it from freely engaging
in any business or competing anywhere in the world, including, without
limitation, any nondisclosure or confidentiality agreements; or

(p) other agreement which is material to its operations and
business prospects or involves a consideration in excess of $100,000
annually, whether or not in the ordinary course of business.

(ii) To the Knowledge of the Company and the Shareholders, all of
the contracts, agreements and instruments set forth or required to be set forth
on the attached Contracts Schedule (the "Material Contracts") are valid, binding
------------------ ------------------
and enforceable in accordance with their respective terms, except as such
enforceability may be limited by (x) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and (y) applicable equitable principles (whether considered in a
proceeding at law or in equity). Subject to any applicable cancellation or
termination rights of a party to a Material Contract, each of the Material
Contracts shall be in full force and effect without penalty in accordance with
their terms upon consummation of the transactions contemplated hereby. To the
Knowledge of the Company and the Shareholders, each of the Company and its
Subsidiaries has performed all obligations required to be performed by it and is
not in default under or in breach of nor in receipt of any claim of default or
breach under any Material Contract; no event has occurred which with the passage
of time or the giving of notice or both would result in a default, breach or
event of noncompliance by the Company or any of its Subsidiaries under any
Material Contract; and none of the Company or any of its Subsidiaries has any
Knowledge of any breach or cancellation or anticipated breach or cancellation by
the other parties to any Material Contract to which they are parties.

(iii) The Purchaser has been supplied with a true and correct copy
of each written Material Contract, together with all amendments, waivers or
other changes thereto (all of which amendments, waivers or other changes thereto
are described on the attached Contracts Schedule).
------------------

5P. Small Business Matters. The Company acknowledges that the
----------------------
Purchaser has advised the Company that Purchaser is a federally licensed Small
Business Investment Company. The information regarding the Company and its
affiliates set forth in the Small Business Administration Form 480, Form 652 and
Parts A and B of Form 1031 delivered at the Closing will be accurate and
complete. The Company shall not use directly or indirectly the proceeds from
the Investment Transaction or the Subordinated Note Offering directly or
indirectly for any purpose for

24
<PAGE>

which a Small Business Investment Company is prohibited from providing funds by
the SBIC Regulations (including 13 CFR, Section 107.720), provided that the
Company, prior to any such use of proceeds, has received a written notice from
the Purchaser setting forth a detailed description of the prohibition upon any
such use.

5Q. Intellectual Property Rights.
----------------------------

(i) The attached Intellectual Property Schedule contains a
------------------------------
complete and accurate list of all (a) patented or registered Intellectual
Property Rights owned or used by the Company and any of its Subsidiaries, (b)
pending patent applications and applications for registrations of other
Intellectual Property Rights filed by the Company and any of its Subsidiaries,
(c) all computer software owned or used by the Company or any of its
Subsidiaries other than commercially available software with a license fee of
less than $1,000, and (d) material unregistered Intellectual Property Rights
owned or used by the Company and any of its Subsidiaries. The attached
Intellectual Property Schedule also contains a complete and accurate list of all
- ------------------------------
licenses and other rights granted by the Company and any of its Subsidiaries to
any third party with respect to any Intellectual Property Rights and all
licenses and other rights granted by any third party to the Company or any of
its Subsidiaries with respect to any Intellectual Property Rights, in each case
identifying the subject Intellectual Property Rights. Each of the Company and/or
its Subsidiaries owns all right, title and interest to, or has the right to use
pursuant to a valid and effective written license, all Intellectual Property
Rights necessary and desirable for the operation of the business of the Company
and its Subsidiaries as presently conducted and as presently proposed to be
conducted, free and clear of all Liens other than Permitted Liens. Except as set
forth on the attached Intellectual Property Schedule, the loss or expiration of
------------------------------
any Intellectual Property Right or related group of Intellectual Property Rights
owned or used by the Company and its Subsidiaries has not had and would not
reasonably be expected to have a Material Adverse Effect. No loss or expiration
of any Intellectual Property Right is, to the Knowledge of the Company and the
Shareholders, threatened or pending. Each of the Company and its Subsidiaries
has taken all commercially reasonable action to maintain and protect the
Intellectual Property Rights which it owns and uses. To the Knowledge of the
Company and the Shareholders, the owners of any Intellectual Property Rights
licensed to the Company and its Subsidiaries have taken all commercially
reasonable action to maintain and protect the Intellectual Property Rights which
are subject to such licenses.

(ii) Except as set forth on the attached Intellectual Property
---------------------
Schedule, to the Knowledge of the Company and the Shareholders (a) there are no
- --------
claims against the Company or any of its Subsidiaries that were either made
within the past five (5) years or are presently pending asserting the
invalidity, misuse or unenforceability of any of such Intellectual Property
Rights, and, to the Knowledge of the Company and the Shareholders, there is no
basis for any such claim; (b) none of the Company or any of its Subsidiaries has
received any notices of, and none has any Knowledge of any facts which indicate
any infringement or misappropriation by, or conflict with, any third party with
respect to such Intellectual Property Rights (including any demand or request
that the Company license any rights from a third party), (c) the operation of
the business of the Company and its Subsidiaries as currently conducted and as
proposed to be conducted has not infringed, misappropriated or conflicted with
and will not infringe, misappropriate or

25
<PAGE>

conflict with any Intellectual Property Rights of other Persons, and (d) the
Intellectual Property Rights owned by or licensed to the Company and its
Subsidiaries have not been infringed, misappropriated or conflicted by other
Persons. The transactions contemplated by this Agreement shall have no material
adverse effect on the right, title or interest of the Company and its
Subsidiaries in and to their Intellectual Property Rights and all of such
Intellectual Property Rights shall be owned or available for use by the Company
and its Subsidiaries on substantially identical terms and conditions immediately
after the Closing.

5R. Litigation, etc. Except as set forth on the attached
---------------
Litigation Schedule, there are no (and, during the five years preceding the date
- -------------------
hereof, there have not been any) actions, suits, proceedings (including any
arbitration proceedings), orders, investigations or claims pending or, to the
Knowledge of the Company and the Shareholders, threatened against the Company
(or to the Knowledge of the Company and the Shareholders, pending or threatened
against any of the officers, directors or employees of the Company with respect
to their businesses or proposed business activities), or pending or threatened
by the Company against any third party, at law or in equity, or before or by any
Government Entity (including any actions, suits, proceedings or investigations
with respect to the transactions contemplated by this Agreement); none of the
Company or any of its Subsidiaries is subject to any arbitration proceedings
under collective bargaining agreements or otherwise or any governmental
investigations or inquiries; and, to the Knowledge of the Company and the
Shareholders, there is no basis for any of the foregoing. Except with respect
to uninsured matters identified on the attached Litigation Schedule, the Company
-------------------
and its Subsidiaries are insured with respect to each of the matters set forth
on the attached Litigation Schedule pursuant to the policies of insurance
-------------------
described on the Insurance Schedule referred to in Section 5T below. To the
------------------
Knowledge of the Company and the Shareholders, none of the Company or its
Subsidiaries is subject to any judgment, order or decree of any Government
Entity, and none of the Company or its Subsidiaries has received any opinion or
memorandum or legal advice from legal counsel to the effect that it is exposed,
from a legal standpoint, to any liability which would reasonably be expected to
have a Material Adverse Effect.

5S. Brokerage. Except as set forth on the Brokerage Schedule
--------- ------------------
attached hereto, there are and shall be no claims for brokerage commissions,
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement to which
the Company or any Subsidiary of the Company is a party or to which the Company
or any Subsidiary of the Company is subject.

5T. Insurance. The attached Insurance Schedule contains a
--------- ------------------
description of each insurance policy maintained by the Company and its
Subsidiaries with respect to its properties, assets and business, and each such
policy shall be in full force and effect as of the Closing or a substituted
policy shall have been obtained therefor. To the Knowledge of the Company and
the Shareholders, none of the Company or any of its Subsidiaries is in default
with respect to its obligations under any insurance policy maintained by it.
Except as set forth on the attached Insurance Schedule, none of the Company or
------------------
any of its Subsidiaries has any self-insurance or co-insurance programs, and to
the Knowledge of the Company and the Shareholders, the reserves set forth on the
Latest Balance Sheet are (and the reserves to be set forth on the Closing
Balance Sheet will be) adequate to cover all anticipated liabilities with
respect to any such self-insurance or co-insurance programs.

26
<PAGE>

5U. Employees. The Employees Schedule attached hereto contains a
--------- ------------------
true and complete list as of September 30, 1996 of (i) the employees currently
employed by the Company and its Subsidiaries having an annual base salary in
calendar year 1995 of $100,000 or more, indicating the title of and a
description of any agreements with such employees , (ii) the rate of all current
compensation payable by the Company or its Subsidiaries to each such employee,
including, without limitation, any bonus, contingent or deferred compensation,
and (iii) the directors of each of the Company and the Subsidiaries. To the
Knowledge of the Company and the Shareholders, no executive or key employee of
the Company or any Subsidiary of the Company and no group of employees of the
Company or any Subsidiary of the Company has any plans to terminate employment
with the Company or any Subsidiary of the Company. To the Knowledge of the
Company and the Shareholders, none of the Company or any of its Subsidiaries has
(a) any material labor relations problems (including any additional union
organization activities, threatened or actual strikes or work stoppages or
material grievances), (b) engaged in any unfair labor practices, (c) during the
past five years, suffered any labor strike, lockout, work stoppage or other
material labor dispute or, (d) any union organization campaign is in progress
with respect to any of the employees, nor any question concerning representation
exists respecting such employees. To the Knowledge of the Company and the
Shareholders, neither the Company nor any Subsidiary has engaged in any plant
closing or employee layoff activities within the last two (2) years that would
violate the Worker Adjustment Retraining and Notification Act of 1988, as
amended, or any similar state or local plant closing or mass layoff statute,
rule or regulation.

5V. ERISA.
-----

(i) Except as set forth on the attached Employee Benefits
-----------------
Schedule, none of the Company or any of its Subsidiaries has any obligation to
- --------
contribute to (or any other liability with respect to) any "multiemployer plan"
(as defined in Section 3(37) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA")).
-----

(ii) None of the Company or any of its Subsidiaries has any current
or potential withdrawal liability with respect to any "multiemployer plan" (as
described in Section 3(37) of ERISA) as a result of any actions taken by the
Company or any of its Subsidiaries prior to the date hereof.

(iii) Except as set forth on the attached Employee Benefits
-----------------
Schedule, none of the Company or any of its Subsidiaries maintains or has any
- --------
obligation to contribute to (or any other liability with respect to) any plan or
arrangement, whether or not terminated, which provides medical, health, life
insurance or other welfare-type benefits for current or future retired or
terminated employees or any dependents of such employees (except for the
coverage required to be provided under Section 4980B of the Code ("COBRA") or as
-----
required under applicable state law).

(iv) None of the Company or any of its Subsidiaries maintains,
contributes to or has any actual liability under (or with respect to) any
employee benefit plan which is a "defined benefit plan" (as defined in Section
3(35) of ERISA).

(v) None of the Company or any of its Subsidiaries maintains,
contributes to or has any actual liability under (or with respect to) any
employee benefit plan which is a "defined

27
<PAGE>

contribution plan" (as defined in Section 3(34) of ERISA), whether or not
terminated, other than the Pen-Tab Industries, Inc. Employee Savings and
Protection Plan (the "Profit Sharing Plan") and the Western States Income
-------------------
Security Fund (the "Union Defined Contribution Plan").
-------------------------------

(vi) Except as set forth on the attached Employee Benefits Schedule
--------------------------
under the heading "Other Plans" (the "Other Plans"), none of the Company or any
-----------
of its Subsidiaries maintains, contributes to or has any actual liability under
(or with respect to) any plan or arrangement providing benefits or remuneration
to current or former employees or independent contractors, including any bonus
or incentive plan, plan for deferred compensation, employee health or other
welfare benefit plan, severance arrangement or other material policy, program or
arrangement, whether or not terminated.

(vii) With respect to the Profit Sharing Plan and the Other Plans
set forth on the attached Employee Benefits Schedule (the "Plans"), all required
-------------------------- -----
payments, premiums, contributions, reimbursements or accruals for all periods
ending prior to or as of the Closing Date shall have been made or properly
accrued. None of the Plans has any material unfunded liabilities which are not
reflected on the Latest Balance Sheet.

(viii) Except as set forth in the attached Employee Benefits
Schedule, to the Knowledge of the Company and the Shareholders, the Plans and
all related trusts, insurance contracts and funds have been maintained, funded
and administered in compliance in all material respects with the applicable
provisions of ERISA, the Code and other applicable laws. To the Knowledge of the
Company and the Shareholders, each of the Company and its Subsidiaries has
timely complied with all reporting and disclosure obligations as they apply to
the Plans, and each of the Company and its Subsidiaries has complied with the
requirements of COBRA. To the Knowledge of the Company and the Shareholders,
none of the Company, any of its Subsidiaries or any trustee or administrator of
any Plan has engaged in any transaction with respect to the Plans which would
subject the Company, any of its Subsidiaries or any trustee or administrator of
the Plans, or any party dealing with any such Plan, nor, to the Knowledge of the
Company and the Shareholders, do the transactions contemplated by this Agreement
constitute transactions which would subject any such party, to either a civil
penalty assessed pursuant to Section 502(i) of ERISA, or excise tax or the tax
or penalty on prohibited transactions imposed by Section 4975 of the Code, or
any other penalty or excise tax. No actions, suits or claims with respect to the
assets of the Plans (other than routine claims for benefits) are pending or to
the Knowledge of the Company or the Shareholders, threatened which could result
in or subject the Company or any of its Subsidiaries to any liability.

(ix) A favorable determination letter from the Internal Revenue
Service has been received by the Company with respect to the Profit Sharing Plan
to the effect that it is qualified under Section 401(a) of the Code (including
requirements imposed by the Tax Reform Act of 1986 and subsequent legislation
other than: (a) legislation for which the Company timely adopted model
amendments issued by the Internal Revenue Service and (b) legislation for which
the deadline for making amendments to the Profit Sharing Plan has not yet
expired.

(x) The Company has provided the Purchaser with (a) the most
recent favorable determination letter issued with respect to the Profit Sharing
Plan, (b) true and complete copies of

28
<PAGE>

all documents pursuant to which the Plans are maintained and administered,
including the most recent summary plan descriptions, and (c) the two most recent
annual reports (Form 5500 and attachments) for the Plans.

(xi) For purposes of this Section 5W, the term "Company" includes
-------
all organizations under common control with the Company pursuant to Section 414
of the Code.

5W. Compliance with Laws; Permits. Except as set forth on the
-----------------------------
attached Compliance Schedule, to the Knowledge of the Company and the
-------------------
Shareholders:

(i) Each of the Company and its Subsidiaries has complied with all
applicable Laws relating to the operation of its respective business. No
notices have been received by and no claims have been filed against the Company
or any Subsidiary of the Company alleging a violation of any such Laws.

(ii) Except with respect to permits relating to Environmental and
Safety Regulations which are addressed in Section 5X below, each of the Company
and its Subsidiaries hold all permits, licenses, certificates, accreditations
and other authorizations of all Government Entities required for the conduct of
its business and the ownership of its properties, and the attached Permits
-------
Schedule sets forth a list of all of such permits, licenses, certificates,
- --------
accreditations and other authorizations. No notices have been received by the
Company or any Subsidiary of the Company alleging the failure to hold any
permit, license, certificate, accreditation or other authorization of any
Government Entity. Each of the Company and its Subsidiaries is in compliance
with all terms and conditions of all permits, licenses, accreditations and
authorizations which it holds. Except as disclosed on the attached Permits
-------
Schedule all of such permits, licenses, accreditations and authorizations will
- --------
be available for use by the Company and its Subsidiaries immediately after the
Closing.

5X. Environmental and Safety Matters.
--------------------------------

(i) Except as set forth on the attached Environmental Schedule,
----------------------
to the Knowledge of the Company and the Shareholders:

(a) Each of the Company and its Subsidiaries has complied
with and is currently in compliance with all Environmental and Safety
Requirements. The Company has not received any oral or written notice,
report or information regarding any violations of or any liabilities
(whether accrued, absolute, contingent, unliquidated or otherwise) or
corrective, investigatory or remedial obligations arising under
Environmental and Safety Requirements which relate to the Company (or any
of its Subsidiaries) or any of its current or former properties or
facilities.

(b) Without limiting the generality of the foregoing, each of
the Company and its Subsidiaries has obtained and complied with, and is
currently in compliance with, all permits, licenses and other
authorizations that may be required pursuant to any Environmental and
Safety Requirements for the occupancy of its properties or facilities or

29
<PAGE>

the operation of i ts business. A list of all such permits, licenses and
other authorizations is set forth on the attached Permits Schedule.
----------------

(c) Neither this Agreement nor the consummation of the
transactions contemplated by this Agreement shall impose any obligations on
the Company or any Subsidiary of the Company for site investigation or
cleanup, or notification to or consent of any government agencies or third
parties under any Environmental and Safety Requirements (including any so
called "transaction-triggered" or "responsible property transfer" laws and
regulations).

(d) None of the following exists at any property or facility
owned, occupied or operated by the Company or any Subsidiary of the
Company:

(1) underground storage tanks;

(2) asbestos-containing materials in any form or
condition;

(3) materials or equipment containing polychlorinated
biphenyls; or

(4) landfills, surface impoundments or other disposal
areas.

(c) None of the Company or any of its Subsidiaries has
treated, stored, disposed of, arranged for or permitted the disposal of,
transported, handled or Released any substance (including any hazardous
substance) or owned, occupied or operated any facility or property (and no
such property or facility is contaminated by any such substance) in a
manner that has given or could give rise to any liabilities (including any
liability for response costs, corrective action costs, personal injury,
natural resource damages, property damage or attorneys fees or any
investigative, corrective or remedial obligations) pursuant to CERCLA or
any other Environmental and Safety Requirements.

(f) None of the Company or any of its Subsidiaries has,
either expressly or by operation of law, assumed or undertaken any
liability or corrective, investigatory or remedial obligation of any other
Person relating to any Environmental and Safety Requirements.

(g) No Environmental Lien has attached to any property owned,
leased or operated by the Company or any of its Subsidiaries.

5Y. Affiliate Transactions. Except as set forth on the attached
----------------------
Affiliate Transactions Schedule, to the Knowledge of the Company and the
- -------------------------------
Shareholders, no officer, director, shareholder or Affiliate of the Company or
any of its Subsidiaries or any individual related by blood, marriage or adoption
to any such individual or any entity in which any such Person or individual owns
any beneficial interest, is a party to any agreement, contract, commitment or
transaction with the Company or any of its Subsidiaries or has any material
interest in any material property used by the Company or any of its
Subsidiaries.

30
<PAGE>

5Z. Suppliers and Customers. The Suppliers and Customers Schedule
----------------------- --------------------------------
attached hereto accurately sets forth a list of the top ten customers and
suppliers of the Company and its Subsidiaries by dollar volume of sales and
purchases, respectively, for the fiscal year ended December 30, 1995. To the
Knowledge of the Company and the Shareholders since September 30, 1996, none of
the Company or any of its Subsidiaries has received any written notice from any
supplier identified on the Suppliers and Customers Schedule to the effect that,
--------------------------------
and to the Knowledge of the Company and the Shareholders, none of the Company or
any of its Subsidiaries has any reason to believe that, such supplier will stop,
materially decrease the rate of, or materially change the terms (whether related
to payment, price or otherwise) with respect to, supplying materials, products
or services to the Company or any of its Subsidiaries (whether as a result of
the consummation of the transactions contemplated hereby or otherwise). To the
Knowledge of the Company and the Shareholders, since September 30, 1996, none of
the Company or any of its Subsidiaries has received any written notice from any
customer of the Company or any of its Subsidiaries listed on the Suppliers and
Customers Schedule to the effect that such customer will stop, or materially
decrease the rate of, buying products of the Company or any of its Subsidiaries
(whether as a result of the consummation of the transactions contemplated hereby
or otherwise).

5AA. Real Property.
-------------

(i) The Real Property Schedule sets forth a list of all owned U.S.
----------------------
real property and owned foreign real property (collectively, the "Owned Real
----------
Property") used by the Company and its Subsidiaries in the operation of the
- --------
Company's (and its Subsidiaries') business. With respect to each such parcel of
Owned Real Property, and except as set forth in the Real Property Schedule: (a)
such parcel is free and clear of all Liens, except Permitted Liens; (b) there
are no leases, subleases, licenses, concessions, or other agreements, written or
oral, granting to any person the right of use or occupance of any portion of
such parcel; and (c) there are no outstanding rights of first refusal to
purchase such parcel, or any portion thereof or interest therein.

(ii) The attached Real Property Schedule sets forth a list of all of
----------------------
the leases, subleases, licenses, amendments and other modifications ("Leases")
------
and each leased, subleased and licensed parcel of real property in which the
Company or any Subsidiary of the Company has a leasehold and subleasehold
interest (the "Leased Real Property"). The Company has delivered to the
--------------------
Purchaser complete and accurate copies of each of the Leases described in the
attached Real Property Schedule. With respect to each Lease listed on the
----------------------
attached Real Property Schedule: (a) the Lease is legal, valid, binding,
----------------------
enforceable and in full force and effect, except as such enforceability may be
limited by (x) applicable insolvency, bankruptcy, reorganization, moratorium or
other similar laws affecting creditors' rights generally and (y) applicable
equitable principles (whether considered in a proceeding at law or in equity);
(b) to the Knowledge of the Company and the Shareholders, the Lease will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the Closing, except as such enforceability may be
limited by (x) applicable insolvency, bankruptcy, reorganization, moratorium or
other similar laws affecting creditors' rights generally and (y) applicable
equitable principles (whether considered in a proceeding at law or in equity);
(c) to the Knowledge of the Company and the Shareholders, none of the Company or
any Subsidiary of the Company or any other party to the Lease is in breach or
default, and no event has occurred which with the passage of time or the giving
of notice or both would result in a breach or default or permit termination,
modification or acceleration under the

31
<PAGE>

Lease; (d) to the Knowledge of the Company and the Shareholders, no party to the
Lease has repudiated any provision thereof; (e) to the Knowledge of the Company
and the Shareholders, there are no disputes, oral agreements, or forbearance
programs in effect as to tfied in any respect, except to the extent that such
modifications are disclosed by the documents delivered to the Purchaser; and (g)
none of the Company or any Subsidiary of the Company has assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the Lease,
other than assignment of the Lease by the Company to OpCo in connection with the
transactions contemplated by this Agreement.

(iii) Except as disclosed on the attached Real Property Schedule,
----------------------
there is no real property leased or owned by the Company or any Subsidiary of
the Company used in the Company's (and its Subsidiaries') business. The Owned
Real Property and Leased Real Property is referred to collectively herein as the
"Real Property."
-------------

(iv) There are no proceedings in eminent domain or other similar
proceedings pending or, to the Knowledge of the Company and the Shareholders,
threatened or affecting any portion of the Real Property.

(v) The current use of the Real Property does not violate any
instrument of record or agreement affecting such Real Property. To the
Knowledge of the Company and the Shareholders, there is no material violation of
any covenant, condition, restriction, easement, agreement or order of any
Government Entity having jurisdiction over any of the Real Property that affects
such real property or the use or occupancy thereof. No damage or destruction
has occurred with respect to any of the Real Property that, individually or in
the aggregate, has had or resulted in, or would reasonably be expected to result
in, a Material Adverse Effect.

(vi) To the Knowledge of the Company and the Shareholders, all
certificates of occupancy, permits, licenses, franchises, approvals and
authorizations (collectively, the "Real Property Permits") of all Government
---------------------
Entities having jurisdiction over the Real Property, required or appropriate to
have been issued to the Company (or any Subsidiary of the Company) to enable the
Real Property to be lawfully occupied and used for all of the purposes for which
it is currently occupied and used have been lawfully issued and are, as of the
date hereof, in full force and effect. The Company has delivered complete and
correct copies of the Real Property Permits to the Purchaser. To the Knowledge
of the Company and the Shareholders, none of the Company or any of its
Subsidiaries has received or been informed in writing by a third party of the
receipt by it of any written notice from any Government Entity having
jurisdiction over the Real Property threatening a suspension, revocation,
modification or cancellation of any Real Property Permit and, to the Knowledge
of the Company and the Shareholders, there is no basis for the issuance of any
such notice or the taking of any such action.

(vii) To the Knowledge of the Company and the Shareholders, the Real
Property is in compliance with all applicable building, zoning, subdivision and
other land use and similar Laws affecting the Real Property (collectively, the
"Real Property Laws"), and, to the Knowledge of the Company and the
------------------
Shareholders, none of the Company or any of its Subsidiaries has received any
written notice of violation or claimed violation of any Real Property Law. To
the Knowledge of the Company and the Shareholders, there is no pending or
anticipated change in any Real

32
<PAGE>

Property Law that will have or result in an adverse effect upon the ownership,
alteration, use, occupancy or operation of the Real Properties or any portion
thereof. To the Knowledge of the Company and the Shareholders, no current use by
the Company of any of the Real Property is dependent on a nonconforming use or
other approval from a governmental authority, the absence of which would have a
adverse effect on the use thereof.

5BB. FIRPTA. Neither of the Shareholders is a foreign person, as
------
defined in Section 1445(f)(3) of the Code.

5CC. Closing Date. The representations and warranties of the
------------
Company contained in this Section 5 and elsewhere in this Agreement and all
information contained in any Exhibit, Schedule or attachment hereto or in any
certificate or other writing delivered by, or on behalf of, the Company to the
Purchaser shall be true and correct in all material respects on the Closing Date
(giving effect to any amendments deemed made in accordance with Section 4I) as
though then made and as though the Closing Date was substituted for the date of
this Agreement throughout such representations and warranties. For purposes of
the representations of the Company or the Shareholders contained in this Section
5, Section 6 below and elsewhere in this Agreement, any disclosure by the
Company or the Shareholders made in any Schedule hereto shall be deemed a
disclosure for purposes of all Schedules hereunder so long as such disclosure is
made with reasonable specificity and the Shareholders can establish that the
Purchaser reasonably should have known that an exception noted on one of the
Schedules as corresponding to a particular Section or Sections of this Agreement
also would correspond to another Section or Sections of this Agreement.

Section 6. Representations and Warranties of the Shareholders. As a
--------------------------------------------------
material inducement to the Purchaser to enter into this Agreement and purchase
the Series 2 Senior Preferred Stock and the Common Stock hereunder, each
Shareholder hereby, separately as to himself and not jointly, represents and
warrants to the Purchaser and the Company as follows:

6A. Power and Authority. The Shareholder possesses all requisite
-------------------
power and authority necessary to carry out the transactions contemplated by this
Agreement.

6B. Authorization; No Breach. This Agreement and all other
------------------------
agreements or instruments contemplated hereby to which the Shareholder is a
party or by which the Shareholder is bound, when executed and delivered by such
Shareholder in accordance with the terms hereof, shall each constitute a valid
and binding obligation of such Shareholder, enforceable in accordance with its
terms, except as such enforceability may be limited by (x) applicable
insolvency, bankruptcy, reorganization, moratorium or other similar laws
affecting creditors' rights generally and (y) applicable equitable principles
(whether considered in a proceeding at law or in equity). The execution,
delivery and performance by the Shareholder of this Agreement and all other
agreements contemplated hereby to which such Shareholder is a party, the
Redemption Transaction, the Exchange Transaction and the fulfillment of and
compliance with the respective terms hereof and thereof by such Shareholder, do
not and shall not to the Knowledge of such Shareholder (i) conflict with or
result in a breach of the terms, conditions or provisions of, (ii) constitute a
default under (whether with or without the passage of time, the giving of notice
or both), (iii) result in the creation of any lien, security interest, mortgage,
charge or encumbrance upon such Shareholder's assets pursuant to, (iv) give any
third party the right to modify, terminate or accelerate any obligation under,
(v) result in a violation of, or (vi) require any authorization, consent,
approval, exemption or

33
<PAGE>

other action by or notice or declaration to, or filing with, any third party or
Government Entity pursuant to, any Law to which such Shareholder is subject, or
any material agreement, instrument, order, judgment or decree to which such
Shareholder is subject.

6C. Title to Shares. All of the Redemption Shares and Exchange
---------------
Shares reflected as owned by the Shareholder on the Capitalization Schedule, are
-----------------------
owned of record and beneficially by such Shareholder, and, except as set forth
on the Capitalization Schedule, such Shareholder has good and marketable title
-----------------------
to the Redemption Shares and Exchange Shares owned by him, free and clear of all
Liens, agreements, voting trusts, proxies and other arrangements or restrictions
of any kind whatsoever (collectively, "Encumbrances"). The Shareholder shall
------------
sell to the Company good and marketable title to the Redemption Shares owned by
him free and clear of all Encumbrances and the Exchange Shares owned by him,
when exchanged, will be free and clear of all Encumbrances.

6D. Brokerage. Except as set forth on the Brokerage Schedule
--------- ------------------
attached hereto, there are no claims for brokerage commissions, finders' fees or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement to which Shareholder is a party
or to which Shareholder is subject. The Shareholder shall pay, indemnify,
defend and hold the Company, its Subsidiaries and the Purchaser harmless
against, any liability, loss or expense (including reasonable attorneys' fees
and out-of-pocket expenses) arising in connection with any such claim.

6E. Litigation, etc. There are no actions, suits, proceedings
---------------
(including any arbitration proceedings), orders, investigations or claims
pending or, to the Shareholder's Knowledge, threatened against or affecting the
Shareholder in which it is sought to restrain or prohibit or to obtain damages
or other relief in connection with the transactions contemplated hereby.

6F. Company Transactions. The Shareholder is not a party to or
--------------------
bound by any agreement with respect to a Company Transaction other than this
Agreement, and the Shareholder has terminated all discussions with third parties
(other than the Purchaser) regarding Company Transactions.

6G. Investment Representations.
--------------------------

(i) Shareholder hereby represents that he is acquiring the Series 1
Senior Preferred Stock, the Series 3 Junior Preferred Stock and the Class A
Common Stock hereunder for his own account with the present intention of holding
such Series 1 Senior Preferred Stock, the Series 3 Junior Preferred Stock and
the Class A Common Stock for purposes of investment, and that he has no
intention of selling any such Series 1 Senior Preferred Stock, the Series 3
Junior Preferred Stock or the Class A Common Stock in a public distribution in
violation of the federal securities laws or any applicable state securities
laws; provided, that nothing contained herein shall prevent the Shareholder or
any subsequent holder of any of the Series 1 Senior Preferred Stock, the Series
3 Junior Preferred Stock or the Class A Common Stock from transferring such
securities in compliance with the terms and conditions of the Shareholders
Agreement.

34
<PAGE>

(ii) The Shareholder has been given full access to all information
regarding the Company that he has requested from the Company and has had the
opportunity to ask questions and receive answers concerning the terms and
conditions of the Series 1 Senior Preferred Stock, the Series 3 Junior Preferred
Stock and the Class A Common Stock to be received by it hereunder. Such
Shareholder is capable of evaluating and has evaluated the merits and risks of
its investment in the Series 1 Senior Preferred Stock, the Series 3 Junior
Preferred Stock and the Class A Common Stock hereunder and is able to bear the
economic risk of its investment in his Series 1 Senior Preferred Stock, the
Series 3 Junior Preferred Stock and the Class A Common Stock.

(iii) The Shareholder either (a) is an "accredited investor" as
defined in Rule 501(a) under the Securities Act or (b) has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of his prospective investment in the
Series 1 Senior Preferred Stock, the Series 3 Junior Preferred Stock and the
Class A Common Stock, is able to bear the economic risk of such investment and,
at the present time, is able to afford a complete loss of such investment.

(iv) The Shareholder understands that the Series 1 Senior Preferred
Stock, the Series 3 Junior Preferred Stock and the Class A Common Stock have not
been registered under the Securities Act on the basis that the sale provided for
in this Agreement is exempt from the registration provisions thereof and that
the Company's reliance on such exemption is predicated upon the representations
of such Shareholder set forth herein.

6H. Closing Date. The representations and warranties of the
------------
Shareholders contained in this Section 6 and elsewhere in this Agreement and all
information contained in any Exhibit, Schedule or attachment hereto or in any
certificate or other writing delivered by, or on behalf of, either of the
Shareholders or the Company to the Purchaser shall be true and correct in all
material respects on the Closing Date (giving effect to any amendments deemed
made in accordance with Section 4I) as though then made and as though the
Closing Date was substituted for the date of this Agreement throughout such
representations and warranties.

Section 7. Representations and Warranties of the Purchaser. As a
-----------------------------------------------
material inducement to the Company and the each of Shareholders to enter into
this Agreement and take the actions set forth in Sections 1A through 1F, the
Purchaser hereby represents and warrants to the Company and each of the
Shareholders as follows:

7A. Organization, Power and Authority. The Purchaser is a
---------------------------------
corporation duly organized, validly existing and in good standing under the Laws
of its jurisdiction of incorporation. The Purchaser possesses all requisite
power and authority necessary to carry out the transactions contemplated by this
Agreement.

7B. Authorization; No Breach. The execution, delivery and
------------------------
performance of this Agreement and all other agreements or instruments
contemplated hereby to which the Purchaser is a party or by which the Purchaser
is bound have been duly authorized by the Purchaser. This Agreement and all
other agreements contemplated hereby to which the Purchaser is a party, when
executed and delivered by the Purchaser in accordance with the terms hereof,
shall each constitute a valid and binding obligation of the Purchaser,
enforceable in accordance with its terms, except as

35
<PAGE>

such enforceability may be limited by (x) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and (y) applicable equitable principles (whether considered in a
proceeding at law or in equity). The execution, delivery and performance by the
Purchaser of this Agreement and all other agreements contemplated hereby to
which the Purchaser is a party, the Investment Transaction, and the fulfillment
of and compliance with the respective terms hereof and thereof by the Purchaser,
do not and shall not (i) conflict with or result in a breach of the terms,
conditions or provisions of, (ii) constitute a default under (whether with or
without the passage of time, the giving of notice or both), (iii) give any third
party the right to modify, terminate or accelerate any obligation under, (iv)
result in a violation of, or (v) require any authorization, consent, approval,
exemption or other action by or notice or declaration to, or filing with, any
Government Entity pursuant to, the organizational documents of the Purchaser, or
any Law to which the Purchaser is subject, or any agreement, instrument, order,
judgment or decree to which the Purchaser is subject, except for any filing or
notice required pursuant to the SBIC Regulations.

7C. Brokerage. There are no claims for brokerage commissions,
---------
finders' fees or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement to which
the Purchaser is a party or to which the Purchaser is subject. The Purchaser
shall pay, indemnify, defend and hold the Company and the Shareholders harmless
against, any liability, loss or expense (including reasonable attorneys' fees
and out-of-pocket expenses) arising in connection with any such claim.

7D. Investment Representations.
--------------------------

(i) The Purchaser hereby represents that it is acquiring the Series
2 Senior Preferred Stock and the Common Stock purchased hereunder for its own
account with the present intention of holding such Series 2 Senior Preferred
Stock and Common Stock for purposes of investment, and that it has no intention
of selling any such Series 2 Senior Preferred Stock or Common Stock in a public
distribution in violation of the federal securities laws or any applicable state
securities laws; provided, that nothing contained herein shall prevent the
Purchaser or any subsequent holder of any of the Series 2 Senior Preferred Stock
or the Common Stock from transferring such securities to its Affiliates or
otherwise in compliance with the terms and conditions of the Shareholders
Agreement.

(ii) The Purchaser has been given full access to all information
regarding the Company that it has requested from the Company and has had the
opportunity to ask questions and receive answers concerning the terms and
conditions of the Series 2 Senior Preferred Stock and the Common Stock to be
purchased by it hereunder. The Purchaser is capable of evaluating and has
evaluated the merits and risks of its purchase of the Series 2 Senior Preferred
Stock and the Common Stock hereunder and is able to bear the economic risk of
its investment in the Series 2 Senior Preferred Stock and the Common Stock.

(iii) The Purchaser either (a) is an "accredited investor" as defined
in Rule 501(a) under the Securities Act or (b) has such knowledge,
sophistication and experience in business and financial matters so as to be
capable of evaluating the merits and risks of its prospective investment

36
<PAGE>

in the Series 2 Senior Preferred Stock and the Common Stock, is able to bear the
economic risk of such investment and, at the present time, is able to afford a
complete loss of such investment.

(iv) The Purchaser understands that the Series 2 Senior Preferred
Stock and the Common Stock have not been registered under the Securities Act on
the basis that the sale provided for in this Agreement is exempt from the
registration provisions thereof and that the Company's reliance on such
exemption is predicated upon the representations of the Purchaser set forth
herein.

7E. Closing Date. The representations and warranties of the
------------
Purchaser contained in this Section 7 and elsewhere in this Agreement shall be
true and correct in all material respects on Closing Date as though then made
and as though the Closing Date was substituted for the date of this Agreement
throughout such representations and warranties.

Section 8. Indemnification and Other Agreements.
------------------------------------

8A. Survival of Representations and Warranties. The
------------------------------------------
representations and warranties in this Agreement and the Schedules and Exhibits
attached hereto or in any writing delivered by any Party to another Party in
connection with this Agreement shall survive the Closing as follows:

(i) the representations and warranties in Section 5N (Tax Matters)
shall terminate when the applicable statutes of limitations with respect to the
liabilities in question expire (after giving effect to any extensions or waivers
thereof);

(ii) the representations and warranties in Section 5B (Capital Stock
and Related Matters), Section 6C (Title to Shares), the first, second and last
sentences of Section 5D (Authorization; No Breach), the first sentence of
Section 6B (Authorization; No Breach) and the first sentence of Section 7B
(Authorization; No Breach) shall not terminate; and

(iii) other representations and warranties in this Agreement and the
Schedules and Exhibits attached hereto or in any writing delivered by any Party
to another Party in connection with this Agreement shall terminate on the second
anniversary of the Closing Date;

provided, that any representation or warranty in respect of which indemnity may
be sought under Section 8A, and the indemnity with respect thereto, shall
survive the time at which it would otherwise terminate pursuant to this Section
8A if written notice of the breach thereof giving rise to such right or
potential right of indemnity shall have been given to the Party against whom
such indemnity may be sought prior to such time. The representations and
warranties in this Agreement shall survive for the periods set forth in this
Section 8A and shall in no event be affected by any investigation, inquiry or
examination made for or on behalf of any Party, or the knowledge of any Party's
officers, directors, shareholders, employees or agents or the acceptance by any
Party of any certificate or opinion hereunder.

37
<PAGE>

8B. General Indemnification.
-----------------------

(i) Indemnification for the Benefit of the Company and the
------------------------------------------------------
Purchaser by the Shareholders. The Shareholders, shall severally (pro rata based
- -----------------------------
upon the Redemption Percentage of each of the Shareholders), and not jointly,
indemnify the Purchaser and its Affiliates, shareholders, partners, officers,
directors, employees, agents, representatives, successors and permitted assigns
and the Company (collectively, the "Shareholder Indemnified Parties") and save
-------------------------------
and hold each of them harmless against and pay on behalf of or reimburse such
Shareholder Indemnified Parties as and when incurred for any direct or indirect
loss, liability, demand, claim, action, cause of action, cost, damage,
deficiency, Tax, penalty, fine or expense, whether or not arising out of third
party claims (including interest, penalties, reasonable attorneys', consultants'
and experts' fees and expenses, Taxes resulting from the receipt of any
indemnification payments hereunder, and all amounts paid in investigation,
defense or settlement of any of the foregoing) (collectively, "Losses"), which
------
any such Shareholder Indemnified Party may suffer, sustain or become subject to,
as a result of, in connection with, relating or incidental to or by virtue of: 1
any facts or circumstances which constitute a breach of any representation or
warranty of the Company or the Shareholders under this Agreement or any of the
Schedules attached hereto; 1 any nonfulfillment or breach of any covenant,
agreement or other provision by the Company or the Shareholders under this
Agreement or any of the Schedules attached hereto required to be performed or
complied with by the Company or the Shareholders at or prior to the Closing; 1
any nonfulfillment or breach of any covenant, agreement or other provision by
the Shareholders under this Agreement or any of the Schedules attached hereto
required to be performed or complied with by the Shareholders after the Closing;
or 1 any claim by any Person (other than the Purchaser) with respect to, or
arising as a result of, any Company Transaction proposed prior to the Closing
Date. If and to the extent any provision of this Section 8B is unenforceable for
any reason, each Shareholder hereby agrees to make the maximum contribution to
the payment and satisfaction of any Loss for which indemnification is provided
for in this Section 8B which is permissible under applicable Laws.
Notwithstanding anything contained herein, in no event shall the Company be
required to provide indemnification or contribution for any obligation of the
Shareholders under this Section 8B(i); provided, however, that the Company shall
be required to provide indemnification to the Shareholders with respect to all
Losses suffered, sustained or incurred by the Shareholders, or either of them,
in connection with the defense of any claim for indemnification asserted by any
of the Shareholder Indemnified Parties (including, without limitation, any claim
of fraud) with respect to which the Shareholder shall be held not to have
liability.

(ii) Indemnification for the Benefit of the Company by the
-----------------------------------------------------
Purchaser. The Purchaser shall indemnify the Company and its Affiliates,
- ---------
shareholders (including the Shareholders but excluding the Purchaser), officers,
directors, employees, agents, representatives, successors and permitted assigns
(collectively, the "Purchaser Indemnified Parties") and hold them harmless
-----------------------------
against any Losses which the Purchaser Indemnified Parties may suffer, sustain
or become subject to, as a result of, in connection with, relating or incidental
to or by virtue of: 1 any facts or circumstances which constitute a breach of
any representation or warranty of the Purchaser under this Agreement or any of
the Schedules attached hereto, or in any of the certificates or other
instruments or documents furnished by the Purchaser pursuant to this Agreement;
any nonfulfillment or breach of any covenant, agreement or other provision by
the Purchaser under this Agreement or any of the

38
<PAGE>

Schedules attached hereto; or (c) any matters which occur after the Closing Date
as a result of the direction on approval of the Board of Directors of the
Company following the Closing Date.

(iii) Manner of Payment. Any indemnification of the Shareholder
-----------------
Indemnified Parties or the Purchaser Indemnified Parties pursuant to this
Section 8B shall be effected by wire transfer of immediately available funds
from one or more of the Shareholders or the Purchaser, as the case may be, to an
account designated by any Shareholder Indemnified Party or Purchaser Indemnified
Party, as the case may be, within 15 days after the determination thereof. Any
such indemnification payments shall include interest at the Applicable Rate
calculated on the basis of the actual number of days elapsed over 360, from the
date any such Loss is suffered or sustained to the date of payment. The amount
of any Loss for which indemnification is provided pursuant to this Section 8B
shall be net of any amounts actually recovered by the indemnified party under
any source of contribution, reimbursement or indemnification whatsoever
("Reimbursement Source") including, without limitation, insurance policies, or
amounts of net tax benefits actually realized, with respect to such Loss. The
Company and the Purchaser shall use commercially reasonable best efforts to
collect any benefits under any insurance polices; provided, that if any
Shareholder Indemnified Party shall not have received the proceeds of any such
insurance policies within 180 days of the incurrence of the Losses, the
Shareholder Indemnified Party may make a claim against the Shareholders for the
entire amount of such Losses (subject to the limitations set forth in Section
8B(v); provided further, that, once any indemnification payment is made to any
Shareholder Indemnified Party, the Shareholder Indemnified Party shall be
required to either (x) direct that any proceeds to be paid under such insurance
policies or other Reimbursement Source with respect to the Loss for which the
indemnification payment was made be paid directly to such Shareholder(s) or (y)
reimburse, as and when any such insurance or other Reimbursement Source proceeds
are received, such Shareholder(s) in an amount equal to the insurance or other
Reimbursement Source proceeds actually received by such Shareholder Indemnified
Party with respect to the Loss for which the indemnification payment was made.
Purchaser shall have a duty to mitigate its damages to the extent required by
applicable law.

(iv) Defense of Third Party Claims. Any Person making a claim for
-----------------------------
indemnification under this Section 8B (an "Indemnitee") shall notify the
----------
indemnifying party (an "Indemnitor") of the claim in writing promptly after
----------
receiving written notice of any action, lawsuit, proceeding, investigation or
other claim against it (if by a third party), describing the claim, the amount
thereof (if known and quantifiable) and the basis thereof; provided that the
failure to so notify an Indemnitor shall not relieve the Indemnitor of its
obligations hereunder except to the extent that the Indemnitor shall be actually
prejudiced by such failure to so notify. Any Indemnitor shall be entitled to
participate in the defense of such action, lawsuit, proceeding, investigation or
other claim giving rise to an Indemnitee's claim for indemnification at such
Indemnitor's expense (subject to the proviso in the last sentence of Section
8B(i) above), and at its option (subject to the limitations set forth below)
shall be entitled to assume the defense thereof by appointing a reputable
counsel reasonably acceptable to the Indemnitee to be the lead counsel in
connection with such defense; provided that prior to the Indemnitor assuming
control of such defense it shall first demonstrate to the Indemnitee in writing
such Indemnitor's financial ability to provide full indemnification to the
Indemnitee with respect to such action, lawsuit, proceeding, investigation or
other claim giving rise to such claim for indemnification hereunder; and
provided further, that:

39
<PAGE>

(a) the Indemnitee shall be entitled to participate in the
defense of such claim and to employ counsel of its choice for such purpose;
provided that the fees and expenses of such separate counsel shall be borne
by the Indemnitee (other than any fees and expenses of such separate
counsel that are incurred prior to the date the Indemnitor effectively
assumes control of such defense which, notwithstanding the foregoing, and
provided that prompt notice of the claim shall have been given to
Indemnitor pursuant to Section 8B(iv) above shall be borne by the
Indemnitor);

(b) the Indemnitor shall not be entitled to assume control of
such defense and shall pay the fees and expenses of counsel retained by the
Indemnitee if (1) the claim for indemnification relates to or arises in
connection with any criminal proceeding, action, indictment, allegation or
investigation; (2) the claim seeks an injunction or equitable relief
against the Indemnitee; (3) a conflict of interest exists between the
Indemnitor and the Indemnitee which renders Indemnitor incapable of
defending against any such claim; or (4) the Indemnitor failed or is
failing to vigorously prosecute or defend such claim; and

(c) if the Indemnitor shall control the defense of any such
claim, the Indemnitor shall obtain the prior written consent of the
Indemnitee before entering into any settlement of a claim or ceasing to
defend such claim if, pursuant to or as a result of such settlement or
cessation, injunctive or other equitable relief will be imposed against the
Indemnitee or if such settlement does not expressly and unconditionally
release the Indemnitee from all liabilities and obligations with respect to
such claim, without prejudice.

(v) Limitations on Indemnification. Notwithstanding the foregoing,
------------------------------
subject to the proviso at the end of this sentence, neither the Shareholders nor
the Purchaser shall be required to indemnify the Shareholder Indemnified Parties
or the Purchaser Indemnified Parties in respect of any Losses suffered by the
Shareholder Indemnified Parties or the Purchaser Indemnified Parties as a result
of any facts or circumstances which constitute a breach of any representation or
warranty listed in Section 8 unless the aggregate of all such Losses suffered by
the Shareholder Indemnified Parties or the Purchaser Indemnified Parties, as the
case may be, exceed $500,000 and then only to the extent of such excess over
$500,000; provided, however, that any Losses suffered as a result of a breach of
representation or warranty set forth in any of Sections 5B, 5C, 5S, 5Y, 6C, 6D,
6F, the first, second and last sentences of Section 5D, the first sentence of
Section 5K, the first sentences of Sections 6B and 7B, and any pre-closing tax
liability of the Company, shall not be subject to the $500,000 deductible
provided for above in this Section 8B(v). Notwithstanding any provision herein
to the contrary, the maximum liability of the Shareholders and the Company
(subject to the allocation based upon the Redemption Percentage provided for in
Section 8B(i) above) with respect to all Losses suffered by the Shareholder
Indemnified Parties as a result of any facts or circumstances which constitute a
breach of any representation or warranty listed in Section 8 shall, as to all
such breaches of representation and warranty, be an aggregate amount which shall
not exceed Five Million Dollars ($5,000,000.00); provided, however, that any
Losses incurred as a result of any pre-closing income tax liability of the
Company shall not be subject to the Five Million Dollar ($5,000,000.00)
limitation set forth in this Section 8B(v).

(vi) Other Indemnification Provisions; Certain Waivers; etc. The
------------------------------------------------------
provisions of this Section 8 shall be the exclusive remedy and procedure for all
claims of breach or

40
<PAGE>

indemnification pursuant to this Agreement or the Schedules hereto; provided,
however, that the parties hereby agree that Losses suffered or incurred by
Purchaser or the Company in connection with any claim for common law fraud which
is decided adversely against the Shareholders by any court of competent
jurisdiction from which all rights of appeal have expired shall not be subject
to the limitations set forth in Section 8B(v) above. Each Shareholder hereby
agrees that, except as provided for above, he shall not make any claim for
indemnification hereunder against the Company by reason of the fact that he is
or was a shareholder, director, officer, employee or agent of the Company or is
or was serving at the request of the Company as a partner, trustee, director,
officer, employee or agent of another entity (whether such claim is for
judgments, damages, penalties, fines, costs, amounts paid in settlement, losses,
expenses or otherwise) with respect to any action, suit, proceeding, complaint,
claim or demand brought by any of the Shareholder Indemnified Parties against
such Shareholder pursuant to this Agreement and such Shareholder hereby
acknowledges and agrees that he shall have no claims or right to contribution or
indemnity from the Company with respect to any amounts paid by the Shareholders
pursuant to this Section 8B. THE PURCHASER, THE COMPANY AND EACH OF THE
SHAREHOLDERS ACKNOWLEDGE THAT THE REDEMPTION TRANSACTION IS NOT IN VIOLATION OF
THE LAWS OF VIRGINIA AND THE PURCHASER HEREBY AGREES NOT TO BRING ANY CLAIM OR
CAUSE OF ACTION ALLEGING ANY VIOLATION THEREOF NOR SHALL ANY CLAIM OR CAUSE OF
ACTION BE BROUGHT BY THE PURCHASER OR THE COMPANY IF A VIOLATION THEREOF IS
ALLEGED OR ASSERTED BY ANY OTHER PARTY, AND THE SHAREHOLDERS SHALL BE FULLY
INDEMNIFIED WITH RESPECT TO ANY SUCH CLAIM. Each Shareholder and the Purchaser
hereby waives any and all preemptive rights which such Shareholder or the
Purchaser may have pursuant to Section 13.1-651 of the Virginia Stock
Corporation Act.

8C. Certain Tax Matters.
-------------------

(i) The Company shall prepare, or cause to be prepared, and file,
or cause to be filed, any Tax Returns of the Company for Tax periods which end
on or before the Closing Date and which have not been filed as of the Closing
Date. The Company shall prepare, or cause to be prepared, and file, or cause to
be filed, any Tax Returns of the Company for Tax periods which begin before the
Closing Date and end after the Closing Date. The Company shall permit the
Shareholders to review and comment on each such Tax Return described in the
preceding sentence prior to filing. In the event the Parties shall disagree as
to any such Tax Return, the Parties shall negotiate in good faith to resolve any
such disagreement. For purposes of this Section 8C, in the case of any Taxes
that are imposed on a periodic basis and are payable for a Taxable period that
includes (but does not end on) the Closing Date, the portion of such Tax which
relates to the portion of such Taxable period ending on the Closing Date shall
(a) in the case of any Taxes other than Taxes based upon or related to income or
receipts, be deemed to be the amount of such Tax for the entire Taxable period
multiplied by a fraction, the numerator of which is the number of days in the
Taxable period ending on the Closing Date and the denominator of which is the
number of days in the entire Taxable period, and (b) in the case of any Tax
based upon or related to income or receipts, be deemed equal to the amount which
would be payable if the relevant Taxable period ended on the Closing Date.

(ii) With respect to any Tax periods ending after the Closing Date,
the Company may make or change any election, file any amended Tax Return, enter
into any closing agreement, settle any Tax claim or assessment relating to the
Company, surrender any right to claim a refund of Taxes, or take any other
similar action, or omit to take any action relating to the filing of any Tax

41
<PAGE>

Return or the payment of any Tax; provided that the Company shall not take such
action without the prior written consent of the Shareholders if such action
would have the effect of increasing the present or future Tax liability or
decreasing any present or future Tax asset of the Shareholders with respect to
any Tax periods ending on or prior to the Closing Date.

8D. Press Release and Announcements. Unless required by law (in
-------------------------------
which case each Party agrees to use reasonable efforts to consult with the other
Parties prior to any such disclosure as to the form and content of such
disclosure), no press releases or other releases of information related to this
Agreement or the transactions contemplated hereby will be issued or released
without the consent of the Purchaser and the Shareholders.

8E. Confidentiality. The Purchaser acknowledges that all
---------------
Confidential Information (as defined in the Confidentiality Agreement) provided
to it by the Company is subject to the terms of a confidentiality agreement
among the Company and the Purchaser (the "Confidentiality Agreement"), the terms
-------------------------
of which are incorporated herein by reference. Effective upon the consummation
of the transactions contemplated hereby, the Confidentiality Agreement shall
terminate.

Section 9. Financial Statements and Other Information.
------------------------------------------

9A. Deliveries. Following the Closing, the Company shall deliver
----------
to each Qualified Securityholder:

(i) within 30 days after the end of each month, a copy of
the unaudited consolidated balance sheets of the Company and its Subsidiaries as
of the end of such month and the related consolidated statements of income and
statements of cash flows and changes in stockholders equity for such month and
for the portion of the fiscal year ending as of the end of such month, all in
reasonable detail and prepared in accordance with GAAP, consistently applied
(subject to normal year-end adjustments and the exclusion of such footnotes as
may be required in accordance with GAAP, consistently applied), accompanied by
comparisons to the Company's annual budget and to the corresponding periods in
the preceding fiscal year, including a management discussion and analysis of
such financial statements and comparisons;

(ii) within 90 days after the close of each fiscal year, a
copy of the audited consolidated financial statements of the Company and its
Subsidiaries, consisting of consolidated balance sheets as of the end of such
fiscal year and consolidated statements of income and statements of cash flows
and changes in stockholders' equity for such fiscal year, setting forth in
comparative form in each case the consolidated figures for the previous fiscal
year-end, which financial statements shall be prepared in accordance with GAAP
(except that inventory shall be reflected on a FIFO basis), consistently
applied, certified (only with respect to the consolidated financial statements)
without qualification by Ernst & Young LLP or any other "big-six" accounting
firm selected by the Company, accompanied by (a) a management discussion and
analysis of such financial statements and comparisons, and (b) such firm's
annual management letter to the Company's board of directors;

42
<PAGE>

(iii) not less than 30 days prior to the beginning of each
fiscal year, projected consolidated statements of cash flows and changes in
stockholders equity of the Company and its Subsidiaries including summary
details of cash disbursements (including capital expenditures) and a summary of
Indebtedness, in each case for such ensuing fiscal year, on a monthly basis;

(iv) promptly after the commencement thereof, notice of all
actions, suits, and proceedings before any Tribunal or other Government Entity
affecting the Company or any of its Subsidiaries which, if determined adversely
to any Person, could have a Material Adverse Effect;

(v) promptly after the sending or filing thereof, copies of
all proxy statements, financial statements and reports which the Company sends
to its stockholders, and copies of all regular, periodic or special reports, and
all registration statements, which the Company files with the SEC or any
national securities exchange or securities market;

(vi) promptly after the furnishing thereof, copies of any
statement or report furnished to any holder of Indebtedness pursuant to the
terms of any indenture, loan or credit or similar agreement, and not otherwise
required to be furnished to the Qualified Securityholders pursuant to any other
paragraph of this Section 9A; and

(vii) such other information respecting the Company's, or its
Subsidiaries' business, financial condition or prospects as any Qualified
Securityholder may, from time to time, reasonably request in writing.

9B. SBIC Regulatory Provisions.
--------------------------

(i) The Company shall notify each holder of Series 2 Senior
Preferred Stock or Common Stock which is a Small Business Investment Company (an
"SBIC Holder") as soon as practicable (and, in any event, not later than 15
-----------
days) prior to taking any action after which the number of record holders of the
Company's voting stock would be increased from fewer than 50 to 50 or more, and
the Company shall notify each SBIC Holder of any other action or occurrence
after which the number of record holders of the Company's voting stock was
increased (or would increase) from fewer than 50 to 50 or more, as soon as
practicable after the Company becomes aware that such other action or occurrence
has occurred or is proposed to occur.

(ii) At the same time the Company delivers its annual audited
financial statements hereunder or at such other times as any SBIC Holder
requests, the Company shall deliver to each SBIC Holder a written statement
certified by the Company's president or chief financial officer describing in
reasonable detail the use of the proceeds of the Financing hereunder by the
Company and its Subsidiaries. In addition to any other rights granted
hereunder, the Company shall grant each SBIC Holder and the United States Small
Business Administration (the "SBA") access to the Company's records for the
---
purpose of verifying the certifications made by the Company in SBA Form 480 and
652 delivered at the Closing and for the purpose of determining whether the
principal business activity of the Company and its Subsidiaries continues to
constitute an eligible business activity (within the meaning of the SBIC
Regulations).

43
<PAGE>

(iii) Upon the occurrence of a Regulatory Violation or in the
event that any SBIC Holder determines in its reasonable good faith judgment that
a Regulatory Violation has occurred, and such SBIC Holder has furnished the
Company and the Shareholders with a written notice describing in detail such
Regulatory Violation then in addition to any other rights and remedies to which
it may be entitled as a holder of Series 2 Senior Preferred Stock or Common
Stock (whether under this Agreement, the Articles of Incorporation or
otherwise), each SBIC Holder shall have the right, to the extent required under
the SBIC Regulations, subject to all restrictions in any financing agreements to
which the Company is subject or pursuant to which it is bound, and further
subject to the full repayment of the Series 1 Senior Preferred Stock and, if
applicable, the Series 3 Junior Preferred, to demand the immediate repurchase of
all of the outstanding shares of Series 2 Senior Preferred Stock and Common
Stock owned by such SBIC Holder at a price per share equal to the purchase price
paid for such stock hereunder, plus, if applicable, all accrued or declared and
unpaid dividends thereon, by delivering written notice of such demand to the
Company. The Company shall pay the purchase price for such stock by a cashier's
or certified check or by wire transfer of immediately available funds to each
SBIC Holder demanding repurchase and repayment within 30 days after the
Company's receipt of the demand notice, and upon such payment, each such SBIC
Holder shall deliver the certificates evidencing the Senior Preferred Stock and
Common Stock to be repurchased, duly endorsed for transfer or accompanied by
duly executed forms of assignment.

(iv) Promptly after the end of each calendar year (but in any
event prior to February 28 of each year), the Company shall deliver to the SBIC
Holder a written assessment of the economic impact of the SBIC Holder's
Financing on the Company, specifying the full-time equivalent jobs created or
retained in connection with the investment, the impact of the SBIC Holders'
Financing on the businesses of the Company in terms of expanded revenue and
taxes and other economic benefits resulting from the investment (including, but
not limited to, technology development or commercialization, minority business
development, urban or rural business development and expansion of exports).

(v) In the event that any SBIC Holder determines that it has
a Regulatory Problem, such SBIC Holder shall have the right to transfer the
Series 2 Senior Preferred Stock or Common Stock held by it without regard to any
restriction on transfer set forth in this Agreement or the Shareholders
Agreement (provided that the transferee agrees to become a party to this
Agreement and the Shareholders Agreement), and the Company shall take all such
actions as are reasonably requested by such SBIC Holder in order to (a)
effectuate and facilitate any transfer by such SBIC Holder of any securities of
the Company then held by such SBIC Holder to any Person designated by such SBIC
Holder, (b) permit such SBIC Holder (or any of its affiliates) to exchange all
or any portion of any voting security then held by it on a share-for-share basis
for shares of a nonvoting security of the Company, which nonvoting security
shall be identical in all respects to the voting security exchanged for it,
except that it shall be nonvoting and shall be convertible into a voting
security on such terms as are requested by such SBIC Holder in light of
regulatory considerations then prevailing (but in no event shall such conversion
right give the SBIC Holder a greater percentage of the Common Stock of the
Company, including greater voting rights or voting percentage of all outstanding
Common Stock (after giving effect to the full conversion of all nonvoting common
stock into voting common stock), as such SBIC Holder had immediately prior to
such exchange, reduced by normal dilution resulting from post exchange share
issuances), (c) continue and preserve the respective allocations of the voting
interests with respect to the

44
<PAGE>

Company arising out of the SBIC's ownership of voting securities and/or provided
in the Shareholders Agreement before the transfers and amendments referred to
above (including entering into such additional agreements as are requested by
such SBIC Holder to permit any Person(s) designated by such SBIC Holder to
exercise any voting power which is relinquished by such SBIC Holder) and (d)
amend this Agreement, the Articles of Incorporation, the Bylaws and related
agreements and instruments to effectuate and reflect the foregoing. The Parties,
and each subsequent holder of any securities held by any of the Parties, agree
to vote their securities in favor of such amendments and actions.

Section 10. Definitions. For the purposes of this Agreement, the
-----------
following terms have the meanings set forth below:

"Accounting Firm" has the meaning set forth in Section 1G(iii).
---------------

"Affiliate" of any particular Person means any other Person
---------
controlling, controlled by or under common control with such particular Person,
where "control" means the possession, directly or indirectly, of the power to
-------
direct the management and policies of a Person whether through the ownership of
voting securities, contract or otherwise.

"Affiliated Group" means any affiliated group as defined in Code
----------------
(S)1504 that has filed a consolidated return for federal income tax purposes (or
any similar group under state, local or foreign law) for a period during which
any of the Company, its Subsidiaries or its predecessors was a member.

"Agreement" has the meaning set forth in the Preamble.
---------

"Applicable Rate" has the meaning set forth in Section 1G(iv).
---------------

"Articles of Incorporation" has the meaning set forth in Section
-------------------------
1A(i).

"Bank" has the meaning set forth in Section 4M(i).
----

"Bylaws" has the meaning set forth in Section 2C.
------

"CERCLA" means the Comprehensive Environmental Response, Compensation,
------
and Liability Act of 1980, as amended.

"Class A Common Stock" has the meaning set forth in Section 1A(ii).
--------------------

"Class B Common Stock" has the meaning set forth in Section 1A(ii).
--------------------

"Closing" has the meaning set forth in Section 1F.
-------

"Closing Balance Sheet" has the meaning set forth in Section 1G(iii).
---------------------

"Closing Date" has the meaning set forth in Section 1F.
------------

45
<PAGE>

"Closing Indebtedness" has the meaning set forth in Section 1G(iii).
--------------------

"Closing Net Worth" has the meaning set forth in Section 1G(i).
-----------------

"COBRA" has the meaning set forth in Section 5W(ii).
-----

"Code" means the Internal Revenue Code of 1986, as amended.
----

"Common Stock" means the Class A Common Stock and the Class B Common.
------------

"Company" has the meaning set forth in the Preamble; provided that
-------
with respect to any provision of this Agreement that relates to a period prior
to the date hereof, the term "the Company" shall be deemed to include the
-------
Company and all predecessors of the Company.

"Company Transaction" has the meaning set forth in Section 4J.
-------------------

"Confidentiality Agreement" has the meaning set forth in Section 8E.
-------------------------

"Employment Agreements" has the meaning set forth in Section 2F.
---------------------

"Encumbrances" has the meaning set forth in Section 6C.
------------

"Environmental Lien" shall mean any Lien, whether recorded or
------------------
unrecorded, in favor of any governmental entity, relating to any liability of
the Company arising under any Environmental and Safety Requirements.

"Environmental and Safety Requirements" shall mean all federal, state,
-------------------------------------
local and foreign statutes, regulations, ordinances and other provisions having
the force or effect of law, all judicial and administrative orders and
determinations, all contractual obligations and all common law, in each case
concerning public health and safety, worker health and safety and pollution or
protection of the environment (including all those relating to the presence,
use, production, generation, handling, transport, treatment, storage, disposal,
distribution, labeling, testing, processing, discharge, Release, threatened
Release, control or cleanup of any hazardous or otherwise regulated materials,
substances or wastes, chemical substances or mixtures, pesticides, pollutants,
contaminants, toxic chemicals, petroleum products or byproducts, asbestos,
polychlorinated biphenyls, noise or radiation).

"ERISA" has the meaning set forth in Section 5W(i).
-----

"Estimated Closing Balance Sheet" has the meaning set forth in Section
-------------------------------
1G(ii).

"Estimated Cash Redemption Price" has the meaning set forth in Section
-------------------------------
1G(ii).

"Estoppel Letter" has the meaning set forth in Section 4M(iv).
---------------

46
<PAGE>

"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
or any similar federal Law then in force.

"Exchange Shares" has the meaning set forth in Section 1A(v).
---------------

"Exchange Transaction" has the meaning set forth in Section 1E.
--------------------

"Final Cash Redemption Price" has the meaning set forth in Section
---------------------------
1G(i).

"Financing" shall have the meaning set forth in the SBIC Regulations.
---------

"GAAP" means United States generally accepted accounting principles as
----
in effect from time to time.

"Governmental Approvals" has the meaning set forth in Section 2T.
----------------------

"Government Entity" means individually, and "Government Entities"
----------------- -------------------
means collectively, the United States of America or any other nation, any state
or other political subdivision thereof, or any entity exercising executive,
legislative, judicial, regulatory or administrative functions of government,
including any Tribunal, in each case having jurisdiction over the Company or any
of its Subsidiaries.

"Guarantee" means any guarantee of the payment or performance of any
---------
Indebtedness or other obligation and any other arrangement whereby credit is
extended to one obligor on the basis of any promise of such Person, whether that
promise is expressed in terms of an obligation to pay the Indebtedness of such
obligor, to provide reimbursement, or to purchase an obligation owed by such
obligor, or to purchase goods and services from such obligor pursuant to a take-
or-pay contract, or to maintain the capital, working capital, solvency or
general financial condition of such obligor, whether or not any such arrangement
is listed in the balance sheet of such Person, or referred to in a footnote
thereto, but shall not include endorsements of items for collection in the
ordinary course of business.

"Improvements" has the meaning set forth in Section 5BB(vi).
------------

"Indebtedness" means at a particular time, without duplication, (i)
------------
any obligations under any indebtedness for borrowed money (including, without
limitation, all principal, interest premiums, penalties, fees, expenses and
brokerage costs), (ii) any indebtedness evidenced by any note, bond, debenture
or other debt security, (iii) any commitment by which a Person assures a
creditor against loss (including contingent reimbursement obligations with
respect to letters of credit), (iv) any indebtedness guaranteed in any manner by
a Person (including guarantees in the form of an agreement to repurchase or
reimburse), (v) any obligations under capitalized leases or with respect to
which a Person is liable, contingently or otherwise, as obligor, guarantor or
otherwise, or with respect to which obligations a Person assures a creditor
against loss, (vi) any indebtedness secured by a Lien on a Person's assets and
(vii) any overdrafts of any accounts in excess of $2.0 million in the aggregate.

47
<PAGE>

"Intellectual Property Rights" means all (i) patents, patent
----------------------------
applications, patent disclosures and inventions as well as any reissues,
continuations, continuations-in-part, divisions, extensions or reexaminations
thereof, (ii) trademarks, service marks, trade dress, trade names, logos and
corporate names and registrations and applications for registration thereof,
together with all of the goodwill associated therewith, (iii) copyrights
(registered or unregistered) and copyrightable works and registrations and
applications for registration thereof, (iv) mask works and registrations and
applications for registration thereof, (v) computer software, data, data bases
and documentation thereof, (vi) trade secrets and other confidential information
(including, ideas, formulas, compositions, inventions (whether patentable or
unpatentable and whether or not reduced to practice), know-how, manufacturing
and production processes and techniques, research and development information,
drawings, specifications, designs, plans, proposals, technical data, financial
and marketing plans and customer and supplier lists and information), (vii)
other intellectual property rights and (viii) copies and tangible embodiments
thereof (in whatever form or medium)

"Investment" as applied to any Person means (i) any direct or indirect
----------
purchase or other acquisition by such Person of any notes, obligations,
instruments, stock, securities or ownership interest (including partnership
interests and joint venture interests) of any other Person and (ii) any capital
contribution by such Person to any other Person.

"Investment Transaction" has the meaning set forth in Section 1B.
----------------------

"IRB Financing" means the indebtedness of the Company with respect to
-------------
the Industrial Revenue Bonds in the principal amount of $7,500,000.

"Knowledge" shall mean the actual knowledge (excluding thereby any
---------
constructive, implied or imputed knowledge) of Alan Hodes or Michael Greenberg
without independent investigation other than by due inquiry of William Leary and
the Controller of the Company.

"Latest Balance Sheet" has the meaning set forth in Section 5E(ii).
--------------------

"Laws" means all statutes, laws, codes, ordinances, regulations,
----
rules, orders, judgments, writs, injunctions, acts or decrees of any Tribunal or
other Government Entity.

"Leases" has the meaning set forth in Section 5CC(ii).
------

"Leased Real Property" has the meaning set forth in Section 5CC(ii).
--------------------

"Lien" or "Liens" means any mortgage, pledge, security interest,
---- -----
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof), any sale of
receivables with recourse against the Company, any filing or agreement to file a
financing statement as debtor under the Uniform Commercial Code or any similar
statute (other than to reflect ownership by a third party of property leased to
the Company under a lease which is not in the nature of a conditional sale or
title retention agreement), or any subordination arrangement in favor of another
Person.

48
<PAGE>

"Loss" or "Losses" has the meaning set forth in Section 8B(i).
---- ------

"Material Adverse Effect" means a material and adverse effect upon the
-----------------------
business, operations, assets, liabilities, financial condition, operating
results, business prospects, cash flow, net worth or employee, customer or
supplier relations of the Company and its Subsidiaries taken as a whole.

"Material Contracts" has the meaning set forth in Section 5O(ii).
------------------

"Net Worth" means, for purposes of Section 1G above, the excess of the
---------
Company's consolidated assets as of the opening of business on the Closing Date
over the Company's consolidated liabilities as of the opening of business on the
Closing Date determined in accordance with GAAP, except as otherwise specified
below. In determining consolidated assets and liabilities hereunder, (i) all
accounting entries shall be taken into account regardless of their amount and
all known errors and omissions shall be corrected, (ii) all known proper
adjustments shall be made, (iii) appropriate reserves for all known and
quantifiable liabilities and obligations for which reserves are appropriate in
accordance with GAAP shall be included, (iv) inventory shall be accounted for on
a first-in-first-out basis and (v) no fees, costs or expenses of the Company
incurred in connection with the transactions contemplated hereby (including the
fees and expenses of legal counsel incurred on behalf of the Company and any
fees and expenses incurred by the Shareholders to the extent paid by the
Company) shall be included as liabilities of the Company as of the opening of
business on the Closing Date, in each case whether or not the Company has
received any bill, invoice or other written statement with respect to such
expenses and fees prior to the Closing, and also excluding all fees and expenses
of any other Person incurred in connection with the transactions contemplated
hereby for which the Company has the obligation to reimburse such Person
hereunder or pursuant to the Subordinated Note Offering.

"Noteholders" means the holders of the Senior Notes.
-----------

"Notice of Disagreement" has the meaning set forth in Section 1G(iii).
----------------------

"OpCo" has the meaning set forth in the Preamble.
----

"Original Class B Common" has the meaning set forth in Section 1A(iv)
-----------------------

"Other Plans" has the meaning set forth in Section 5W(v).
-----------

"Owned Real Property" has the meaning set forth in Section 5CC(i).
-------------------

"Party" has the meaning set forth in the Preamble.
-----

"Permitted Liens" means (i) Liens for Taxes or assessments and similar
---------------
charges, which either are (a) not delinquent or (b) being contested in good
faith and by appropriate proceedings, and adequate reserves (as determined in
accordance with GAAP, consistently applied) have been established on the
Company's books with respect thereto, (ii) mechanics', materialmen's or
contractors' Liens or encumbrances or any similar statutory Lien or restriction
for amounts not

49
<PAGE>

yet due and payable, (iii) zoning, entitlement, building and other land use
regulations imposed by governmental agencies having jurisdiction over the Real
Property which are not violated by the current use and operation of the Real
Property, (iv) Liens existing pursuant to the IRB Financing and (v) covenants,
conditions, restrictions, easements and other similar matters of record
affecting title to the Real Property which do not materially impair the
occupancy or use of the Real Property for the purposes for which it is currently
used in connection with the Company's business.

"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.

"Plans" has the meaning set forth in Section 5W(vi).
-----

"Profit Sharing Plan" has the meaning set forth in Section 5W(iv).
-------------------

"Purchaser Indemnified Parties" has the meaning set forth in Section
-----------------------------
8B(ii).

"Purchaser" has the meaning set forth in the Preamble.
---------

"Qualified Securityholder" means (i) the Purchaser (and its Permitted
------------------------
Transferees) so long as the Purchaser and its Permitted Transferees (as defined
in the Shareholders Agreement) hold any Series 2 Senior Preferred Stock or, at
least 5% of the Common Stock, determined on a fully-diluted basis.

"Real Property" has the meaning set forth in Section 5CC(iii).
-------------

"Real Property Permits" has the meaning set forth in Section 5CC(vii).
---------------------

"Real Property Laws" has the meaning set forth in Section 5CC(viii).
------------------

"Redemption Percentage" means in the case of Hodes, 86%, and in the
---------------------
case of Greenberg, 14%.

"Redemption Shares" has the meaning set forth in Section 1A(iv).
-----------------

"Redemption Transaction" has the meaning set forth in Section 1D.
----------------------

"Registration Rights Agreement" has the meaning set forth in Section
-----------------------------
2E.

"Regulatory Problem" means any set of facts or circumstances wherein
------------------
it has been asserted by any Government Entity (or any SBIC Holder believes that
there is a substantial risk of such assertion) that such SBIC Holder is not
entitled to hold, or exercise any significant right with respect to, the
securities of the Company held by such SBIC Holder.

"Regulatory Violation" means, with respect to any SBIC Holder
--------------------
providing Financing under this Agreement, a change in the principal business
activity of the Company and its

50
<PAGE>

Subsidiaries to an ineligible business activity (within the meaning of the SBIC
Regulations) if such change occurs within one year after the date of the initial
Financing hereunder.

"Release" shall have the meaning set forth in CERCLA.
-------

"Restricted Payment" means (i) any dividend or other distribution,
------------------
direct or indirect, in respect of any capital stock of the Company, or stock of
any Subsidiary which is not a Wholly-Owned Subsidiary of the Company, other than
a dividend payable solely in the form of additional shares of stock of that
type, (ii) loans, advances or other payments in respect of or in any way related
to any such capital stock of the Company, including, any redemption, retirement,
sinking fund or similar payment, purchase or other acquisition for value, direct
or indirect, of all or any portion of any such capital stock of the Company, and
(iii) any prepayment of principal, optional redemption, purchase, retirement
prior to stated maturity, defeasance, or similar optional payment with respect
to any Indebtedness of the Company or any of its Subsidiaries.

"SBIC Regulations" means the Small Business Investment Act of 1958 and
----------------
the regulations issued thereunder as set forth in 13 CFR 107 and 121, as
amended.

"Securities Act" means the Securities Act of 1933, as amended, or any
--------------
similar federal law then in force.

"Series 1 Senior Preferred Stock" has the meaning set forth in Section
-------------------------------
1A(v).

"Series 2 Senior Preferred Stock" has the meaning set forth in Section
-------------------------------
1A(ii).

"Series 3 Junior Preferred Stock" has the meaning set forth in Section
-------------------------------
1A(v).

"Shareholders" has the meaning set forth in the Preamble.
------------

"Shareholders Agreement" has the meaning set forth in Section 2D.
----------------------

"Shareholder Indemnified Parties" has the meaning set forth in Section
-------------------------------
8B(i).

"Small Business Investment Company" has the meaning given such term in
---------------------------------
the SBIC Regulations.

"Stock Option Plan" has the meaning set forth in Section 2G.
-----------------

"Stock Purchase Price" has the meaning set forth in Section 1B.
--------------------

"Subordinated Note Offering" has the meaning set forth in Section 1C.
--------------------------

"Subchapter S Election" has the meaning set forth in Section 5N(iii).
---------------------

"Subsidiary" means, with respect to any Person, any corporation,
----------
limited liability company, partnership, association or other business entity of
which (i) if a corporation, a majority

51
<PAGE>

of the total voting power of shares of stock 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 limited liability company, partnership,
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 ownership interest in a limited liability company, partnership,
association or other business entity if such Person or Persons shall be
allocated a majority of limited liability company, partnership, association or
other business entity gains or losses or shall be or control any managing
director or general partner of such limited liability company, partnership,
association or other business entity .

"Targeted Net Worth" has the meaning set forth in Section 1G(i).
------------------

"Tax" or "Taxes" means federal, state, county, local, foreign or other
--- -----
income, gross receipts, ad valorem, franchise, profits, sales or use, transfer,
registration, excise, utility, environmental, communications, real or personal
property, capital stock, license, payroll, wage or other withholding,
employment, social security, severance, stamp, occupation, alternative or add-on
minimum, estimated and other taxes of any kind whatsoever (including
deficiencies, penalties, additions to tax, and interest attributable thereto)
whether disputed or not.

"Tax Return" means any return, information report or filing with
----------
respect to Taxes, including any schedules attached thereto and including any
amendment thereof.

"Third Party Approvals" has the meaning set forth in Section 2S.
---------------------

"13 CFR" means Title 13, Code of Federal Regulations.
------

"Treasury Regulations" means the United States Treasury Regulations
--------------------
promulgated under the Code, and any reference to any particular Treasury
Regulation section shall be interpreted to include any final or temporary
revision of or successor to that section regardless of how numbered or
classified.

"Tribunal" means any government, arbitration panel, court or
--------
governmental department, commission, board, bureau, agency or instrumentality of
the United States of America or any state, province, commonwealth, nation,
territory, possession, county, parish, town, township, village, municipality or
other Government Entity, whether now or hereafter constituted and/or existing.

"Wholly-Owned Subsidiary" means, with respect to any Person, any
-----------------------
corporation, partnership, association or other business entity of which (i) if a
corporation, 100% of the total voting power of shares of stock entitled
(irrespective of whether, at the time, stock of any other class or classes of
such corporation shall have or might have voting power by reason of the
happening 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

52
<PAGE>

of that Person or a combination thereof, or (ii) if a partnership, association
or other business entity, 100% 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.

Section 11. Termination.
-----------

11A. Conditions of Termination. This Agreement may be terminated at
-------------------------
any time prior to the Closing:

(i) by the mutual written consent of the Parties;

(ii) by the Purchaser following notice from the Company or the
Shareholders given pursuant to Section 4I; provided, that if the Purchaser does
not exercise its right to terminate within twenty (20) days following such
notice, any such representation, warranty shall be deemed amended as expressly
set forth in the notice given pursuant to Section 4I, and the Purchaser shall
have waived its right to terminate this Agreement with respect to such notice;
or

(iii) by the Purchaser or the Shareholders and the Company if the
transactions contemplated hereby have not been consummated by February 28, 1997;

11B. Effect of Termination. In the event of termination of this
---------------------
Agreement as provided above, this Agreement shall forthwith become void and of
no further force and effect, except that the covenants and agreements set forth
in the last two sentences of Section 4J and in Sections 12A, 12E, 12F, 12H, 12I,
12J, 12M, 12O, and 12P shall survive such termination indefinitely, and except
that nothing in this Section 11B shall be deemed to release any Party from any
liability for any breach by such Party of the terms and provisions of this
Agreement or to impair the right of any Party to compel specific performance by
another Party of its obligations under this Agreement.

Section 12. Miscellaneous.
-------------

12A. Fees and Expenses. Upon the consummation of the Closing
-----------------
hereunder, the Company shall pay all fees and expenses incurred by the Parties
(or shall reimburse the Parties for such fees and expenses), including fees and
expenses of legal counsel, accountants, investment bankers or other
representatives and consultants (other than investment banking fees, if any, or
other consulting fees charged by Purchaser or any of its affiliates with respect
to this transaction or any portion thereof), in connection with this Agreement
and the consummation of the transactions contemplated hereby; provided, that the
Shareholders shall bear (and shall indemnify the Company and the Purchaser for)
all investment banking and advisory fees and expenses charged by any investment
banking or advisory firm retained by the Shareholders or the Company in
connection with the transactions contemplated by this Agreement. In addition,
the Company shall pay, and shall hold the Purchaser and each Shareholder
harmless against liability for the payment of, (i) the reasonable fees and
expenses incurred with respect to any amendments or waivers (whether or not the
same become effective) under or in respect of this Agreement and the other
agreements contemplated hereby and the Articles of Incorporation (including in
connection with any proposed merger,

53
<PAGE>

sale or recapitalization of the Company), (ii) all stamp and other Taxes which
may be payable in respect of the execution and delivery of this Agreement, the
issuance, delivery or acquisition of the Preferred Stock or the Common Stock
hereunder, (iii) the reasonable fees and expenses incurred with respect to the
enforcement of the rights granted under this Agreement, the Articles of
Incorporation and the other agreements contemplated hereby and (iv) the
reasonable fees and expenses incurred by each such Person in any filing with any
Government Entity with respect to its investment in the Company or in any other
filing with any Government Entity with respect to the Company which mentions
such Person.

12B. Remedies. Any Person having any rights under any provision of
--------
this Agreement shall be entitled to enforce such rights specifically (without
posting a bond or other security), to recover damages by reason of any breach of
any provision of this Agreement and to exercise all other rights granted by
Laws. All such rights and remedies shall be cumulative and non-exclusive, and
may be exercised singularly or concurrently. One or more successive actions may
be brought against the Company, either in the same action or in separate
actions, as often as the Purchaser or any of such holders deems advisable, until
all of the obligations to such Person are paid and performed in full.

12C. Consent to Amendments; Waivers. This Agreement may be amended,
------------------------------
or any provision of this Agreement may be waived; provided, that (i) prior to
the Closing any such amendment or waiver shall be effective upon the approval,
in a writing, executed by all of the Parties, and (ii) after the Closing, any
such amendment or waiver shall be effective upon the vote of holders of 75% of
the Common Stock voting as a single class; except, that no amendment or waiver
of any of the provisions of Section 8 shall be effective against the
Shareholders unless such amendment or waiver is approved in writing by the
Shareholders. No course of dealing between or among the Parties shall be deemed
effective to modify, amend or discharge any part of this Agreement or any rights
or obligations of any such Party or such holder under or by reason of this
Agreement.

12D. Successors and Assigns.
----------------------

(i) This Agreement and all covenants and agreements
contained herein and rights, interests or obligations hereunder, by or on behalf
of any of the Parties hereto, shall bind and inure to the benefit of the
respective successors and permitted assigns of the Parties hereto whether so
expressed or not, except that neither this Agreement nor any of the covenants
and agreements herein or rights, interests or obligations hereunder may be
assigned or delegated by the Shareholders, or assigned or delegated by the
Company prior to the Closing, without the prior written consent of the Purchaser
and except as otherwise provided by Section 12D(ii) below, neither this
Agreement nor any of the covenants and agreements herein or rights, interests or
obligations hereunder may be assigned or delegated by the Purchaser without the
prior written consent of the Shareholders.

(ii) The Purchaser and, following the Closing, the Company
and its Subsidiaries may assign its rights pursuant to this Agreement, including
its rights to indemnification, to any of its lenders as collateral security. The
Purchaser and, following the Closing, the Company and its Subsidiaries may
assign this Agreement and its rights and obligations hereunder in

54
<PAGE>

connection with a merger or consolidation involving the Company or any of its
Subsidiaries or in connection with a sale of stock or assets of the Company or
any of its Subsidiaries or other disposition of the Company or any of its
Subsidiaries.

(iii) In addition, and whether or not any express assignment
has been made, the provisions of this Agreement which are for a Party's benefit
as a holder of the Company's equity securities are also for the benefit of, and
enforceable by, any subsequent holder of the Company's equity securities.

12E. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement or the application of any
such provision to any Person or circumstance shall be held to be prohibited by,
illegal or unenforceable under applicable law or rule in any respect by a court
of competent jurisdiction, such provision shall be ineffective only to the
extent of such prohibition, illegality or unenforceability, without invalidating
the remainder of such provision or the remaining provisions of this Agreement.

12F. Counterparts. This Agreement may be executed in counterparts
------------
(including by means of telecopied signature pages), 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.

12G. Descriptive Headings; Interpretation. The headings and captions
------------------------------------
used in this Agreement and the table of contents to this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Any capitalized terms used in any Schedule or
Exhibit attached hereto and not otherwise defined therein shall have the
meanings set forth in this Agreement. The use of the word "including" herein
shall mean "including without limitation."

12H. Entire Agreement. This Agreement, the agreements and documents
----------------
referred to herein and the Confidentiality Agreement contain the entire
agreement and understanding among the Parties with respect to the subject matter
hereof and supersede all prior agreements and understandings, whether written or
oral, relating to such subject matter in any way, including, without limitation
the letter of intent dated October 29, 1996 by and among the Company, the
Shareholders and the Purchaser.

12I. No Third-Party Beneficiaries. This Agreement is for the sole
----------------------------
benefit of the Parties and their permitted successors and assigns and nothing
herein expressed or implied shall give or be construed to give any Person, other
than the Parties and such permitted successors and assigns, any legal or
equitable rights hereunder.

12J. Cooperation on Tax Matters. The Parties shall cooperate fully,
--------------------------
as and to the extent reasonably requested by each Party and at the requesting
Party's expense, in connection with any audit, litigation or other proceeding
with respect to any Party's request) the provision of records and information
which are reasonably relevant to any such audit, litigation or other proceeding
and making employees available on a mutually convenient basis to provide
additional information and explanation of any material

55
<PAGE>

provided hereunder. The Parties agree (i) to retain all books and records with
respect to Tax matters pertinent to the Company relating to any taxable period
beginning before the Closing Date until the expiration of the statute of
limitations (and, to the extent notified by any Party, any extensions thereof)
applicable to such taxable periods, and to abide by all record retention
agreements entered into with any taxing authority, and (ii) to give each Party
reasonable written notice prior to transferring, destroying or discarding any
such books and records and, if any Party so requests, the Purchaser, the Company
or the Shareholders, as the case may be, shall allow such party to take
possession of such books and records.

12K. Schedules and Exhibits. All Schedules and Exhibits attached
----------------------
hereto or referred to herein are hereby incorporated in and made a part of this
Agreement as if set forth in full herein.

12L. Governing Law. The corporate law of the State of Virginia
-------------
shall govern all issues and questions concerning the relative rights and
obligations of the Company and the holder of its equity securities. All other
issues and questions concerning the construction, validity, enforcement and
interpretation of this Agreement and the Schedules and Exhibits hereto shall be
governed by, and construed in accordance with, the laws of the State of New York
without giving effect to any choice of law or conflict of law rules or
provisions (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 New York. In furtherance of the foregoing, the internal law of the State of
New York shall control the interpretation and construction of this Agreement
(and all Schedules and Exhibits hereto), even though under that jurisdiction's
choice of law or conflict of law analysis, the substantive law of some other
jurisdiction would ordinarily apply.

12M. Notices. All notices, demands or other communications to be
-------
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the recipient or when sent by facsimile followed by delivery by reputable
overnight courier service, one day after being sent to the recipient by
reputable overnight courier service (charges prepaid) or five days after being
mailed to the recipient by certified or registered mail, return receipt
requested and postage prepaid. Such notices, demands and other communications
shall be sent to the Purchaser, the Shareholders and the Company at the
addresses indicated below or to such other address or to the attention of such
other person as the recipient party has specified by prior written notice to the
sending party. All notices, demands and other communications hereunder may be
given by any other means (including telecopy or electronic mail), but shall not
be deemed to have been duly given unless and until it is actually received by
the intended recipient.

The Company (prior to the Closing):
----------------------------------

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attn: Mr. Alan Hodes
Facsimile No.: (540) 622-2008

56
<PAGE>

with a copy to:
--------------
(which shall not constitute notice to the Company)

Rudnick & Wolfe
Suite 1800
203 North LaSalle Street
Chicago, Illinois 60601
Attn: Stephen A. Landsman, Esq.
Facsimile No.: (312) 236-7516

The Company (after the Closing):
-------------------------------

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attn: Mr. Alan Hodes
Facsimile No.: (540) 622-2008

with copies to:
--------------
(which shall not constitute notice to the Company)

Rudnick & Wolfe
Suite 1800
203 North LaSalle Street
Chicago, Illinois 60601
Attn: Stephen A. Landsman, Esq.
Facsimile No.: (312) 236-7516

Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: Mr. Thomas F. McWilliams
Facsimile No.: (212) 888-2940

Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Attn: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900

57
<PAGE>

The Shareholders:
----------------

Mr. Alan Hodes
c/o Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attn: Mr. Alan Hodes
Facsimile No.: (540) 622-2008

Mr. Michael Greenberg
c/o Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attn: Mr. Alan Hodes
Facsimile No.: (540) 622-2008

with a copy to:
--------------
(which shall not constitute notice to the Shareholders)

Rudnick & Wolfe
Suite 1800
203 North LaSalle Street
Chicago, Illinois 60601
Attn: Stephen A. Landsman, Esq.
Facsimile No.: (312) 236-7516

The Purchaser:
-------------

Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: Mr. Thomas F. McWilliams
Facsimile No.: (212) 888-2940

with a copy to:
--------------
(which shall not constitute notice to the Purchaser)

Kirkland & Ellis
153 East 53rd Street
New York, New York 10022
Attn: Kirk A. Radke, Esq.
Facsimile No.: (212) 446-4900

12N. Jurisdiction and Venue. ALL JUDICIAL PROCEEDINGS BROUGHT BY OR
----------------------
AGAINST THE COMPANY, THE PURCHASER OR THE SHAREHOLDERS WITH RESPECT TO THIS
AGREEMENT, ANY OTHER AGREEMENT CONTEMPLATED HEREBY OR ANY TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY MAY BE BROUGHT

58
<PAGE>

IN ANY STATE OR FEDERAL COURT OF COMPETENT JURISDICTION IN THE CITY OF NEW YORK
IN THE STATE OF NEW YORK. BY EXECUTION AND DELIVERY OF THIS AGREEMENT THE
COMPANY, THE PURCHASER AND EACH SHAREHOLDER ACCEPTS FOR ITSELF AND HIMSELF AND
IN CONNECTION WITH ITS OR HIS RESPECTIVE PROPERTIES, GENERALLY AND
UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS, AND
IRREVOCABLY AGREES TO BE BOUND BY ANY FINAL JUDGMENT RENDERED THEREBY IN
CONNECTION WITH THIS AGREEMENT FROM WHICH ALL RIGHTS TO APPEAL HAVE EXPIRED. THE
COMPANY, THE PURCHASER AND EACH SHAREHOLDER HEREBY WAIVES ANY CLAIM THAT SUCH
JURISDICTION IS AN INCONVENIENT FORUM OR AN IMPROPER FORUM BASED ON LACK OF
VENUE. THE COMPANY, THE PURCHASER AND EACH SHAREHOLDER DESIGNATES AND APPOINTS
_____________________________ [ADDRESS] (AND SUCH OTHER PERSONS AS MAY HEREAFTER
BE SELECTED BY SUCH PERSON WITH THE CONSENT OF THE PURCHASER) TO RECEIVE ON ITS
BEHALF SERVICE OF ALL PROCESS IN ANY SUCH PROCEEDINGS IN ANY SUCH COURT, SUCH
SERVICE BEING HEREBY ACKNOWLEDGED BY THE COMPANY, THE PURCHASER AND EACH
SHAREHOLDER TO BE EFFECTIVE AND BINDING SERVICE IN EVERY RESPECT. A COPY OF SUCH
PROCESS SO SERVED SHALL BE MAILED BY REGISTERED MAIL TO THE COMPANY, THE
PURCHASER OR ANY SHAREHOLDER AT SUCH PERSON'S RESPECTIVE ADDRESSES PROVIDED
HEREIN. TO THE EXTENT PERMITTED BY LAW, IF ANY AGENT APPOINTED BY THE COMPANY,
THE PURCHASER OR ANY SHAREHOLDER REFUSES TO ACCEPT SERVICE, SUCH PERSON HEREBY
AGREES THAT SERVICE UPON SUCH PERSON BY MAIL SHALL CONSTITUTE SUFFICIENT NOTICE.

12O. Waiver of Right to Jury Trial. THE COMPANY, THE PURCHASER AND
-----------------------------
EACH SHAREHOLDER HEREBY WAIVE, 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.

12P. No Strict Construction. The Parties have participated jointly
----------------------
in the negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties, and no presumption or burden of proof
shall arise favoring or disfavoring any Party by virtue of the authorship of any
of the provisions of this Agreement.

* * * * *

59
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this
Recapitalization Agreement on the date first written above.

PEN-TAB INDUSTRIES, INC.

By:_________________________________
Name:
Title:

CITICORP VENTURE CAPITAL, LTD.

By:_________________________________
Name:
Title:

____________________________________
ALAN HODES

____________________________________
MICHAEL GREENBERG

60
<PAGE>

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 Alan Hodes (the
-------
"Executive").
---------

WHEREAS, the Company, Pen-Tab and the Executive desire to enter into an
agreement regarding the employment of the Executive as President and Chief
Executive Officer 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 2, 4, 5, 6 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 President and Chief Executive Officer of the Company and Pen-Tab)
written directives of the Board which failure shall not be cured within ten (10)
Business Days after written notice thereof, or (iv) the failure of the Company
and its Subsidiaries, on a consolidated basis, to earn sufficient net income
<PAGE>

by April 15, 1999 to pay the current dividends upon the Company's 10% Series 1
Senior Redeemable Preferred Stock pursuant to the provisions of the Indenture
governing the Senior Notes (as that term is defined in the Shareholders
Agreement) which relate to the Limitation on Restricted Payments (assuming, for
purposes of this definition of "Cause", that there shall exist no other
limitation upon payment).

"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
Virginia, 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.

2
<PAGE>

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 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 President and Chief
Executive Officer of the Company and Pen-Tab under the supervision and
direction of the Company's and Pen-Tab's 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.

(i) Base Salary. During the Employment Period, the Executive's
-----------
base salary shall be $300,000 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

3
<PAGE>

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 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 each year (payable in equal or substantially
equal

4
<PAGE>

consecutive monthly installments) (1) the stated Base
Salary through the period ending on February 4, 2002, and
(2) the amount of the most recent bonus payment earned by
the Executive prior to the year in which Executive's
employment terminates, and (3) all vested benefits to
which Executive is 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

5
<PAGE>

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 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

6
<PAGE>

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.

(e) Key Man Life Insurance. The Executive shall use his reasonable
----------------------
best efforts to obtain an additional key man life insurance policy in the
incremental amount of $3.0 million within ninety (90) days of the Closing
Date. The key man insurance policy shall be for the benefit of the
Company, and the Company shall pay all premiums on such policy and shall
reimburse the Executive for all reasonable out-of-pocket expenses incurred
in connection with obtaining such policy.

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 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

7
<PAGE>

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 Board and perform all actions requested by 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 President and Chief Executive Officer 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.
---------------------------

"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

8
<PAGE>

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 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

9
<PAGE>

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 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

10
<PAGE>

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

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.
167 Kelley Drive
Front Royal, VA 22630
Attention: Alan Hodes
Telecopy No.: (540) 622-2008

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

11
<PAGE>

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, 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:

ALAN HODES

_____________________________

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 )

___________________________________
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
-----------------

A-1

<PAGE>

CERTIFICATE OF INCORPORATION

PEN-TAB INDUSTRIES, INC.

ARTICLE ONE
-----------

The name of the corporation is Pen-Tab Industries, Inc. (hereinafter
called the "Corporation").

ARTICLE TWO
-----------

The address of the Corporation's registered office in the state of
Delaware is 1013 Centre Road, Wilmington, Delaware 19805, in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is Corporation Service Company.

ARTICLE THREE
-------------

The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.

ARTICLE FOUR
------------

The total number of shares which the Corporation shall have the
authority to issue is One Thousand (1,000) shares, all of which shall be shares
of Common Stock, with a par value of $0.01 (One Cent) per share.

ARTICLE FIVE
------------

The name and mailing address of the incorporator is as follows:

Name Address
---- -------

Laura-Jayne Urso c/o Kirkland & Ellis
153 East 53rd Street
39th Floor
New York, NY 10022
<PAGE>

ARTICLE SIX
-----------

The directors shall have the power to adopt, amend or repeal By-Laws,
except as may be otherwise be provided in the By-Laws.

ARTICLE SEVEN
-------------

The Corporation expressly elects not to be governed by Section 203 of
the General Corporation Law of the State of Delaware.

ARTICLE EIGHT
-------------

Section 1. Nature of Indemnity. Each person who was or is made a
--------- -------------------
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he (or a person of whom
he is the legal representative), is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary, or agent of another corporation or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee,
fiduciary or agent or in any other capacity while serving as a director,
officer, employee, fiduciary or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent which it is empowered to do so by the
General Corporation Law of the State of Delaware, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than said law permitted the Corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees
actually and reasonably incurred by such person in connection with such
proceeding and such indemnification shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that, except as provided
in Section 2 of this Article Eight, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding initiated by such
person only if such proceeding was authorized by the Board of Directors of the
Corporation. The right to indemnification conferred in this Article Eight shall
be a contract right and, subject to Sections 2 and 5 of this Article Eight,
shall include the right to payment by the Corporation of the expenses incurred
in defending any such proceeding in advance of its final disposition. The
Corporation may, by action of the Board of Directors, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.

2
<PAGE>

Section 2. Procedure for Indemnification of Directors and Officers.
--------- -------------------------------------------------------
Any indemnification of a director or officer of the Corporation under Section 1
of this Article Eight or advance of expenses under Section 5 of this Article
Eight shall be made promptly, and in any event within 30 days, upon the written
request of the director or officer. If a determination by the Corporation that
the director or officer is entitled to indemnification pursuant to this Article
Eight is required, and the Corporation fails to respond within sixty days to a
written request for indemnity, the Corporation shall be deemed to have approved
the request. If the Corporation denies a written request for indemnification or
advancing of expenses, in whole or in part, or if payment in full pursuant to
such request is not made within 30 days, the right to indemnification or
advances as granted by this Article Eight shall be enforceable by the director
or officer in any court of competent jurisdiction. Such person's costs and
expenses incurred in connection with successfully establishing his right to
indemnification, in whole or in part, in any such action shall also be
indemnified by the Corporation. It shall be a defense to any such action (other
than an action brought to enforce a claim for expenses incurred in defending any
proceeding in advance of its final disposition where the required undertaking,
if any, has been tendered to the Corporation) that the claimant has not met the
standards of conduct which make it permissible under the General Corporation Law
of the State of Delaware for the Corporation to indemnify the claimant for the
amount claimed, but the burden of such defense shall be on the Corporation.
Neither the failure of the Corporation (including the Board of Directors,
independent legal counsel, or its stockholders) to have made a determination
prior to the commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable standard of
conduct set forth in the General Corporation Law of the State of Delaware, nor
an actual determination by the Corporation (including its Board of Directors,
independent legal counsel, or its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to the action or create
a presumption that the claimant has not met the applicable standard of conduct.

Section 3. Nonexclusivity of Article Eight. The rights to
--------- -------------------------------
indemnification and the payment of expenses incurred in defending a proceeding
in advance of its final disposition conferred in this Article Eight shall not be
exclusive of any other right which any person may have or hereafter acquire
under any statute, provision of the certificate of incorporation, by-law,
agreement, vote of stockholders or disinterested directors or otherwise.

Section 4. Insurance. The Corporation may purchase and maintain
--------- ---------
insurance on its own behalf and on behalf of any person who is or was a
director, officer, employee, fiduciary, or agent of the Corporation or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against any liability asserted against him or her and

3
<PAGE>

incurred by him or her in any such capacity, whether or not the Corporation
would have the power to indemnify such person against such liability under this
Article Eight.

Section 5. Expenses. Expenses incurred by any person described in
--------- --------
Section 1 of this Article Eight in defending a proceeding shall be paid by the
Corporation in advance of such proceeding's final disposition unless otherwise
determined by the Board of Directors in the specific case upon receipt of an
undertaking by or on behalf of the director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation. Such expenses incurred by other employees and agents may be so
paid upon such terms and conditions, if any, as the Board of Directors deems
appropriate.

Section 6. Employees and Agents. Persons who are not covered by the
--------- --------------------
foregoing provisions of this Article Eight and who are or were employees or
agents of the Corporation, or who are or were serving at the request of the
Corporation as employees or agents of another corporation, partnership, joint
venture, trust or other enterprise, may be indemnified to the extent authorized
at any time or from time to time by the Board of Directors.

Section 7. Contract Rights. The provisions of this Article Eight
--------- ---------------
shall be deemed to be a contract right between the Corporation and each director
or officer who serves in any such capacity at any time while this Article Eight
and the relevant provisions of the General Corporation Law of the State of
Delaware or other applicable law are in effect, and any repeal or modification
of this Article Eight or any such law shall not affect any rights or obligations
then existing with respect to any state of facts or proceeding then existing.

Section 8. Merger or Consolidation. For purposes of this Article
--------- -----------------------
Eight, references to "the Corporation" shall include, in addition to the
resulting corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers, and employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation, or is or
was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, shall stand in the same position under this Article
Eight with respect to the resulting or surviving corporation as he or she would
have with respect to such constituent corporation if its separate existence had
continued.

4
<PAGE>

ARTICLE NINE
------------

The Corporation reserves the right to amend or repeal any provisions
contained in this Certificate of Incorporation from time to time and at any time
in the manner now or hereafter prescribed by the laws of the State of Delaware,
and all rights conferred upon stockholders and directors are granted subject to
such reservation.

5
<PAGE>

I, the undersigned, being the sole incorporator hereinbefore named,
for the purpose of forming a corporation in pursuance of the General Corporation
Law of the State of Delaware, do make and file this Certificate, hereby
declaring and certifying that the facts herein stated are true, and accordingly
have hereunto set my hand this 13th day of January 1997.

______________________________
Laura-Jayne Urso
Sole Incorporator

<PAGE>

BYLAWS
OF
PEN-TAB INDUSTRIES, INC.
A DELAWARE CORPORATION

BYLAW I - OFFICES
-----------------

The principal office of the Corporation shall be located at 167 Kelley
Drive, Front Royal, Virginia 22630. The Corporation may have such other offices,
within or without the Commonwealth of Virginia, as the Board of Directors may
designate or as the business of the Corporation may from time to time require.

The registered office of the Corporation in the State of Delaware shall be
located at 1013 Centre Road, Wilmington, Delaware 19805, in the County of New
Castle. The name of the Corporation's registered agent at such address is
Corporation Service Company. The registered office and/or agent of the
Corporation may be changed form time to time by action of the Board of
Directors.

BYLAW II - STOCKHOLDERS
-----------------------

1. ANNUAL MEETING.
--------------

The annual meeting of the Stockholders shall be held during the month of
April each year at such hour, on such day, and at such place, within or without
the Commonwealth of Virginia, as fixed by the Board of Directors, for the
purpose of electing Directors and for the transaction of such other business as
may come before the meeting.

2. SPECIAL MEETINGS.
----------------

Unless otherwise required by law, special meetings of the Stockholders may
be called for any purpose or purposes, by the Chairman of the Board of
Directors, by the President or Executive Vice President (at their discretion),
by the Board of Directors, or by the President or Secretary at the request of a
majority of the Board of Directors or the holder(s) of not less than ten percent
(10%) of all outstanding shares of the Corporation entitled to vote at such
meeting.

3. PLACE OF MEETINGS.
-----------------

Unless otherwise required by law, the Board of Directors or the President
may designate in the notice of meeting any place within or without the
Commonwealth of Virginia as the place of meeting for any annual meeting or for
any special meeting. A waiver of notice signed by all Stockholders entitled to
vote at a meeting may designate any place, within or without the Commonwealth of
Virginia, as the place for holding such meeting. If no designation is made or
if a special meeting be otherwise called, the place of meeting shall be the
principal office of the Corporation.
<PAGE>

4. NOTICE OF MEETINGS.
------------------

(a) Unless otherwise required by law, written or printed notice stating the
place, day and hour of the meeting and, in case of a special meeting, the
purpose or purposes for which the meeting is called, shall be delivered not less
than ten (10) nor more than sixty (60) days prior to the date of the meeting,
personally, by mail, or by telegraph, teletype, or other form of recorded
communication, by or at the direction of the President or the Secretary to each
Stockholder of record entitled to vote at such meeting. Notwithstanding the
foregoing, however, notice of a Stockholders' meeting to act on an amendment of
the Articles of Incorporation, a plan of merger or share exchange, a proposed
sale of all or substantially all of the Corporation's assets, or the dissolution
of the Corporation shall be delivered not less than ten (10) nor more than sixty
(60) days prior to the date of the meeting. If mailed, notice of any
Stockholders' meeting shall be deemed to be delivered when deposited in the
United States mail, addressed to the Stockholder at his address as it appears on
the stock transfer books of the Corporation, with postage thereon prepaid.

(b) Waiver of Notice. A Stockholder's attendance at a meeting (1) waives
----------------
objection to lack of notice or defective notice of the meeting, unless the
Stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting and does not thereafter vote for or assent
to business transacted at such meeting; and (2) waives objection to
consideration of a particular matter at the meeting that is not within the
purpose or purposes described in the meeting notice, unless the Stockholder
objects to considering the matter when it is presented and does not thereafter
vote for or assent to such particular matter.

5. FIXING OF RECORD DATE.
---------------------

For the purpose of determining Stockholders entitled to notice of or to
vote at any meeting of Stockholders or any adjournment thereof, or to receive
payment of any dividend, or in order to make a determination of Stockholders for
any other proper purpose, the Directors of the Corporation may fix in advance a
date as the record date for any such determination of Stockholders, such date in
any case to be not more than sixty (60) days and, in case of a meeting of
Stockholders, not less than ten (10) days prior to the date on which the
particular action requiring such determination of Stockholders is to be taken.
If no record date is fixed for the determination of Stockholders entitled to
notice of or to vote at a meeting of Stockholders, or Stockholders entitled to
receive payment of a dividend, the date on which notice of the meeting is mailed
or the date on which the resolution of the Directors declaring such dividend is
adopted, as the case may be, shall be the record date for such determination of
Stockholders. When a determination of Stockholders entitled to vote at any
meeting of Stockholders has been made as provided in this Paragraph 5 of Bylaw
II, such determination shall apply to any adjournment thereof unless the Board
of Directors fixes a new record date, which it shall do if the meeting is
adjourned to a date more than one hundred twenty (120) days after the date fixed
for the original meeting.

-2-
<PAGE>

6. VOTING LISTS.
------------

The officer or agent having charge of the stock transfer books for shares
of the Corporation shall make, at least ten (10) days before such meeting of
Stockholders, a complete list of the Stockholders entitled to vote at such
meeting, or any adjournment thereof, arranged in alphabetical order, with the
address of and the number of shares held by each, which list, for a period of
ten (10) days prior to such meeting, shall be kept on file at the principal
office of the Corporation and shall be subject to inspection by any Stockholder
at any time during usual business hours. Such list shall also be produced and
kept open at the time and place of the meeting and shall be subject to the
inspection of any Stockholder during the whole time of the meeting. The original
stock transfer book shall be prima facie evidence as to who are the Stockholders
entitled to examine such list or transfer books or to vote at the meeting of
Stockholders. In the event that the requirements of this Section 6 of Bylaw II
are not substantially complied with, the meeting shall, on the demand of any
Stockholder in person or by proxy, be adjourned until the requirements are
complied with.

7. QUORUM.
------

At any meeting of Stockholders a majority of the outstanding shares of the
Corporation entitled to vote, represented in person or by proxy, shall
constitute a quorum at a meeting of Stockholders. If less than said number of
the outstanding shares are represented at a meeting, a majority of the shares so
represented may adjourn the meeting from time to time without further notice. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted that might have been transacted at the meeting as
originally notified; provided that the day, hour and place of the adjourned
meeting is announced at the meeting before adjournment. If a new record date for
the adjourned meeting is or shall be fixed, pursuant to the terms of these
Bylaws, however, notice of the adjourned meeting shall be given to persons who
are Stockholders as of the new record date. The Stockholders present at a duly
organized meeting may continue to transact business for the remainder of the
meeting and for any adjournment of the meeting, notwithstanding the withdrawal
of enough Stockholders to leave less than a quorum, unless a new record date is
or shall be set for the adjourned meeting.

8. PROXIES.
-------

At all meeting of Stockholders, a Stockholder may vote by proxy executed in
writing by the Stockholder or by his duly authorized attorney-in-fact. Such
proxy shall be filed with the Secretary of the Corporation, or other officer or
agent authorized to tabulate votes before or at the time of the meeting, and
shall be effective when received by the Secretary or such other officer or agent
authorized to tabulate votes.

-3-
<PAGE>

9. VOTING.
------

Each Stockholder entitled to vote in accordance with the terms and
provisions of the Articles of Incorporation and these Bylaws shall be entitled
to one (1) vote, in person or by proxy, for each share of stock entitled to vote
and held by such Stockholder. Upon the demand of any Stockholder, the vote for
Directors and the vote upon any question before the meeting shall be by ballot.
All elections for Directors shall be decided by a plurality of votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present; all other questions shall be decided by majority vote of the total
votes cast, except as otherwise provided by the Articles of Incorporation or the
laws of the Commonwealth of Virginia, or by contractual voting agreement by and
among Stockholders.

10. ORDER OF BUSINESS.
-----------------

The order of business at all meetings of the Stockholders shall be as
follows:

1. Roll call.
2. Proof of notice of meeting or waiver of notice.
3. Reading of minutes of preceding meeting.
4. Reports of officers.
5. Reports of Committees.
6. Election of Directors.
7. Unfinished Business.
8. New Business.

11. INFORMAL ACTION BY STOCKHOLDERS.
-------------------------------

Unless otherwise provided by law, any action required or permitted by
Delaware law to be taken at a Stockholders meeting may be taken without a
meeting if the action is taken by all Stockholders entitled to vote on the
action. The action shall be evidenced by one or more written consents
describing the action taken, signed by all the Stockholders entitled to vote on
the action, and delivered to the Secretary of the Corporation for inclusion in
the minutes or filing with the corporate records of the Corporation. This
consent in writing may be in the form of a single copy signed by all such
Stockholders or in the form of counterparts signed by any number of Stockholders
provided that all counterparts together shall include all Stockholders entitled
to vote on such action. Any action taken by unanimous written consent shall be
effective according to its terms when all consents are in possession of the
Corporation. A Stockholder may withdraw consent only by delivering a written
notice of withdrawal to the Corporation prior to the time that all consents are
in the possession of the Corporation. Action taken under this Section is
effective as of the date specified therein provided the consent states the date
of execution by each Stockholder.

-4-
<PAGE>

12. INSPECTION RIGHTS.
-----------------

(a) Any Stockholder of the Corporation shall be entitled to inspect and
copy, during regular business hours at the Corporation's principal office, any
of the records of the Corporation described in Bylaw VIII, Section 2 herein
below, provided that he gives the Corporation written notice of his demand at
least five (5) business days before the date on which he wishes to inspect and
copy. The Corporation may impose a reasonable charge, covering the cost of
labor and material, for copies of any documents provided to the Stockholder
pursuant to this Section 12(a) of Bylaw II, provided that such charge may not
exceed the estimated cost of production or reproduction of the records.

(b) A Stockholder of the Corporation may inspect and copy the records of
the Corporation described in Bylaw VIII, Section 2 herein below only if that
Stockholder: (i) has been a Stockholder of record for at least six (6) months
immediately preceding his demand to inspect and copy records of the Corporation,
or is a holder of record of at least five percent (5%) of all of the outstanding
shares of stock of the Corporation, (ii) makes his demand in good faith and for
a proper purpose, (iii) describes with reasonable particularity his purpose and
the records he desires to inspect, (iv) demands to inspect and copy records that
are directly connected with his purpose, and (v) gives the Corporation written
notice of his demand at least five (5) business days before the date on which he
wishes to inspect and copy, then such Stockholder is entitled to inspect and
copy, during regular business hours at a reasonable location specified by the
Corporation, any of the following records of the Corporation: excerpts from
minutes of any meeting of the Board of Directors, records of any action of a
committee of the Board of Directors, while acting in place of the Board of
Directors on behalf of the Corporation, minutes of any meeting of the
Stockholders, records of action taken by the Stockholders or Board of Directors
without a meeting, accounting records of the Corporation, and the record of
Stockholders.

BYLAW III - BOARD OF DIRECTORS
------------------------------

1. GENERAL POWERS.
--------------

The business and affairs of the Corporation shall be managed under the
direction of its Board of Directors. The Directors shall in all cases act as a
Board, and they may adopt such rules and regulations for the conduct of their
meetings and the management of the Corporation as they may deem proper, so long
as the rules and regulations adopted by the Board are not inconsistent with
these Bylaws and the laws of the State of Delaware.

2. NUMBER AND TENURE.
-----------------

The Corporation shall have five (5) Directors. Each Director shall hold
office until the next annual meeting of the Stockholders and until his successor
shall have been elected and shall qualify, or until there is a decrease in the
number of Directors. No individual shall be named or elected as a Director
without his prior consent.

-5-
<PAGE>

3. REGULAR MEETINGS.
----------------

Regular meetings of the Directors shall be held without other notice than
this Bylaw III immediately after, and at the same place as, each annual meeting
of Stockholders. The Directors may provide, by resolution, the time and place
for the holding of additional regular meetings without other notice than that
provided in such resolution.

4. SPECIAL MEETINGS.
----------------

(a) Special meetings of the Directors may be called by or at the request of
the President, the Executive Vice President or any Director. The person or
persons authorized to call special meetings of the Directors may fix the place
for holding any special meeting of the Directors called by them.

(b) Notice of any special meeting shall be given at least twenty-four (24)
hours previously thereto by: (1) written notice delivered personally, or by
telegram, or mailed to each Director at his business address, or (2) oral notice
communicated in person or by telephone. Written notice, if in a comprehensible
form, shall be effective at the earliest of the following: (i) when received,
(ii) five (5) days after its deposit in the United States mail, as evidenced by
the postmark, if mailed postpaid and correctly addressed, or (iii) on the date
shown on the return receipt, if sent by registered or certified mail, return
receipt requested, and the receipt is signed by or on behalf of the addressee.
Oral notice is effective when communicated if communicated in a comprehensible
manner.

(c) Waiver of Notice. The attendance of or participation by a Director at
----------------
a meeting shall constitute a waiver of notice of such meeting, unless the
Director at the beginning of the meeting or promptly upon his arrival objects to
holding the meeting or transacting business at the meeting and does not
thereafter vote for or assent to action taken at the meeting.

5. TELECONFERENCE MEETINGS.
-----------------------

The Board of Directors shall permit any or all Directors to participate in
a regular or special meeting by, or conduct the meeting through the use of, any
means of communication by which all Directors participating may simultaneously
hear each other during the meeting. A Director participating in a meeting by
this means shall be deemed to be present in person at the meeting.

6. QUORUM.
------

At any meeting of the Directors a majority of the Directors shall
constitute a quorum for the transaction of business.

-6-
<PAGE>

7. MANNER OF ACTING.
----------------

Provided that a quorum is present when a vote is taken, the affirmative
vote of a majority of the Directors present at a meeting shall be the act of the
Board of Directors.

8. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
-----------------------------------------

Newly created directorships resulting from an increase in the number of
Directors and vacancies occurring in the Board for any reason may be filled by a
vote of the Stockholders or by a majority of the Directors then in office, and
if the Directors remaining in office constitute less than a quorum of the Board,
they may fill the vacancy by the affirmative vote of a majority of the Directors
remaining in office. A Director elected to fill a vacancy caused by
resignation, death, or removal shall be elected to hold office until the next
meeting of Stockholders at which Directors are elected. A vacancy that will
occur at a later date, may be filled before the vacancy occurs, but the new
Director may not take office until the vacancy occurs.

9. REMOVAL OF DIRECTORS.
--------------------

Any or all of the Directors may be removed with or without cause by a vote
of the Stockholders holding a majority of the Shares at a meeting of the
Stockholders called expressly for that purpose.

10. RESIGNATION.
-----------

A Director may resign at any time by giving written notice to the Board,
the Board's Chairman, the President, the Executive Vice President or the
Secretary of the Corporation. Unless otherwise specified in the notice, the
resignation shall take effect upon receipt thereof by the Board or such officer,
and the acceptance of the resignation shall not be necessary to make it
effective.

11. COMPENSATION.
------------

No compensation shall be paid to Directors, as such, for their services,
but by resolution of the Board a fixed sum and expenses for actual attendance at
each regular or special meeting of the Board may be authorized. Nothing herein
contained shall be construed to preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor.

12. PRESUMPTION OF ASSENT.
---------------------

A Director of the Corporation who is present at a meeting of the Directors
or a committee of the Board of Directors at which action on any corporate matter
is taken shall be presumed to have assented to the action taken unless he
objects at the beginning of the meeting, or promptly upon his arrival, to
holding the meeting or transacting specified

-7-
<PAGE>

business at the meeting, or he votes against, or abstains from, the action
taken. A Director's right to dissent to action taken on any corporate matter at
a meeting of the Directors or a committee of the Board of Directors at which the
Director is present shall not apply to a Director who voted in favor of such
action.

13. EXECUTIVE AND OTHER COMMITTEE.
-----------------------------

If the number of Directors is fixed at more than two (2), then the Board,
by resolution, may designate from among its members an Executive Committee and
other committees, each consisting of two (2) or more Directors. Each such
committee shall serve at the pleasure of the Board.

14. INFORMAL ACTION BY DIRECTORS OR COMMITTEES.
------------------------------------------

Unless otherwise provided by law, any action required to be taken at a
Directors' meeting, or any action that may be taken at a Directors' meeting or a
committee meeting, may be taken without a meeting if each and every Director
entitled to vote on the matter signs one or more written consents setting forth
the action, signed either before or after such action, and such consent is
included in the minutes or is filed with the Corporation records. Action taken
under this Section 14 of Bylaw III is effective when the last Director signs the
consent unless the consent specifies a different effective date, in which event
the action taken is effective as of the date specified therein, provided the
consent states the date of execution by each Director. Such a consent in writing
may be in the form of a single copy signed by all Directors or in the form of
counterparts signed by any number of Directors provided that all counterparts
together shall include the signatures of all of the Corporation's Directors.

15. TRANSACTIONS WITH INTERESTED DIRECTORS.
--------------------------------------

(a) Any transaction with the Corporation in which a Director of the
Corporation has a direct or indirect personal interest (a "conflict of interests
transaction") shall be valid if: (1) the material facts of the transaction and
the Director's interest were disclosed or known to the Board of Directors, or a
committee thereof, and the Board of Directors or such committee authorized,
approved, or ratified the transaction; or (2) the material facts of the
transaction and the Director's interest were disclosed to the Stockholders
entitled to vote and they authorized, approved, or ratified the transaction; or
(3) the transaction was fair to the Corporation.

(b) For the purposes of Section 15(a) of this Bylaw III, the following
definitions shall apply: (1) a Director of the Corporation has an indirect
personal interest in a transaction if: (i) another entity in which he has a
material financial interest or in which he is a General Partner is a party to
the transaction, or (ii) another entity of which he is a Director, officer, or
trustee is a party to the transaction, and the transaction is or should be
considered by the Board of Directors of the Corporation; (2) a conflict of
interest transaction is authorized, approved, or ratified by the Board of
Directors, or a committee thereof, if it receives the affirmative vote of a
majority of the Directors on the Board of Directors, or on

-8-
<PAGE>

such committee, who have no direct or indirect personal interest in the
transaction, provided that no transaction can be authorized, approved or
ratified under this Section 15 of Bylaw III by a single Director; (3) a quorum
of the Board of Directors is present for the purpose of taking action if a
majority of the Directors who have no direct or indirect personal interest in
the transaction vote to authorize, approve, or ratify the transaction; (4) a
conflict of interest transaction is authorized, approved, or ratified by the
Stockholders of the Corporation entitled to vote if the transaction receives the
vote of a majority of the shares entitled to be counted, provided that shares
owned by or voted under the control of a Director who has a direct or indirect
personal interest in the transaction, and shares owned by or voted under the
control of an entity in which such Director has a material financial interest or
in which he is a General Partner may not be counted in a vote of Stockholders to
determine whether to authorize, approve, or ratify the conflict of interest
transaction described in this Section 15 of Bylaw III; and (5) a quorum of the
Stockholders is present for the purpose of taking action if a majority of the
shares, whether or not present, which are entitled to be counted in a vote on
the transaction, is represented.

15. STATEMENT OF BUSINESS AND CONDITION.
-----------------------------------

The Board of Directors shall present at each annual meeting, and, when
called for by the Stockholders at Special Meetings of the Stockholders, a
complete statement of the business and condition of the Corporation.

BYLAW IV - OFFICERS
-------------------

1. NUMBER.
------

The officers of the Corporation shall be a President, an Executive Vice
President, any number of Vice Presidents as shall be deemed advisable, a
Secretary and a Treasurer, each of whom shall be appointed by the Directors.
Such other officers and assistant officers as may be deemed necessary may be
appointed by the Directors. Any duly appointed officer may appoint one (1) or
more officers or assistant officers. The same individual may simultaneously
hold more than one office in the Corporation.

2. ELECTION AND TERM OF OFFICE.
---------------------------

The officers of the Corporation to be appointed by the Directors shall be
appointed annually at the first meeting of the Directors held after each annual
meeting of the Stockholders. Each officer shall hold office until his successor
shall have been duly appointed, or until his death, or until he shall resign, or
shall have been removed in the manner hereinafter provided.

3. REMOVAL.
-------

Any officer or agent appointed by the Directors or by another officer may
be removed by the Directors at any time, with or without cause, when in their
judgment the best interests of the Corporation would be served thereby, but such
removal shall be

-9-

<PAGE>

without prejudice to the contract rights, if any, of the person so removed. Any
officer or assistant officer, if appointed by another officer, may likewise be
removed by such officer.

4. VACANCIES.
---------

A vacancy in any office because of death, resignation, removal,
disqualification, or otherwise, may be filled by the Directors for the unexpired
portion of the term.

5. CHAIRMAN OF THE BOARD.
---------------------

The Chairman of the Board of Directors, if one be elected, shall preside at
all meetings of the Board of Directors and he shall have and perform such other
duties as from time to time may be assigned to him by the Board of Directors.

6. PRESIDENT.
---------

The President shall be the principal executive officer of the Corporation
and, subject to the control of the Directors, shall in general supervise and
control all of the business and affairs of the Corporation. The President shall
preside at all meetings of the Stockholders and of the Directors (unless, in the
case of the Directors, a Chairman of the Board shall be elected and shall be
present at the meeting). He may sign, with the Secretary or any other proper
officer of the Corporation thereunto authorized by the Directors, certificates
for Shares of the Corporation, any deeds, mortgages, bonds, and contracts, or
other instruments that the Directors have authorized to be executed, except in
cases where the signing and execution thereof shall be expressly delegated by
the Directors or by these Bylaws to some other officer or agent of the
Corporation, or shall be required by law to be otherwise signed or executed; and
in general shall perform all duties incident to the office of President and such
other duties as may be prescribed by the Directors from time to time.

7. EXECUTIVE VICE PRESIDENT.
------------------------

The Executive Vice President shall be the next senior executive officer of
the Corporation and, subject to the control of the Directors, shall assist the
President in the general supervision and control of all of the business and
affairs of the Corporation. In the absence of the President or at his direction,
the Executive Vice President shall preside at all meetings of the Stockholders
and the Directors (unless, in the case of the Directors, a Chairman of the Board
shall be elected and shall be present at the meeting). He may sign, with the
Secretary or any other proper officer of the Corporation thereunto authorized by
the Directors, certificates for Shares of the Corporation, any deeds, mortgages,
bonds, and contracts, or other instruments that the Directors have authorized to
be executed, except in cases where the signing and execution thereof shall be
expressly delegated by the Directors or by these Bylaws to some other officer or
agent of the Corporation, or shall be required by law to be otherwise signed or
executed; and in general shall perform all duties incident to the office of
Executive Vice President and such other duties as may be prescribed by the
Directors from time to time.

-10-
<PAGE>

8. VICE PRESIDENT(S).
-----------------

The Board of Directors is authorized to name any number of Vice Presidents
as it shall deem advisable. The Vice Presidents shall perform such duties as
from time to time may be assigned to them by the President, the Executive Vice
President or by the Directors.

9. SECRETARY.
---------

The Secretary shall keep the minutes of the Stockholders' and of the
Directors' meetings in one or more books provided for that purpose; see that all
notices are duly given in accordance with the provisions of these Bylaws or as
required; be custodian of the corporate records and of the seal of the
Corporation and keep a register of the post office address of each Stockholder
that shall be furnished to the Secretary by such Stockholder; have general
charge of the stock transfer books of the Corporation; and in general perform
all duties incident to the office of Secretary and such other duties as from
time to time may be assigned to him by the President or by the Directors.

10. TREASURER.
---------

If required by the Directors, the Treasurer shall give a bond for the
faithful discharge of his duties in such sum and with such surety or sureties as
the Directors shall determine. He shall have charge and custody of and be
responsible for all funds and securities of the Corporation; receive and give
receipts for moneys due and payable to the Corporation from any source
whatsoever, and deposit all such moneys in the name of the Corporation in such
banks, trust companies, or other depositories as shall be selected in accordance
with these Bylaws; and in general perform all of the duties incident to the
office of Treasurer and such other duties as from time to time may be assigned
to him by the President or by the Directors.

11. SALARIES.
--------

The salaries of the officers shall be fixed form time to time by the
Directors, and no officer shall be prevented from receiving such salary because
he is also a Director of the Corporation.

BYLAW V - CONTRACTS, CHECKS AND DEPOSITS
----------------------------------------

1. CONTRACTS.
---------

The Directors may authorize any officer or officers, agent or agents, to
enter into any contract or execute and deliver any instrument in the name of and
on behalf of the Corporation, and such authority may be general or confined to
specific instances.

-11-
<PAGE>

2. CHECKS, DRAFTS, ETC.
-------------------

All checks, drafts, or other orders for the payment of money, notes, or
other evidences of indebtedness issued in the name of the Corporation, shall be
signed by such officer or officers, agent or agents of the Corporation and in
such manner as shall from time to time be determined by resolution of the
Directors.

3. DEPOSITS.
--------

All funds of the Corporation not otherwise employed shall be deposited from
time to time to the credit of the Corporation in such banks, trust companies, or
other depositories as the Directors may select.

BYLAW VI - CERTIFICATES FOR SHARES AND THEIR TRANSFER
-----------------------------------------------------

1. CERTIFICATES FOR SHARES.
-----------------------

Certificates representing shares of the Corporation shall be in such form
as shall be determined by the Directors. Such certificates shall be signed by
the President or Executive Vice President and by the Secretary or by such other
officers authorized by law and by the Directors. All certificates for shares
shall be consecutively numbered or otherwise identified. The name and address
of the Stockholders, the number of shares, and the date of issue shall be
entered on the stock transfer books of the Corporation. All certificates
surrendered to the Corporation for transfer shall be canceled, and no new
certificate shall be issued until the former certificate for a like number of
shares shall have been surrendered and cancelled, except that in case of a lost,
destroyed, or mutilated certificate a new one may be issued therefor upon such
terms and indemnity to the Corporation as the Directors may prescribe.

2. TRANSFERS OF SHARES.
-------------------

(a) Upon surrender to the Corporation or the transfer agent of the
Corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignment, or authority to transfer, it shall be the
duty of the Corporation to issue a new certificate to the person entitled
thereto and to cancel the old certificate; every such transfer shall be entered
on the transfer book of the Corporation, which shall be kept at its principal
office.

(b) The Corporation shall be entitled to treat the holder of record of any
share as the holder in fact thereof, and, accordingly, shall not be bound to
recognize any equitable or other claim to or interest in such share on the part
of any other person whether or not it shall have express or other notice
thereof, except as expressly provided by Virginia law.

-12-
<PAGE>

BYLAW VII - FISCAL YEAR
-----------------------

The fiscal year of the Corporation shall begin on the first day of January
in each year, or as designated by the Board of Directors.

BYLAW VII - CORPORATE RECORDS
-----------------------------

1. PERMANENT RECORDS, ACCOUNTING RECORDS, STOCKHOLDER RECORDS.
----------------------------------------------------------

The Corporation shall keep at its principal place of business unless
decided otherwise by the Directors of the Corporation, as permanent records,
minutes of all meetings of its Stockholders and Board of Directors, a record of
all actions taken by the Stockholders or Board of Directors without a meeting,
and a record of all actions taken by a committee of the Board of Directors in
place of the Board of Directors on behalf of the Corporation. The Corporation
shall maintain appropriate accounting records. The Corporation or its
Registered Agent shall maintain a record of the Stockholders of the Corporation
in a form that permits preparation of a list of the names and addresses of all
Stockholders, in alphabetical order, showing the number of shares of stock held
by each.

2. ADDITIONAL RECORDS.
------------------

In addition to the foregoing records and reports, the Corporation shall
keep a copy of the following records: its Articles of Incorporation or restated
Articles of Incorporation, if any, and any amendments thereto, these Bylaws and
restated Bylaws, if any, and any amendments hereto, resolutions adopted by the
Board of Directors creating one (1) or more classes or series of shares, and
fixing their relative rights, preferences, and limitations, if shares issued
pursuant to such resolutions are outstanding, the minutes of all Stockholders'
meetings and records of all action taken by Stockholders without a meeting for
the past three (3) years, all written communications to Stockholders generally
within the past three (3) years, including the financial statements furnished
for the past three (3) years, a list of the names and business addresses of the
Corporation's current Directors and officers, and its most recent annual report
delivered to the Virginia State Corporation Commission.

BYLAW IX - DIVIDENDS
--------------------

The Directors may from time to time declare, and the Corporation may pay,
dividends on its outstanding shares in the manner and upon the terms and
conditions provided by law.

BYLAW X - SEAL
--------------

The Directors shall provide a corporate seal. The seal will be circular
and inscribed with the name of the Corporation, the state of incorporation, year
of incorporation, and the words, "Corporate Seal."

-13-
<PAGE>

BYLAW XI - WAIVER OF NOTICE
---------------------------

Unless otherwise provided by law, whenever any notice is required to be
given to any Stockholder or Director of the Corporation under the provisions of
these Bylaws or under the provisions of the Articles of Incorporation, a waiver
thereof in writing, signed by the person or persons entitled to such notice,
whether before or after the time stated therein, shall be deemed equivalent to
the giving of such notice.

BYLAW XII - AMENDMENTS
----------------------

These Bylaws may be altered, amended, or repealed and new Bylaws may be
adopted by a vote of the Stockholders representing a majority of all the voting
shares issued and outstanding, at any annual Stockholders' meeting, at any
special Stockholders' meeting when the proposed amendment has been set out in
the notice of such meeting, or by a majority vote of the total number of
Directors then in office.

BYLAW XII - VOTING OF STOCK IN OTHER CORPORATIONS
-------------------------------------------------

Any stock in other corporations, which may from time-to-time be held by the
Corporation, may be represented and voted at any meeting of Stockholders of such
other corporation by the President, Executive Vice President, Secretary or
Treasurer, or by proxy or proxies appointed by the President, Executive Vice
President, Secretary or Treasurer, or otherwise pursuant to authorization
thereunto given by a resolution of the Board of Directors adopted by a vote of
the Directors,

BYLAW XIV - INTERPRETATION OF BYLAWS
------------------------------------

In the event that any provision of these Bylaws is or becomes inconsistent
with any provision of the Corporation's certificate of incorporation, the
General Corporation Law of the State of Delaware or any other applicable law,
such provision of these Bylaws shall not be given any effect to the extent of
such inconsistency but shall otherwise be given full force and effect.

-14-

<PAGE>

- --------------------------------------------------------------------------------

INDENTURE

Dated as of February 1, 1997

Between

PEN-TAB INDUSTRIES, INC.

and

UNITED STATES TRUST COMPANY OF NEW YORK, Trustee

________________

up to $200,000,000
10% 7/8 Senior Subordinated Notes due 2007

- --------------------------------------------------------------------------------
<PAGE>

CROSS-REFERENCE TABLE

<TABLE>
<CAPTION>
Indenture
Trust Indenture Act Section Section
- --------------------------- ---------
<S> <C>
(S) 310(a)(1).......................................... 7.10
(a)(2)....................................... 7.10
(a)(3)....................................... N.A.
(a)(4)....................................... N.A.
(a)(5)....................................... N.A.
(b).......................................... 7.08; 7.10; 13.02
(c).......................................... N.A.
(S) 311(a)............................................. 7.11
(b).......................................... 7.11
(c).......................................... N.A.
(S) 312(a)............................................. 2.05
(b).......................................... 13.03
(c).......................................... 13.03
(S) 313(a)............................................. 7.06
(b)(1)....................................... N.A.
(b)(2)....................................... 7.06
(c).......................................... 7.06; 13.02
(d).......................................... 7.06
(S) 314(a)............................................. 4.11; 4.12; 13.02
(b).......................................... N.A.
(c)(1)....................................... 13.04
(c)(2)....................................... 13.04
(c)(3)....................................... N.A.
(d).......................................... N.A.
(e).......................................... 13.05
(f).......................................... N.A.
(S) 315(a)............................................. 7.01(b)
(b).......................................... 7.05; 13.02
(c).......................................... 7.01(a)
(d).......................................... 7.01(c)
(e).......................................... 6.11
(S) 316(a)(last sentence).............................. 2.09
(a)(1)(A).................................... 6.05
(a)(1)(B).................................... 6.04
(a)(2)....................................... N.A.
(b).......................................... 6.07
(c).......................................... 10.04
(S) 317(a)(1).......................................... 6.08
(a)(2)....................................... 6.09
(b).......................................... 2.04
(S) 318(a)............................................. 13.01
</TABLE>

____________________

N.A. means Not Applicable.
NOTE: This Cross-Reference Table shall not, for any purpose, be deemed to be a
part of this Indenture.
<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<CAPTION>
Page
----

ARTICLE ONE

DEFINITIONS AND INCORPORATION BY REFERENCE

<S> <C> <C>
SECTION 1.01. Definitions............................................. 1
SECTION 1.02. Other Definitions....................................... 20
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act........................................ 20
SECTION 1.04. Rules of Construction................................... 21

ARTICLE TWO

THE SECURITIES

SECTION 2.01. Form and Dating......................................... 22
SECTION 2.02. Execution and Authentication............................ 24
SECTION 2.03. Registrar and Paying Agent.............................. 24
SECTION 2.04. Paying Agent To Hold Money in Trust..................... 25
SECTION 2.05. Securityholder Lists.................................... 25
SECTION 2.06. Transfer and Exchange................................... 26
SECTION 2.07. Replacement Securities.................................. 36
SECTION 2.08. Outstanding Securities.................................. 36
SECTION 2.09. Treasury Securities..................................... 36
SECTION 2.10. Temporary Securities.................................... 37
SECTION 2.11. Cancellation............................................ 37
SECTION 2.12. Defaulted Interest...................................... 37
SECTION 2.13. CUSIP or CINS Number.................................... 38
SECTION 2.14 Payments of Interest.................................... 38

ARTICLE THREE

REDEMPTION

SECTION 3.01. Notices to Trustee...................................... 39
SECTION 3.02. Selection of Securities To Be
Redeemed............................................. 39
SECTION 3.03. Notice of Redemption.................................... 39
SECTION 3.04. Effect of Notice of Redemption.......................... 40
SECTION 3.05. Deposit of Redemption Price............................. 41
SECTION 3.06. Securities Redeemed in Part............................. 41

ARTICLE FOUR

COVENANTS

SECTION 4.01. Payment of Securities................................... 41
SECTION 4.02. Maintenance of Office or Agency......................... 41
SECTION 4.03. Limitation on Transactions with
</TABLE>

-i-
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Affiliates and Related Persons.......................... 42
SECTION 4.04. Limitation on Indebtedness.............................. 43
SECTION 4.05. Limitation on Certain Asset
Dispositions......................................... 45
SECTION 4.06. Limitation on Restricted Payments....................... 47
SECTION 4.07. Corporate Existence..................................... 50
SECTION 4.08. Payment of Taxes and Other Claims....................... 50
SECTION 4.09. Notice of Defaults...................................... 50
SECTION 4.10. Maintenance of Properties............................... 51
SECTION 4.11. Compliance Certificate.................................. 51
SECTION 4.12. Provision of Financial Information...................... 52
SECTION 4.13. Waiver of Stay, Extension or Usury
Laws................................................. 52
SECTION 4.14. Change of Control....................................... 52
SECTION 4.15. Limitation on Senior Subordinated
Indebtedness......................................... 53
SECTION 4.16. Limitations Concerning Distributions
and Transfers by Restricted Subsidiaries............. 54
SECTION 4.17. Limitation on Issuance and Sale of
Capital Stock of Restricted Subsidiaries............. 55
SECTION 4.18. Limitation on Liens..................................... 55
SECTION 4.19. Future Guarantors....................................... 57

ARTICLE FIVE

MERGERS; SUCCESSOR CORPORATION

SECTION 5.01. Restriction on Mergers, Consolidations
and Certain Sales of Assets.......................... 57
SECTION 5.02. Successor Corporation Substituted....................... 58

ARTICLE SIX

DEFAULT AND REMEDIES

SECTION 6.01. Events of Default....................................... 58
SECTION 6.02. Acceleration............................................ 60
SECTION 6.03. Other Remedies.......................................... 61
SECTION 6.04. Waiver of Past Default.................................. 61
SECTION 6.05. Control by Majority..................................... 62
SECTION 6.06. Limitation on Suits..................................... 62
SECTION 6.07. Rights of Holders To Receive Payment.................... 63
SECTION 6.08. Collection Suit by Trustee.............................. 63
SECTION 6.09. Trustee May File Proofs of Claim........................ 64
SECTION 6.10. Priorities.............................................. 64
SECTION 6.11. Undertaking for Costs................................... 65
</TABLE>

-ii-
<PAGE>

Page
----

ARTICLE SEVEN

TRUSTEE
<S> <C> <C>
SECTION 7.01. Duties of Trustee....................................... 65
SECTION 7.02. Rights of Trustee....................................... 66
SECTION 7.03. Individual Rights of Trustee............................ 68
SECTION 7.04. Trustee's Disclaimer.................................... 68
SECTION 7.05. Notice of Defaults...................................... 68
SECTION 7.06. Reports by Trustee to Holders........................... 68
SECTION 7.07. Compensation and Indemnity.............................. 68
SECTION 7.08. Replacement of Trustee.................................. 69
SECTION 7.09. Successor Trustee by Merger, etc........................ 71
SECTION 7.10. Eligibility; Disqualification........................... 71
SECTION 7.11. Preferential Collection of Claims
Against Company...................................... 71

ARTICLE EIGHT

SUBORDINATION OF SECURITIES

SECTION 8.01. Securities Subordinated to Senior
Debt................................................. 72
SECTION 8.02. No Payment on Securities in Certain
Circumstances........................................ 72
SECTION 8.03. Payment Over of Proceeds upon
Dissolution, etc..................................... 73
SECTION 8.04. Subrogation............................................. 75
SECTION 8.05. Obligations of Company Unconditional.................... 75
SECTION 8.06. Notice to Trustee....................................... 76
SECTION 8.07. Reliance on Judicial Order or
Certificate of Liquidating Agent..................... 77
SECTION 8.08. Trustee's Relation to Senior Debt....................... 77
SECTION 8.09. Subordination Rights Not Impaired by
Acts or Omissions of the Company or
Holders of Senior Debt............................... 78
SECTION 8.10. Securityholders Authorize Trustee To
Effectuate Subordination of
Securities........................................... 78
SECTION 8.11. This Article Not To Prevent Events of
Default.............................................. 78
SECTION 8.12. Trustee's Compensation Not Prejudiced................... 79
SECTION 8.13. No Waiver of Subordination Provisions................... 79
SECTION 8.14. Subordination Provisions Not
Applicable to Money Held in Trust for
Securityholders; Payments May Be Paid
Prior to Dissolution................................. 79
SECTION 8.15. Acceleration of Securities.............................. 80
</TABLE>

-iii-
<PAGE>

<TABLE>
<CAPTION>
Page
----

ARTICLE NINE

DISCHARGE OF INDENTURE

<S> <C> <C>
SECTION 9.01. Termination of Company's Obligations.................... 80
SECTION 9.02. Application of Trust Money.............................. 82
SECTION 9.03. Repayment to Company.................................... 82
SECTION 9.04. Reinstatement........................................... 83

ARTICLE TEN

AMENDMENTS, SUPPLEMENTS AND WAIVERS

SECTION 10.01. Without Consent of Holders.............................. 83
SECTION 10.02. With Consent of Holders................................. 84
SECTION 10.03. Compliance with Trust Indenture Act..................... 86
SECTION 10.04. Revocation and Effect of Consents....................... 86
SECTION 10.05. Notation on or Exchange of Securities................... 87
SECTION 10.06. Trustee To Sign Amendments, etc......................... 87

ARTICLE ELEVEN

GUARANTEE

SECTION 11.01. Unconditional Guarantee................................. 87
SECTION 11.02. Severability............................................ 88
SECTION 11.03. Release of a Guarantor.................................. 88
SECTION 11.04. Limitation of Guarantor's Liability..................... 89
SECTION 11.05. Contribution............................................ 89
SECTION 11.06. Execution of Guarantee.................................. 90
SECTION 11.07. Subordination of Subrogation and
Other Rights......................................... 90

ARTICLE TWELVE

SUBORDINATION OF GUARANTEE

SECTION 12.01. Guarantee Obligations Subordinated
to Senior Debt of Guarantors......................... 91
SECTION 12.02. No Payment on Guarantees in Certain
Circumstances........................................ 91
SECTION 12.03. Payment Over of Proceeds upon
Dissolution, etc..................................... 92
SECTION 12.04. Subrogation............................................. 94
SECTION 12.05. Obligations of Guarantors Unconditional................. 94
SECTION 12.06. Notice to Trustee....................................... 95
SECTION 12.07. Reliance on Judicial Order or
Certificate of Liquidating Agent..................... 96
</TABLE>
-iv-
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 12.08. Trustee's Relation to Senior
Debt of Guarantors................................... 97
SECTION 12.09. Subordination Rights Not Impaired by
Acts or Omissions of the Guarantors or Holders of
Senior Debt of Guarantors............................ 97
SECTION 12.10. Securityholders Authorize Trustee To Effectuate
Subordination of Guarantee........................... 97
SECTION 12.11. This Article Not To Prevent Events of Default........... 98
SECTION 12.12. Trustee's Compensation Not Prejudiced................... 98
SECTION 12.13. No Waiver of Guarantee Subordination Provisions......... 98
SECTION 12.14. Payments May Be Paid Prior to Dissolution............... 98

ARTICLE THIRTEEN

MISCELLANEOUS

SECTION 13.01. Trust Indenture Act Controls............................ 99
SECTION 13.02. Notices................................................. 99
SECTION 13.03. Communications by Holders with Other Holders............ 101
SECTION 13.04. Certificate and Opinion as to Conditions Precedent...... 101
SECTION 13.05. Statements Required in Certificate or Opinion........... 101
SECTION 13.06. Rules by Trustee, Paying Agent, Registrar............... 102
SECTION 13.07. Governing Law........................................... 102
SECTION 13.08. No Recourse Against Others.............................. 102
SECTION 13.09. Successors.............................................. 102
SECTION 13.10. Counterpart Originals................................... 102
SECTION 13.11. Severability............................................ 103
SECTION 13.12. No Adverse Interpretation of Other Agreements........... 103
SECTION 13.13. Legal Holidays.......................................... 103

SIGNATURES ............................................................. 104
</TABLE>

-v-
<PAGE>

<TABLE>
<S> <C>
EXHIBIT A - Form of Security ............................................ A-1
EXHIBIT B - Form of Certificate of Transfer.............................. B-1
EXHIBIT C - Form of Certificate of Exchange.............................. C-1
</TABLE>

_________________________

NOTE: This Table of Contents shall not, for any purpose, be deemed to be a
part of this Indenture.

-vi-
<PAGE>

INDENTURE dated as of February 1, 1997, between PEN-TAB INDUSTRIES,
INC., a Delaware corporation (the "Company"), and the UNITED STATES TRUST
-------
COMPANY OF NEW YORK, a bank and trust company organized under the New York
Banking Law, as trustee (the Trustee").

Each party hereto agrees as follows for the benefit of the other party
and for the equal and ratable benefit of the Holders of the Company's 10 7/8%
Senior Subordinated Notes due 2007:

ARTICLE ONE

DEFINITIONS AND INCORPORATION BY REFERENCE

SECTION 1.011. Definitions.
-----------

"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.
- ------------ ----------

"Additional Interest" shall have the meaning set forth in the
-------------------
Registration Rights Agreement.

"Agent" means any Registrar, Paying Agent or co-Registrar. See
-----
Section 2.03.

"Applicable Procedures" means with respect to any transfer or exchange
---------------------
of interests in a Global Security, the rules and procedures of DTC, Euroclear or
Cedel that apply to such transfer or exchange.

"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
<PAGE>

-2-

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 Section 4.18, (f) any
Restricted Payment permitted by Section 4.06, (g) any disposition of assets or
property in the ordinary course of business to the extent such property or
assets are obsolete, wornout 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 Section 5.01; 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.

"Board of Directors" means the Board of Directors of the Company or
------------------
any Guarantor, as the case may be, or any authorized committee of that Board.

"Board Resolution" means, with respect to any Person, a duly adopted
----------------
resolution of the Board of Directors of such Person.

"Business Day" means each Monday, Tuesday, Wednesday, Thursday and
------------
Friday that is not a day on which banking institutions in the City of New York
are authorized or obligated by law, resolution or executive order to close.
<PAGE>

-3-

"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).

"Cedel" means Cedel Bank, societe anonyme.
-----

"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.

"Company" means the Person named as the "Company" in the first
-------
paragraph of this Indenture until a successor shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
-------
such successor.

"Company Request" or "Company Order" means a written request or order
--------------- -------------
signed in the name of the Company by its Chairman of the Board, its Vice
Chairman of the Board, its President or a Vice President, and by its Treasurer,
an Assistant Treasurer, its Secretary or an Assistant Secretary, and delivered
to the Trustee.

"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
<PAGE>

-4-

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
--------------------
<PAGE>

-5-

include as Consolidated Interest Expense (x) 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 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 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 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 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
<PAGE>

-6-

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.

"Corporate Trust Office of the Trustee" shall be at the address of the
-------------------------------------
Trustee specified in Section 13.02 or such other address as the Trustee may give
notice to the Company.

"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.
<PAGE>

-7-

"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 $25,000,000 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 Securities.

"DTC" means the Depository Trust Company or its successors.
---

"Euroclear" means Morgan Guaranty Trust Company of New York (Brussels
---------
Office) as operator of the Euroclear system.

"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations promulgated by the Commission thereunder.

"Exchange Registration Statement" shall have the meaning set forth in
-------------------------------
the Registration Rights Agreement.

"Expiration Date" has the meaning set forth in the definition of
---------------
"Offer to Purchase" below.

"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 this 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 this Indenture shall be made without giving effect to (i) the deduction or
amortization of any
<PAGE>

-8-

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.

"Global Security" means the global security, without coupons,
---------------
representing all or a portion of the Securities deposited with DTC substantially
in the form of Exhibit A attached hereto.

"guarantee" by any Person means any obligation, contingent or
---------
otherwise, of such Person guaranteeing any Indebtedness of any other Person (the
"primary obligor") in any manner, whether directly or indirectly, and including,
---------------
without limitation, any obligation of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (ii) to purchase property, securities or
services for the purpose of assuring the holder of such Indebtedness of the
payment of such Indebtedness, or (iii) to maintain working capital, equity
capital or other financial statement condition or liquidity of the primary
obligor so as to enable the primary obligor to pay such Indebtedness (and
"guaranteed," "guaranteeing" and "guarantor" shall have meanings correlative to
---------- ------------ ---------
the foregoing); provided, however, that the guarantee by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.

"Guarantee" means the guarantee of the Securities by each Guarantor
---------
under this Indenture.

"Guarantor" means each Restricted Subsidiary, if any, of the Company
---------
formed or acquired after the Issue Date, which pursuant to the terms of this
Indenture executes a supplement to this Indenture as a Guarantor.

"Holder" or "Securityholder" means the Person in whose name a Security
------ --------------
is registered on the books of the Registrar or any co-Registrar.

"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
<PAGE>

-9-

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
<PAGE>

-10-

case, incurred or assumed in connection with the disposition of any business or
assets of a Restricted Subsidiary of the Company.

"Indenture" means this Indenture as amended or supplemented from time
---------
to time.

"Interest Payment Date" means the stated maturity of an installment of
---------------------
interest on the Securities.

"Initial Global Securities" means the Regulation S Global Security and
-------------------------
the 144A Global Security, each of which contains a Securities Act Legend.

"Initial Securities" means the Securities containing a Securities Act
------------------
Legend.

"Institutional Accredited Investors" means an institution that is an
----------------------------------
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
of Regulation D promulgated under the Securities Act.

"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 February 4, 1997.
----------

"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 the
Company's parent, Pen-Tab Holdings, Inc., a Virginia corporation, through
management stock purchase or option plans.
<PAGE>

-11-

"Maturity Date" means the date, which is set forth on the face of the
-------------
Securities, on which the Securities will mature.

"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 Section 4.05) 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" has the meaning set forth in the definition of "Offer to
-----
Purchase" below.

"Offer to Purchase" means a written offer (the "Offer") sent by the
----------------- -----
Company by first class mail, postage prepaid, to each
<PAGE>

-12-

Holder at his address appearing in the register for the Securities on the date
of the Offer offering to purchase up to the principal amount of Securities
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to this 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 Securities 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 to be included therein. The Offer shall contain all
instructions and materials necessary to enable such Holders to tender Securities
pursuant to the Offer to Purchase. The Offer shall also state:

(1) the Section of this 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 Securities 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 this 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 Securities accepted for payment (as specified
pursuant to this Indenture) (the "Purchase Price");
--------------

(5) that the Holder may tender all or any portion of the Securities
registered in the name of such Holder and that any portion of a
Security tendered must be tendered in an integral multiple of $1,000
principal amount;

(6) the place or places where Securities are to be surrendered for tender
pursuant to the Offer to Purchase;
<PAGE>

-13-

(7) that interest on any Security 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 Security 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 Security
pursuant to the Offer to Purchase will be required to surrender such
Security at the place or places specified in the Offer prior to the
close of business on the Expiration Date (such Security 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
Securities 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 Security the Holder tendered, the certificate
number of the Security the Holder tendered and a statement that such
Holder is withdrawing all or a portion of his tender;

(11) that (a) if Securities 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
Securities and (b) if Securities 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 Securities 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 Securities in denominations of $1,000 or integral multiples
thereof shall be purchased); and

(12) that in the case of any Holder whose Security is purchased only in
part, the Company shall execute and
<PAGE>

-14-

the Trustee shall authenticate and deliver to the Holder of such
Security without service charge, a new Security or Securities, 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 Security so tendered.

An Offer to Purchase shall be governed by and effected in accordance
with the provisions above pertaining to any Offer.

"Officer" means the Chairman, the President, any Vice President, the
-------
Chief Financial Officer, the Treasurer, or the Secretary of the Company.

"Officers' Certificate" means a certificate signed by two Officers
---------------------
(one of whom shall be the Chief Financial Officer of the Company) or by an
Officer and an Assistant Treasurer or Assistant Secretary of the Company
complying with Sections 13.04 and 13.05.

"Opinion of Counsel" means a written opinion from legal counsel who is
------------------
reasonably acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.

"Participant" means, with respect to DTC, Euroclear or Cedel, a Person
-----------
who has an account with DTC, Euroclear or Cedel, respectively (and with respect
to DTC, shall include Euroclear and Cedel).

"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 full faith and credit of the United States of America is pledged in support
thereof), maturing within one year of the date of purchase; (ii)
<PAGE>

-15-

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 totalling 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 this Indenture;
(x) Investments received as consideration for an Asset Disposition in compliance
with Section 4.05; (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
<PAGE>

-16-

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.

"principal" of a debt security means the principal of the security
---------
plus, when appropriate, the premium, if any, on the security.

"Principals" means Citicorp Venture Capital, Ltd.
----------

"Private Exchange Securities" shall have the meaning set forth in the
---------------------------
Registration Rights Agreement.

"Purchase Amount" has the meaning set forth in the definition of
---------------
"Offer to Purchase" above.

"Purchase Date" has the meaning set forth in the definition of "Offer
-------------
to Purchase" above.

"Purchase Price" has the meaning set forth in the definition of "Offer
--------------
to Purchase" above.

"QIB" means a "qualified institutional buyer" as defined in Rule 144A.
---

"redemption date," when used with respect to any Security to be
---------------
redeemed, means the date fixed for such redemption pursuant to this Indenture.

"redemption price," when used with respect to any Security to be
----------------
redeemed, means the price fixed for such redemption pursuant to this Indenture
as set forth in the form of Security annexed as Exhibit A.

"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement dated the date hereof among the Company, J.P. Morgan Securities Inc.
and Bear, Stearns & Co. Inc.

"Regulation S" means Regulation S promulgated under the Securities Act
------------
(including any successor regulation thereto) as it may be amended from time to
time.
<PAGE>

-17-

"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 Physical Security" means a Physical Security containing a
----------------------------
Securities Act Legend.

"Rule 144" shall have the meaning set forth in the Registration Rights
--------
Agreement.

"Rule 144A" shall have the meaning set forth in the Registration
---------
Rights Agreement.

"Securities" means the 10 7/8% Senior Subordinated Notes due 2007
----------
issued pursuant to the terms of this Indenture, as amended or supplemented from
time to time.

"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated by the Commission thereunder.

"Securityholder" has the meaning set forth in the definition of
--------------
"Holder" above.

"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 borrowed money is created, incurred, assumed or guaranteed
expressly provides that such Indebtedness for borrowed money is not senior or
superior in right of payment to the Securities, 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

B-3
<PAGE>

-18-

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 Securities, (c) any Indebtedness of such
Person to any of its 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.

"Shelf Registration Statement" shall have the meaning set forth in the
----------------------------
Registration Rights Agreement.

"Stated Maturity," when used with respect to any Security or any
---------------
installment of interest thereon, means the date specified in such Security as
the fixed date on which the principal of such Security or such installment of
interest is due and payable.

"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 Securities.

"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 goodwill, 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.

"TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S)
---
77aaa-77bbbb) as in effect on the date of this Indenture, except as provided in
Section 10.03.

<PAGE>

-19-

"Trustee" means the party named as such in this Indenture until a
-------
successor replaces it in accordance with the provisions of this Indenture and
thereafter means such successor.

"Trust Officer" means any officer within the corporate trust
-------------
department (or any successor group of the Trustee) including any vice president,
assistant vice president, assistant secretary or any other officer or assistant
officer of the Trustee customarily performing functions similar to those
performed by the persons who at that time shall be such officers, and also
means, with respect to a particular corporate trust matter, any other officer to
whom such trust matter is referred because of his knowledge of and familiarity
with the particular subject.

"Unrestricted Global Securities" means one or more Global Securities
------------------------------
that do not and are not required to bear the Securities Act Legend.

"Unrestricted Physical Securities" means one or more Physical
--------------------------------
Securities that do not and are not required to bear the Securities Act Legend.

"Unrestricted Securities" means the Securities that do not and are not
-----------------------
required to bear the Securities Act Legend.

"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 Board of Directors of the Company
may not designate any Subsidiary of the Company to be an Unrestricted Subsidiary
if, after such 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
<PAGE>

-20-

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.

SECTION 1.012. Other Definitions.
-----------------

<TABLE>
<CAPTION>
Term Defined in Section
---- ------------------
<S> <C>
"Bankruptcy Law" 6.01
"Change of Control" 4.14
"Custodian" 6.01
"Event of Default" 6.01
"Funding Guarantor" 11.05
"Guarantor Blockage Period" 12.02(a)
"Guarantor Payment Blockage Notice" 12.02(a)
"144A Global Security" 2.01(a)
"Paying Agent" 2.03
"Payment Blockage Notice" 8.02(a)
"Payment Blockage Period" 8.02(a)
"Physical Security" 2.01(b)
"Registrar" 2.03
"Regulation S Global Security" 2.01(a)
"Required Filing Date" 4.12
"Securities Act Legend" 2.06(f)
"United States Government Obligation" 9.01
</TABLE>

SECTION 1.013. Incorporation by Reference of Trust Indenture Act.
--------------------------------------------------

Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a
<PAGE>

-21-

part of this Indenture. The following TIA terms used in this Indenture have the
following meanings:

"Commission" means the Securities and Exchange Commission.
----------

"indenture securities" means the Securities.
--------------------

"indenture security holder" means a Holder or Securityholder.
-------------------------

"indenture to be qualified" means this Indenture.
-------------------------

"indenture trustee" or "institutional trustee" means the Trustee.
----------------- ---------------------

"obligor" on the indenture securities means the Company or any other
-------
obligor on the Securities.

All other TIA terms used in this Indenture that are defined by the
TIA, defined by TIA reference to another statute or defined by Commission rule
and not otherwise defined herein have the meanings assigned to them therein.

SECTION 1.0 Rules of Construction.
---------------------

Unless the context otherwise requires:

(1) a term has the meaning assigned to it;

(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with generally accepted accounting principles in effect
from time to time, and any other reference in this Indenture to "generally
accepted accounting principles" refers to GAAP;

(3) "or" is not exclusive;

(4) words in the singular include the plural, and words in the plural
include the singular;

(5) provisions apply to successive events and transactions; and

(6) "herein," "hereof" and other words of similar import refer to this
Indenture as a whole and not to any particular Article, Section or other
subdivision.
<PAGE>

-22-

ARTICLE TWO

THE SECURITIES

SECTION 1.021. Form and Dating.
---------------

(a) Global Securities. Securities offered and sold to QIBs in
-----------------
reliance on Rule 144A shall be issued initially substantially in the form of
Exhibit A hereto in the name of Cede & Co. as nominee of DTC, duly executed by
the Company and authenticated by the Trustee as hereinafter provided. Such
Security shall be referred to herein as the "144A Global Security." Securities
offered and sold in reliance on Regulation S shall be issued initially
substantially in the form of Exhi bit A hereto in the name of Cede & Co. as
nominee of DTC, duly executed by the Company and authenticated by the Trustee as
hereinafter provided. Such Security shall be referred to herein as the
"Regulation S Global Security." Unrestricted Global Securities shall be issued
initially in accordance with Sections 2.06(b)(iv), 2.06(c)(ii) and 2.06(e) in
the name of Cede & Co. as nominee of DTC, duly executed by the Company and
authenticated by the Trustee as hereinafter provided. The aggregate principal
amount of each of the Global Security may from time to time be increased or
decreased by adjustments made on the records of the Trustee as hereinafter
provided.

Each Global Security shall represent such of the outstanding
Securities as shall be specified therein and each shall provide that it shall
represent the aggregate principal amount of outstanding Securities from time to
time endorsed thereon and that the aggregate principal amount of outstanding
Securities represented thereby may from time to time be reduced or increased, as
appropriate, to reflect exchanges, redemptions and transfers of interests
therein in accordance with the terms of this Indenture. Any endorsement of a
Global Security to reflect the amount of any increase or decrease in the
principal amount of outstanding Securities represented thereby shall be made by
the Trustee in accordance with instructions given by the Holder thereof as
required by Section 2.06 hereof.

Upon the issuance of the Global Security to DTC, DTC shall credit, on
its internal book-entry registration and transfer system, its Participant's
accounts with the respective interests owned by such Participants. Interests in
the Global Securities shall be limited to Participants, including Euroclear and
Cedel, and indirect Participants.
<PAGE>

-23-

The Participants shall not have any rights either under this Indenture
or under any Global Security with respect to such Global Security held on their
behalf by DTC, and DTC may be treated by the Company, the Trustee and any agent
of the Company or the Trustee as the absolute owner of such Global Security for
the purpose of receiving payment of or on account of the principal of and,
subject to the provisions of this Indenture, interest and Additional Interest,
if any, on the Global Securities and for all other purposes. Notwithstanding
the foregoing, nothing herein shall prevent the Company, the Trustee or any
agent of the Company or the Trustee from giving effect to any written
certification, proxy or other authorization furnished by DTC or impair, as
between DTC and its Participants, the operation of customary practices of DTC
governing the exercise of the rights of an owner of a beneficial interest in any
Global Security.

The provisions of the "Operating Procedures of the Euroclear System"
and "Terms and Conditions Governing Use of Euroclear" and the "General Terms and
Conditions of Cedel Bank" and "Customer Handbook" of Cedel shall be applicable
to interests in the Regulation S Global Security that are held by the
Participants through Euroclear or Cedel.

(b) Physical Securities. Securities offered and sold to Institutional
-------------------
Accredited Investors who are not also QIBs shall be issued initially
substantially in the form of Exhibit A hereto, in certificated form and issued
in the names of the purchasers thereof (or their nominees), duly executed by the
Company and authenticated by the Trustee as hereinafter provided. Such
Securities, together with any Securities subsequently issued, whether pursuant
to the terms of Section 2.06 hereof or otherwise, that are not Global
Securities, shall be referred to herein as the "Physical Securities."

(c) Securities. The provisions of the form of Securities contained in
----------
Exhibit A hereto are incorporated herein by reference. The Securities and the
Trustee's Certificates of Authentication shall be substantially in the form of
Exhibit A hereto. The Securities may have notations, legends or endorsements
required by law, stock exchange rule or usage. The Company shall approve the
form of the Securities and any notation, legend or endorsement (including
notations relating to the Guarantee) on them. If required, the Securities may
bear the appropriate legend regarding original issue discount for federal income
tax purposes. Each Security shall be dated the date of its authentication. The
terms and provisions contained in the
<PAGE>

-24-

Securities shall constitute, and are hereby expressly made, a part of this
Indenture.

SECTION 1.022. Execution and Authentication.
----------------------------

Two Officers of the Company shall sign the Securities for the Company
by manual or facsimile signature.

If an Officer whose signature is on a Security no longer holds that
office at the time the Trustee authenticates the Security, the Security shall be
valid nevertheless.

A Security shall not be valid until an authorized officer of the
Trustee manually signs the certificate of authentication on the Security. The
signature shall be conclusive evidence that the Security has been authenticated
under this Indenture.

The Trustee shall authenticate (i) Initial Securities for original
issue in the aggregate principal amount of up to $200,000,000 in one or more
series, (ii) Private Exchange Securities form time to time only in exchange for
a like principal amount of Initial Securities and (iii) Unrestricted Securities
from time to time only (x) in exchange for a like principal amount of Initial
Securities or (y) in an aggregate principal amount of not more than the excess
of $200,000,000 over the sum of the aggregate principal amount of (A) Initial
Securities then outstanding, (B) Private Exchange Securities then outstanding
and (C) Unrestricted Securities issued in accordance with clause (iii)(x), in
each case upon a written order signed by an Officer of the Company. The order
shall be based upon a Board Resolution of the Company to similar effect filed
with the Trustee and shall specify the amount of Securities to be authenticated
and the date on which the original issue of Securities is to be authenticated.
The order shall also provide instructions concerning registration, amounts for
each Holder and delivery. The aggregate principal amount of Securities
outstanding at any time may not exceed $200,000,000 except as provided in
Section 2.07. The Securities shall be issued only in registered form, without
coupons and only in denominations of $1,000 and any integral multiple thereof.

SECTION 1.023. Registrar and Paying Agent.
--------------------------

The Company shall maintain an office or agency where Securities may be
presented for registration of transfer or for exchange ("Registrar") and an
---------
office or agency where Securities may be presented for payment ("Paying Agent").
------------
The Company may
<PAGE>

-25-

have one or more co-Registrars and one or more additional paying agents. The
term "Paying Agent" includes any additional paying agent.

The Company shall enter into an appropriate agency agreement with any
Agent not a party to this Indenture. The agreement shall implement the
provisions of this Indenture that relate to such Agent and shall, if required,
incorporate the provisions of the TIA. The Company shall notify the Trustee of
the name and address of any such Agent. If the Company fails to maintain a
Registrar or Paying Agent, the Trustee shall act as such and shall be entitled
to appropriate compensation in accordance with the provisions of Section 7.07.

The Company initially appoints the Trustee as Registrar and Paying
Agent. The Company shall give written notice to the Trustee in the event that
the Company decides to act as Registrar. None of the Company, its Subsidiaries
or any of their Affiliates may act as Paying Agent.

SECTION 1.024. Paying Agent To Hold Money in Trust.
-----------------------------------

The Company shall require each Paying Agent to agree in writing to
hold in trust for the benefit of Securityholders or the Trustee all money held
by the Paying Agent for the payment of principal of or interest on the
Securities (whether such money has been paid to it by the Company or any other
obligor on the Securities), and the Company and the Paying Agent shall each
notify the Trustee of any default by the Company (or any other obligor on the
Securities) in making any such payment. The Company at any time may require a
Paying Agent to pay all money held by it to the Trustee and account for any
funds disbursed and the Trustee may at any time during the continuance of any
payment default, upon written request to a Paying Agent, require such Paying
Agent to pay all money held by it to the Trustee and to account for any funds
disbursed. Upon making such payment the Paying Agent shall have no further
liability for the money delivered to the Trustee.

SECTION 1.025. Securityholder Lists.
--------------------

The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee at least five Business Days before each Interest Payment Date and
at such other times as the Trustee may request in writing a list in
<PAGE>

-26-

such form and as of such date as the Trustee may reasonably require of the names
and addresses of Securityholders.

SECTION 1.026. Transfer and Exchange.
---------------------

(a) Transfer and Exchange of Global Securities. Transfer of the Global
------------------------------------------
Securities shall be by delivery. Global Securities will be exchanged by the
Company for Physical Securities only (i) if DTC notifies the Company that it is
unwilling or unable to continue to act as depositary with respect to the Global
Securities or ceases to be a clearing agency registered under the Exchange Act
and, in either case, a successor depositary registered as a clearing agency
under the Exchange Act is not appointed by the Company within 120 days, (ii) at
any time if the Company in its sole discretion determines that the Global
Securities (in whole but not in part) should be exchanged for Physical
Securities or (iii) if the owner of an interest in the Global Securities
requests such Physical Securities, following an Event of Default under the
Indenture, in a writing delivered through DTC to the Trustee.

Upon the occurrence of any of the events specified in the previous
paragraph, Physical Securities shall be issued in such names as DTC shall
instruct the Trustee and the Trustee shall cause the aggregate principal amount
of the applicable Global Security to be reduced accordingly and direct DTC to
make a corresponding reduction in its book-entry system. The Company shall
execute and the Trustee shall authenticate and deliver to the Person designated
in the instructions a Physical Security in the appropriate principal amount.
The Trustee shall deliver such Physical Securities to the Persons in whose names
such Securities are so registered. Physical Securities issued in exchange for
an Initial Global Security pursuant to this Section 2.06(a) shall bear the
Securities Act Legend and shall be subject to all restrictions on transfer
contained therein. Global Securities may also be exchanged or replaced, in
whole or in part, as provided in Sections 2.07 and 2.10. Every Security
authenticated and delivered in exchange for, or in lieu of, a Global Security or
any portion thereof, pursuant to Section 2.07 or 2.10, shall be authenticated
and delivered in the form of, and shall be, a Global Security. A Global
Security may not be exchanged for another Security other than as provided in
this Section 2.06(a).

(b) Transfer and Exchange of Interests in Global Securities. The
-------------------------------------------------------
transfer and exchange of interests in Global Securities shall be effected
through DTC, in accordance with this Indenture and the procedures of DTC
therefor. Interests in Initial Global Securities shall be subject to
restrictions on
<PAGE>

-27-

transfer comparable to those set forth herein to the extent required by the
Securities Act. The Trustee shall have no obligation to ascertain DTC's
compliance with any such restrictions on transfer. Transfers of interests in
Global Securities shall also require compliance with subparagraph (i) below, as
well as one or more of the other following subpara graphs as applicable:

(i) All Transfers and Exchanges of Interests in Global Securities.
-------------------------------------------------------------
In connection with all transfers and exchanges of interests in Global
Securities (other than transfers of Interests in a Global Security to
Persons who take delivery thereof in the form of an interest in the same
Global Security), the transferor of such interest must deliver to the
Registrar (1) instructions given in accordance with the Applicable
Procedures from a Participant or an indirect Participant directing DTC to
credit or cause to be credited an interest in the specified Global Security
in an amount equal to the interest to be transferred or exchanged, (2) a
written order given in accordance with the Applicable Procedures containing
information regarding the Participant account to be credited with such
increase and (3) instructions given by the Holder of the Global Security to
effect the transfer referred to in (1) and (2) above.

(ii) Transfer of Interests in the Same Initial Global Security.
---------------------------------------------------------
Interests in any Initial Global Security may be transferred to Persons who
take delivery thereof in the form of an interest in the same Initial Global
Security in accordance with the transfer restrictions set forth in Section
2.06(f) hereof.

(iii) Transfer of Interests to Another Initial Global Security.
--------------------------------------------------------
Interests in any Initial Global Security may be transferred to Persons who
take delivery thereof in the form of an interest in another Initial Global
Security if the Registrar receives the following:

(A) if the transferee will take delivery in the form of an
interest in the 144A Global Security, then the transferor must deliver
a certificate in the form of Exhibit B hereto, including the
certifications in item 1 thereof; or

(B) if the transferee will take delivery in the form of an
interest in the Regulation S Global Security, then the transferor must
deliver a
<PAGE>

-28-

certificate in the form of Exhibit B hereto, including the
certifications in item 2 thereof.

(iv) Transfer and Exchange of Interests in Initial Global
----------------------------------------------------
Security for Interests in an Unrestricted Global Security. Interests in any
---------------------------------------------------------
Initial Global Security may be exchanged by the holder thereof for an
interest in the Unrestricted Global Security or transferred to a Person who
takes delivery thereof in the form of an interest in the Unrestricted
Global Security if:

(A) such exchange or transfer is effected pursuant to the
Exchange Registration Statement in accordance with the Registration
Rights Agreement;

(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement; or

(1) if the Holder of such an interest in a Initial Global
Security proposes to exchange it for an interest in the
Unrestricted Global Security, a certificate from such Holder in
the form of Exhibit C hereto, including the certifications in
item 1(a) thereof;

(2) if the Holder of such an interest in a Initial Global
Security proposes to transfer it to a Person who shall take
delivery thereof in the form of an interest in an Unrestricted
Global Security, a certificate in the form of Exhibit B hereto,
including the certification in item 4 thereof; and

(3) in each such case set forth in this paragraph (C), an
Opinion of Counsel in form reasonably acceptable to the Company,
to the effect that such exchange or transfer is in compliance
with the Securities Act and, that the restrictions on transfer
contained herein and in Section 2.06(f) hereof are not required
in order to maintain compliance with the Securities Act.

If any such transfer is effected pursuant to paragraph (B) above at a time
when an Unrestricted Global Security has not yet been issued, the Company
shall issue and, upon receipt
<PAGE>

-29-

of an authentication order in accordance with Section 2.02, the Trustee
shall authenticate one or more Unrestricted Global Securities in an
aggregate principal amount equal to the principal amount of interests in
the Initial Global Security transferred pursuant to paragraph (B) above.

(v) Notation by the Trustee of Transfer of Interests Among Global
-------------------------------------------------------------
Securities. Upon satisfaction of the requirements for transfer of
----------
interests in Global Securities pursuant to clauses (iii) or (iv) above, the
Trustee, as Registrar, shall reduce or cause to be reduced the aggregate
principal amount of the relevant Global Security from which the interests
are being transferred, and increase or cause to be increased the aggregate
principal amount of the Global Security to which the interests are being
transferred, in each case, by the principal amount so transferred and shall
direct DTC to make corresponding adjustments in its book-entry system. No
transfer of interests of a Global Security shall be effected until, and any
transferee pursuant thereto shall succeed to the rights of a holder of such
interests only when, the Registrar has made appropriate adjustments to the
applicable Global Security in accordance with this paragraph.

(c) Transfer or Exchange of Physical Securities for Interests in a
--------------------------------------------------------------
Global Security.
- ---------------

(i) If any holder of Physical Securities required to contain the
Securities Act Legend proposes to exchange such Securities for an interest
in a Global Security or to transfer such Physical Securities to a Person
who takes delivery thereof in the form of an interest in a Global Security,
then, upon receipt by the Registrar of the following documentation (all of
which may be submitted by facsimile):

(A) if the holder of such Physical Registered Securities proposes
to exchange such Securities for an interest in an Initial Global
Security, a certificate from such holder in the form of Exhibit C
hereto, including the certifications in item 2 thereof;

(B) if such Physical Securities are being transferred to a QIB in
accordance with Rule 144A under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item 1 thereof; or
<PAGE>

-30-

(C) if such Physical Securities are being transferred to a Non-
U.S. Person (as defined in Regulation S) in an offshore transaction in
accordance with Rule 904 under the Securities Act, a certificate to
the effect set forth in Exhibit B hereto, including the certifications
in item 2 thereof.

the Trustee shall cancel the Physical Securities, increase or cause to be
increased the aggregate principal amount of, in the case of clause (B)
above, the 144A Global Security, in the case of clause (C) above, the
Regulation S Global Security, and direct DTC to make a corresponding
increase in its book-entry system.

(ii) A holder of Physical Securities required to contain the
Securities Act Legend may exchange such Securities for an interest in the
Unrestricted Global Security or transfer such Restricted Physical
Securities to a Person who takes delivery thereof in the form of an
interest in the Unrestricted Global Security only:

(A) if such exchange or transfer is effected pursuant to the
Exchange Registration Statement in accordance with the Registration
Rights Agreement;

(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement;

(1) if the Holder of such Physical Securities proposes to
exchange such Securities for an interest in the Unrestricted
Global Security, a certificate from such Holder in the form of
Exhibit C hereto, including the certifications in item 1(b)
thereof;

(2) if the Holder of such Registered Securities proposes to
transfer such Securities to a Person who shall take delivery
thereof in the form of an interest in the Unrestricted Global
Security, a certificate in the form of Exhibit B hereto,
including the certifications in item 4 thereof; and
<PAGE>

-31-

(3) in each such case set forth in this paragraph (C), an
Opinion of Counsel in form reasonably acceptable to the Company,
to the effect that such exchange or transfer is in compliance
with the Securities Act and that the restrictions on transfer
contained herein and in Section 2.06(f) hereof are not required
in order to maintain compliance with the Securities Act.

If any such transfer is effected pursuant to paragraph (B) above
at a time when an Unrestricted Global Security has not yet been
issued, the Company shall issue and, upon receipt of an authentication
order in accordance with Section 2.02, the Trustee shall authenticate
(i) one or more Unrestricted Global Securities in an aggregate
principal amount equal to the principal amount of Physical Securities
transferred pursuant to paragraph (B) above.

(d) Transfer and Exchange of Physical Securities.
--------------------------------------------

(i) Transfer of a Physical Security to Another Physical Security.
------------------------------------------------------------
Following the occurrence of one or more of the events specified in Section
2.06(a), a Physical Security may be transferred to Persons who take
delivery thereof in the form of another Physical Security if the Registrar
receives the following:

(A) if the transfer is being effected pursuant to and in
accordance with Rule 144A, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item 3(a) thereof; or

(B) if the transfer is being effected pursuant to and in
accordance with Regulation S, then the transferor must deliver a
certificate in the form of Exhibit B hereto, including the
certifications in item 3(b) thereof.

(ii) Transfer and Exchange of Restricted Physical Security for
---------------------------------------------------------
Physical Security Which Does Not Bear the Securities Act Legend. Following
---------------------------------------------------------------
the occurrence of one or more of the events specified in Section 2.06(a), a
Restricted Physical Security may be exchanged by the Holder thereof for a
Physical Security or transferred to a Person who takes delivery thereof in
the form of a Physical Security which does not bear the Securities Act
Legend if:
<PAGE>

-32-

(A) such exchange or transfer is effected pursuant to the
Exchange Registration Statement in accordance with the Registration
Rights Agreement;

(B) any such transfer is effected pursuant to the Shelf
Registration Statement in accordance with the Registration Rights
Agreement; or

(C) the Registrar receives a certificate from such holder in the
form of Exhibit C hereto, including the certifications in item 1(c)
thereof and an Opinion of Counsel in form reasonably acceptable to the
Company, to the effect that such exchange or transfer is in compliance
with the Securities Act and, that the restrictions on transfer
contained herein and in Section 2.06(f) hereof are not required in
order to maintain compliance with the Securities Act.

(iii) Exchange of Physical Securities. When Physical Securities
-------------------------------
are presented by a Holder to the Registrar with a request to register the
exchange of such Physical Securities for an equal principal amount of
Physical Securities of other authorized denominations, the Registrar shall
make the exchange as requested only if the Physical Securities are endorsed
or accompanied by a written instrument of transfer in form satisfactory to
the Registrar duly executed by such Holder or by his attorney duly
authorized in writing and shall be issued only in the name of such Holder
or its nominee. The Physical Securities issued in exchange for Physical
Securities shall bear the Securities Act Legend and shall be subject to all
restrictions on transfer contained herein in each case to the same extent
as the Physical Securities so exchanged.

(iv) Return of Physical Securities. In the event of a transfer
-----------------------------
pursuant to clauses (i) or (ii) above and the Holder thereof as delivered
certificates representing an aggregate principal amount of Securities in
excess of that to be transferred, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder of such Security without
service charge, a new Physical Security or Securities of any authorized
denomination requested by the Holder, in an aggregate principal amount
equal to the portion of the Security not so transferred.

(e) Exchange Offer. Upon the occurrence of the Exchange Offer (as
--------------
defined in the Registration Rights Agreement) in accordance with the
Registration Rights Agreement, the Company
<PAGE>

-33-

shall issue and, upon receipt of an authentication order in accordance with
Section 2.02, the Trustee shall authenticate one or more Unrestricted Global
Securities in an aggregate principal amount equal to the principal amount of the
interests in the Initial Global Securities and Restricted Physical Securities
tendered for acceptance by persons participating therein. Concurrently with the
issuance of such Securities, the Trustee shall cause the aggregate principal
amount of the applicable Initial Global Securities to be reduced accordingly and
direct DTC to make a corresponding reduction in its book-entry system. The
Trustee shall cancel any Restricted Physical Certificates in accordance with
Section 2.11 hereof.

In the case that one or more of the events specified in Section
2.06(a) have occurred, upon the occurrence of such Exchange Offer, the Company
shall issue and, upon receipt of an authentication order in accordance with
Section 2.02, the Trustee shall authenticate Unrestricted Physical Securities
in an aggregate principal amount equal to the principal amount of the Restricted
Physical Securities tendered for acceptance by persons participating therein.

(f) Legends.
-------

Each Initial Global Security and each Restricted Physical Security
shall bear the legend (the "Securities Act Legend") in substantially the
---------------------
following form:

"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF
THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND THE SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF THE SECURITY
EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE SELLER MAY BE RELYING ON
THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT
PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE SECURITY EVIDENCED
HEREBY AGREES FOR THE BENEFIT OF THE COMPANY THAT (A) SUCH SECURITY
MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(a) TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED
INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (b) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT OR (c) OUTSIDE THE UNITED
<PAGE>

-34-

STATES TO A FOREIGN PERSON IN A TRANSACTION MEETING THE REQUIREMENTS
OF RULE 904 UNDER THE SECURITIES ACT, (2) TO THE COMPANY OR (3)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AND, IN EACH CASE, IN
ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE
UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION AND (B) THE HOLDER
WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER
FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE RESTRICTIONS
SET FORTH IN (A) ABOVE."

(g) Global Security Legend. Each Global Security shall bear a legend
----------------------
in substantially the following form:

UNLESS AND UNTIL IT IS EXCHANGED IN WHOLE OR IN PART FOR
SECURITIES IN DEFINITIVE FORM, THIS SECURITY MAY NOT BE TRANSFERRED
EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC") TO A NOMINEE OF DTC, OR BY ANY SUCH NOMINEE OF
DTC, OR BY DTC TO A SUCCESSOR DEPOSITORY OR A NOMINEE OF SUCH
SUCCESSOR DEPOSITORY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC, TO THE COMPANY OR ITS AGENT FOR
REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE
ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS
IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED
BY AN AUTHORIZED REPRESENTATIVE OF DTC). ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL
INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.

TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS
IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS
GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH
THE RESTRICTIONS SET FORTH IN SECTION 2.06 OF THE INDENTURE.

(h) Cancellation and/or Adjustment of Global Securities. At such time
---------------------------------------------------
as all interests in the Global Securities have been exchanged for Physical
Securities, all Global Securities shall be returned to or retained and cancelled
by the Trustee in accordance with Section 2.11 hereof. At any time prior to
such cancellation, if any interest in a Global Security is exchanged for an
interest in another Global Security
<PAGE>

-35-

or for Physical Securities, the principal amount of Securities represented by
such Global Security shall be reduced accordingly and an endorsement shall be
made on such Global Security, by the Trustee to reflect such reduction.

(i) General Provisions Relating to All Transfers and Exchanges.
----------------------------------------------------------

(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Trustee shall authenticate Global Securities
and Physical Securities upon a written order signed by an Officer of the
Company or at the Registrar's request.

(ii) No service charge shall be made to a Holder for any
registration of transfer or exchange, but the Company may require payment
of a sum sufficient to cover any stamp or transfer tax or similar
governmental charge payable in connection therewith (other than any such
stamp or transfer taxes or similar governmental charge payable upon
exchange or transfer pursuant to Sections 2.10, 3.06, 4.05, 4.14 and 10.05
hereof).

(iii) All Global Securities and Physical Securities issued upon
any registration of transfer or exchange of Global Securities or Physical
Securities shall be the valid obligations of the Company, evidencing the
same debt, and entitled to the same benefits under this Indenture, as the
Global Securities or Physical Securities surrendered upon such registration
of transfer or exchange.

(iv) The Company shall not be required (A) to issue, to register
the transfer of or to exchange Securities during a period beginning at the
opening of business 15 days before the day of any selection of Securities
for redemption under Section 3.02 hereof and ending at the close of
business on the day of selection, (B) to register the transfer of or to
exchange any Security so selected for redemption in whole or in part,
except the unredeemed portion of any Security being redeemed in part or (C)
to register the transfer of or to exchange a Security between a record date
and the next succeeding Interest Payment Date.

(v) Prior to due presentment for the registration of a transfer
of any Security, the Trustee, any Agent and the Company may deem and treat
the Person in whose name any Security is registered as the absolute owner
of such Security for the purpose of receiving payment of principal
<PAGE>

-36-

of and interest on such Securities and for all other purposes, and none of
the Trustee, any Agent or the Company shall be affected by notice to the
contrary.

SECTION 1.027 Replacement Securities.
----------------------

If a mutilated Security is surrendered to the Trustee or if the Holder
of a Security claims that the Security has been lost, destroyed or wrongfully
taken, the Company shall issue and the Trustee shall authenticate a replacement
Security if the Trustee's requirements are met. An indemnity bond in an amount
sufficient in the judgment of the Company and the Trustee to protect the
Company, the Trustee or any Agent from any loss which any of them may suffer if
a Security is replaced may be required by the Trustee or the Company. The
Company and the Trustee each may charge such Holder for its expenses in
replacing such Security.

Every replacement Security is an additional obligation of the Company.

SECTION 1.028 Outstanding Securities.
----------------------

Securities outstanding at any time are all Securities that have been
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation and those described in this Section as not outstanding.
A Security does not cease to be outstanding because the Company or one of its
Affiliates holds the Security.

If a Security is replaced pursuant to Section 2.07, it ceases to be
outstanding unless the Trustee receives proof satisfactory to it that the
replaced Security is held by a bona fide purchaser.

If the Paying Agent holds on a redemption date or Maturity Date money
sufficient to pay the principal of, and interest on Securities payable on that
date, then on and after that date such Securities cease to be outstanding and
interest on them ceases to accrue.

SECTION 1.029 Treasury Securities.
-------------------

In determining whether the Holders of the required principal amount of
Securities have concurred in any direction, waiver or consent, Securities owned
by the Company, any Subsidiary or any of their respective Affiliates shall be
disregarded, except that for the purposes of determining whether
<PAGE>

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the Trustee shall be protected in relying on any such direction, waiver or
consent, only Securities that the Trustee actually knows are so owned shall be
so disregarded.

The Trustee may require an Officers' Certificate listing securities
owned by the Company, any Subsidiary or any of their respective Affiliates.

SECTION 2.10. Temporary Securities.
--------------------

Until definitive Securities are ready for delivery, the Company may
prepare and the Trustee shall authenticate temporary Securities. Temporary
Securities shall be substantially in the form of definitive Securities but may
have variations that the Company considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Securities in exchange for temporary Securities. Until
such exchange, temporary Securities shall be entitled to the same rights,
benefits and privileges as definitive Securities.

SECTION 2.11. Cancellation.
------------

The Company at any time may deliver Securities to the Trustee for
cancellation. The Registrar and the Paying Agent shall forward to the Trustee
any Securities surrendered to them for transfer, exchange or payment. The
Trustee and no one else shall cancel all Securities surrendered for transfer,
exchange, payment or cancellation. The Company may not issue new Securities to
replace, or reissue or resell, Securities which the Company has redeemed, paid,
purchased on the open market or otherwise, or otherwise acquired or have been
delivered to the Trustee for cancellation. The Trustee (subject to the record-
retention requirements of the Exchange Act) may, but shall not be required to
destroy cancelled Securities.

SECTION 2.12. Defaulted Interest.
------------------

If the Company defaults in a payment of interest on the Securities, it
shall pay the defaulted interest, plus any interest payable on the defaulted
interest pursuant to Section 4.01 hereof, to the persons who are Securityholders
on a subsequent special record date, and such term, as used in this Section 2.12
with respect to the payment of any defaulted interest, shall mean the fifteenth
day next preceding the date fixed by the Company for the payment of defaulted
interest, whether or not such day is a Business Day. At least 15 days before
such special record date, the Company shall mail to each
<PAGE>

-38-

Securityholder and to the Trustee a notice that states such special record date,
the payment date and the amount of defaulted interest to be paid.

SECTION 2.13. CUSIP or CINS Number.
--------------------

The Company in issuing the Securities may use a "CUSIP" or "CINS"
number, and if so, such CUSIP or CINS number shall be included in notices of
redemption or exchange as a convenience to Holders; provided that any such
--------
notice may state that no representation is made as to the correctness or
accuracy of the CUSIP or CINS number printed in the notice or on the Securities,
and that reliance may be placed only on the other identification numbers printed
on the Securities. The Company will promptly notify the Trustee of any change
in the CUSIP or CINS number.

SECTION 2.14. Payments of Interest.
--------------------

(a) The Holder of a Physical Security at the close of business on the
regular record date with respect to any Interest Payment Date shall be entitled
to receive the interest and Additional Interest, if any, payable on such
Interest Payment Date notwithstanding any transfer or exchange of such Physical
Security subsequent to the regular record date and prior to such Interest
Payment Date, except if and to the extent the Company shall default in the
payment of the interest or Additional Interest due on such Interest Payment
Date, in which case such defaulted interest and Additional Interest, if any,
shall be paid in accordance with Section 2.12; provided that, in the event of an
exchange of a Physical Security for a beneficial interest in any Global Security
subsequent to a regular record date or any special record date and prior to or
on the related Interest Payment Date or other payment date under Section 2.12,
any payment of the interest and Additional Interest payable on such payment date
with respect to any such Physical Security shall be made to the Person in whose
name such Physical Security was registered on such record date. Payments of
interest on the Global Securities will be made to the Holder of the Global
Security on each Interest Payment Date; provided that, in the event of an
exchange of all or a portion of a Global Security for Physical Security
subsequent to the regular record date or any special record date and prior to or
on the related Interest Payment Date or other payment date under Section 2.12
any payment of interest or Additional Interest payable on such Interest Payment
Date or other payment date with respect to the Physical Security shall be made
to the Holder of the Global Security.
<PAGE>

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(b) The Trustee shall pay interest and Additional Interest, if any, to
DTC, with respect to any Global Security held by DTC, on the applicable Interest
Payment Date in accordance with instructions received from DTC at least five
Business Days before the applicable Interest Payment Date.

ARTICLE THREE

REDEMPTION

SECTION 1.031. Notices to Trustee.
------------------

If the Company wants to redeem Securities pursuant to paragraph 5 of
the Securities at the applicable redemption price set forth thereon, it shall
notify the Trustee in writing of the redemption date and the principal amount of
Securities to be redeemed.

The Company shall give the notice provided for in this Section 3.01 at
least 45 days before the redemption date (unless a shorter notice shall be
agreed to by the Trustee in writing) but not more than 60 days before the
redemption date, together with an Officers' Certificate stating that such
redemption will comply with the conditions contained herein.

SECTION 1.032. Selection of Securities To Be Redeemed.
--------------------------------------

If less than all of the Securities are to be redeemed pursuant to
paragraph 5 thereof, the Trustee shall select the Securities to be redeemed pro
---
rata or by lot or in such other manner as the Trustee shall deem appropriate and
- ----
fair. The Trustee shall make the selection from the Securities then
outstanding, subject to redemption and not previously called for redemption.
The Trustee may select for redemption portions (equal to $1,000 or any integral
multiple thereof) of the principal of Securities that have denominations larger
than $1,000. Provisions of this Indenture that apply to Securities called for
redemption also apply to portions of Securities called for redemption.

SECTION 1.033. Notice of Redemption.
--------------------

At least 30 days but not more than 60 days before a redemption date,
the Company shall mail a notice of redemption by first class mail to each Holder
whose Securities are to be redeemed.
<PAGE>

-40-

The notice shall identify the Securities to be redeemed and shall
state:

(1) the redemption date;

(2) the redemption price;

(3) the CUSIP number;

(4) the name and address of the Paying Agent to which the Securities
are to be surrendered for redemption;

(5) that Securities called for redemption must be surrendered to the
Paying Agent to collect the redemption price;

(6) that, unless the Company defaults in making the redemption
payment, interest on Securities called for redemption ceases to accrue on
and after the redemption date and the only remaining right of the Holders
is to receive payment of the redemption price upon surrender to the Paying
Agent; and

(7) if any Security is being redeemed in part, the portion of the
principal amount of such Security to be redeemed and that, after the
redemption date, upon surrender of such Security, a new Security or
Securities in principal amount equal to the unredeemed portion thereof will
be issued.

At the Company's request, the Trustee shall give the notice of
redemption on behalf of the Company, in the Company's name and at the Company's
expense.

SECTION 1.034. Effect of Notice of Redemption.
------------------------------

Once a notice of redemption is mailed, Securities called for
redemption become due and payable on the redemption date and at the redemption
price. Upon surrender to the Paying Agent, such Securities shall be paid at the
redemption price, plus accrued interest thereon to the redemption date, but
interest installments whose maturity is on or prior to such redemption date
shall be payable to the Holders of record at the close of business on the
relevant record dates referred to in the Securities. The Trustee shall not be
required to (i) issue, authenticate, register the transfer of or exchange any
Security during a period beginning 15 days before the date a notice of
redemption is mailed and ending at the close of business on the
<PAGE>

-41-

date the redemption notice is mailed, or (ii) register the transfer or exchange
of any Security so selected for redemption in whole or in part, except the
unredeemed portion of any Security being redeemed in part.

SECTION 1.035. Deposit of Redemption Price.
---------------------------

At least one Business Day before the redemption date, the Company
shall deposit with the Paying Agent money sufficient to pay the redemption price
of and accrued interest on all Securities to be redeemed on that date other than
Securities or portions thereof called for redemption on that date which have
been delivered by the Company to the Trustee for cancellation.

SECTION 1.036. Securities Redeemed in Part.
---------------------------

Upon surrender of a Security that is redeemed in part, the Trustee
shall authenticate for the Holder a new Security equal in principal amount to
the unredeemed portion of the Security surrendered.

ARTICLE FOUR

COVENANTS

SECTION 1.041. Payment of Securities.
---------------------

The Company shall pay the principal of and interest on the Securities
in the manner provided in the Securities. An installment of principal or
interest shall be considered paid on the date due if the Trustee or Paying Agent
holds on that date money designated for and sufficient to pay the installment in
full and is not prohibited from paying such money to the Holders of the
Securities pursuant to the terms of this Indenture.

The Company shall pay interest on overdue principal at the same rate
per annum borne by the Securities. The Company shall pay interest on overdue
- ---------
installments of interest at the same rate per annum borne by the Securities, to
---------
the extent lawful.

SECTION 1.042. Maintenance of Office or Agency.
-------------------------------

The Company shall maintain in the Borough of Manhattan, The City of
New York, an office or agency where Securities may be surrendered for
registration of transfer or exchange or for presentation for payment and where
notices and demands to or upon the Company in respect of the Securities and this
Indenture may
<PAGE>

-42-

be served. The Company shall give prompt written notice to the Trustee of the
location, and any change in the location, of such office or agency. If at any
time the Company shall fail to maintain any such required office or agency or
shall fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demands may be made or served at the address of the
Trustee set forth in Section 13.02.

The Company may also from time to time designate one or more other
offices or agencies where the Securities may be presented or surrendered for any
or all such purposes and may from time to time rescind such designations;
provided that no such designation or rescission shall in any manner relieve the
Company of its obligation to maintain an office or agency in the Borough of
Manhattan, The City of New York, for such purposes. The Company shall give
prompt written notice to the Trustee of any such designation or rescission and
of any change in the location of any such other office or agency.

SECTION 1.043. Limitation on Transactions with
Affiliates and Related Persons.
-------------------------------

The Company shall not, and shall 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 $5,000,000 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
Section 4.06, (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
<PAGE>

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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.

SECTION 1.044. Limitation on Indebtedness.
--------------------------

The Company shall not, and shall 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 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 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) $40,000,000 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) $5,000,000, 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 pro-visions 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
<PAGE>

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any other Indebtedness permitted under this Indenture (including the
Securities); (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 Securities 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 Securities, such
refunding Indebtedness is made pari passu with or subordinate in right of
payment to the Securities, and, in the case of any refunding of Indebtedness
that is subordinate in right of payment to the Securities, such refunding
Indebtedness is subordinate in right of payment to the Securities on terms no
less favorable to the Holders of the Securities 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 Section 4.14
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 $3,000,000 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
<PAGE>

-45-

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 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
Private Exchange Securities and Securities issued in exchange for outstanding
Securities pursuant to the terms of an exchange offer registered pursuant to the
Securities Act together with Indebtedness of the Guarantors, if any, under the
Guarantee incurred in accordance with this 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.

SECTION 1.045. Limitation on Certain Asset Dispositions.
----------------------------------------

The Company shall not, and shall 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
<PAGE>

-46-

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 Securities 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 Securities 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 $5,000,000 (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 $5,000,000 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 this Indenture) and the amount of Net
Available Proceeds then required to be otherwise applied in accordance with this
Section 4.05 shall be reset to zero, subject to any subsequent Asset
Disposition. These provisions will not apply to a transaction consummated in
compliance with the provisions of Section 5.01.

In the event that the Company makes an Offer to Purchase the
Securities, the Company shall comply with any
<PAGE>

-47-

applicable securities laws and regulations, including any applicable
requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act.

SECTION 1.046. Limitation on Restricted Payments.
---------------------------------

The Company shall not, and shall 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 clause (i) of Section 4.04, 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
<PAGE>

-48-

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 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 shall 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 this
Indenture, (ii) the renewal, extension, refunding or refinancing of any
Indebtedness otherwise permitted pursuant to clause (v) of Section 4.04, (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
<PAGE>

-49-

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 $2,500,000 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.

For purposes of this Section 4.06, (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.
<PAGE>

-50-

SECTION 1.047. Corporate Existence.
-------------------

Subject to Article Five, the Company shall do or shall cause to be
done all things necessary to preserve and keep in full force and effect its
corporate existence and the corporate, partnership or other existence of each of
its Subsidiaries in accordance with the respective organizational documents of
each such Subsidiary and the rights (charter and statutory) and material
franchises of the Company and its Subsidiaries; provided, however, that the
Company shall not be required to preserve any such right or franchise, or the
corporate existence of any Subsidiary, if the Board of Directors of the Company
shall determine that the preservation thereof is no longer desirable in the
conduct of the business of the Company and its Subsidiaries, taken as a whole,
and that the loss thereof is not, and will not be, adverse in any material
respect to the Holders; provided, further, however, that a determination of the
Board of Directors of the Company shall not be required in the event of a merger
of one or more wholly-owned Subsidiaries of the Company with or into another
wholly-owned Subsidiary of the Company or another Person, if the surviving
Person is a wholly-owned Subsidiary of the Company organized under the laws of
the United States or a State thereof or of the District of Columbia.

SECTION 1.048. Payment of Taxes and Other Claims.
---------------------------------

The Company shall pay or discharge or cause to be paid or discharged,
before the same shall become delinquent, (1) all material taxes, assessments and
governmental charges levied or imposed upon the Company or any Subsidiary of the
Company or upon the income, profits or property of the Company or any Subsidiary
of the Company and (2) all lawful claims for labor, materials and supplies
which, in each case, if unpaid, might by law become a material liability, or
Lien upon the property, of the Company or any Subsidiary of the Company;
provided, however, that the Company shall not be required to pay or discharge or
cause to be paid or discharged any such tax, assessment, charge or claim whose
amount, applicability or validity is being contested in good faith by
appropriate proceedings and for which appropriate provision has been made.

SECTION 1.049. Notice of Defaults.
------------------

(1) In the event that any Indebtedness of the Company or any of its
Subsidiaries is declared due and payable before its maturity because of the
occurrence of any default (or any event which, with notice or lapse of time, or
both, would constitute
<PAGE>

-51-

such a default) under such Indebtedness, the Company shall promptly give written
notice to the Trustee of such declaration, the status of such default or event
and what action the Company is taking or proposes to take with respect thereto.

(2) Upon becoming aware of any Default or Event of Default, the
Company shall promptly deliver an Officers' Certificate to the Trustee
specifying the Default or Event of Default.

SECTION 4.10. Maintenance of Properties.
-------------------------

The Company shall cause all material properties owned by or leased to
it or any of its Subsidiaries and used or useful in the conduct of its business
or the business of any of its Subsidiaries to be maintained and kept in normal
condition, repair and working order and supplied with all necessary equipment
and shall cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary, so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section 4.10 shall prevent the Company or any of its
Subsidiaries from discontinuing the use, operation or maintenance of any of such
properties, or disposing of any of them, if such discontinuance or disposal is,
in the judgment of the Board of Directors or of the board of directors of the
Subsidiary concerned, or of an officer (or other agent employed by the Company
or of any of its Subsidiaries) of the Company or such Subsidiary having
managerial responsibility for any such property, desirable in the conduct of the
business of the Company or any of its Subsidiaries, and if such discontinuance
or disposal is not adverse in any material respect to the Holders.

SECTION 4.11. Compliance Certificate.
----------------------

The Company shall deliver to the Trustee within 55 days after the end
of each of the first three fiscal quarters of the Company and within 100 days
after the close of each fiscal year a certificate signed by the principal
executive officer, principal financial officer or principal accounting officer
stating that a review of the activities of the Company has been made under the
supervision of the signing officers with a view to determining whether a Default
or Event of Default has occurred and whether or not the signers know of any
Default or Event of Default by the Company that occurred during such fiscal
quarter or fiscal year. If they do know of such a Default or Event of Default,
the certificate shall describe all such Defaults or Events of Default, their
status and the action the Company is taking or
<PAGE>

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proposes to take with respect thereto. The first certificate to be delivered by
the Company pursuant to this Section 4.11 shall be for the fiscal quarter ending
March 31, 1997.

SECTION 4.12. 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 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 Securities as their names and addresses appear in the 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 Securities.

SECTION 4.13. Waiver of Stay, Extension or Usury Laws.
---------------------------------------

The Company covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay or extension law or any usury law
or other law, which would prohibit or forgive the Company from paying all or any
portion of the principal of and/or interest on the Securities as contemplated
herein, wherever enacted, now or at any time hereafter in force, or which may
affect the covenants or the performance of this Indenture; and (to the extent
that it may lawfully do so) the Company hereby expressly waives all benefit or
advantage of any such law, and covenants that it shall not hinder, delay or
impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law had
been enacted.

SECTION 4.14. Change of Control.
-----------------
<PAGE>

-53-

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 Securities 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 Securities owned by such Holder pursuant to the Offer to
Purchase, subject to the requirement that any portion of a Security 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 this 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 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
Securities, 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.

SECTION 4.15. Limitation on Senior Subordinated Indebtedness.
----------------------------------------------

The Company shall not (i) directly or indirectly Incur any
Indebtedness that by its terms would expressly rank senior in right of payment
to the Securities and expressly rank subordinate
<PAGE>

-54-

in right of payment to any Senior Debt and (ii) permit a Guaran tor, if any, to
and no Guarantor will directly or indirectly Incur any Indebtedness that by its
terms would expressly rank senior in right of payment to the Guarantee of such
Guarantor and expressly rank subordinate in right of payment to any Senior Debt
of such Guarantor.

SECTION 4.16. Limitations Concerning Distributions
and Transfers by Restricted Subsidiaries.
----------------------------------------

The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist any consensual encumbrance or restriction 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) or (b) 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) this Indenture, (g)
applicable law, (h) customary provisions restricting subletting or assignment of
any lease governing any leasehold interest of
<PAGE>

-55-

any Restricted Subsidiary of the Company, (i) restrictions contained in
Indebtedness permitted to be incurred subsequent to the Issue Date pursuant to
Section 4.04; 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
Section 4.18 and restrict the transfer of property subject to such agreements.

SECTION 4.17. Limitation on Issuance and Sale
of Capital Stock of Restricted Subsidiaries.
-------------------------------------------

The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, (a) transfer, convey, sell or other wise 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 Section 4.05 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.

SECTION 4.18. Limitation on Liens.
-------------------

The Company shall not, and shall 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 Securities and all other amounts due under this
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 Securities and any Indebtedness pari
passu with the Securities are senior to such Liens securing such Subordinated
Indebtedness) equally and
<PAGE>

-56-

ratably with such Indebtedness or, in the event such Indebtedness is subordinate
in right of payment to the Securities 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 Section 4.04;
(iii) Liens securing only the Securities 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 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 Section
4.04; (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
<PAGE>

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this 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.

SECTION 4.19. Future Guarantors.
------------------

The Company shall 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 Securities
and this Indenture on the terms set forth in Articles Eleven and Twelve.

ARTICLE FIVE

MERGERS; SUCCESSOR CORPORATION

SECTION 1.051. Restriction on Mergers, Consolidations
and Certain Sales of Assets.
--------------------------------------

The Company shall 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 Securities
and under this 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 Section 4.04; (iv)
<PAGE>

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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 Section 4.18, the Company, Restricted Subsidiary or the Surviving
Entity, as the case may be, shall have secured the Securities as required by
said Section 4.18. 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 this Indenture in connection with any transaction complying with
the provisions of Section 4.05.

SECTION 1.052. Successor Corporation Substituted.
---------------------------------

Upon any consolidation of the Company or any Subsidiary of the Company
with, or merger of the Company or any such Subsidiary into, any other Person or
any sale, assignment, lease, conveyance or other disposition of all or
substantially all of the Company's consolidated assets (as an entirety or
substantially as an entirety in one transaction or a series of related
transactions, including by way of liquidation or dissolution) in accordance with
Section 5.01, upon the execution of a supplemental indenture by the Surviving
Person in form and substance satisfactory to the Trustee (as evidenced by the
Trustee's execution thereof), the Surviving Person shall succeed to, and be
substituted for, and may exercise every right and power of and shall assume all
obligations of, the Company or such Subsidiary, as the case may be, under this
Indenture and the Securities or the Guarantees, as the case may be, with the
same effect as if such Surviving Person had been named as the Company or such
Subsidiary, as the case may be, herein, and thereafter, except in the case of a
lease, the predecessor Person shall be relieved of all obligations and covenants
under this Indenture and the Securities or the Guarantees, as the case may be.

ARTICLE SIX

DEFAULT AND REMEDIES

SECTION 1.061. Events of Default.
-----------------
<PAGE>

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An "Event of Default" occurs if:

(1) the Company fails to pay principal of (or premium, if any, on)
Securities when due (whether or not prohibited by Article Eight or Twelve
hereof);

(2) the Company fails to pay any interest on any Security when due and
payable, and the default continues for 30 days (whether or not prohibited
by Article Eight or Twelve hereof);

(3) the Company defaults in the payment of principal of and interest
on Securities required to be purchased pursuant to an Offer to Purchase, as
described under Sections 4.05 or 4.14 hereof, when due and payable (whether
or not prohibited by Article Eight or Twelve hereof);

(4) the Company fails to perform or comply with any of the provisions
of Section 5.01;

(5) the Company fails to perform any other covenant or agreement under
this Indenture or the Securities, 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 Securities;

(6) the Company defaults 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 $5,000,000 or more
individually or in the aggregate that has resulted in the acceleration of
the payment of such Indebtedness or the Company or any of its Subsidiaries
fails to pay principal when due at the stated maturity of any such
Indebtedness;

(7) there shall have been rendered any final judgment or judgments
(not subject to appeal) against the Company or any of its Subsidiaries in
an amount of $5,000,000 or more which remains undischarged or unstayed for
a period of 60 days after the date on which the right to appeal has
expired;

(8) the Company or any of its Subsidiaries pursuant to or within the
meaning of any Bankruptcy Law:

(A) commences a voluntary case or proceeding,
<PAGE>

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(B) consents to the entry of an order for relief against it in an
involuntary case or proceeding,

(D) makes a general assignment for the benefit of its creditors;

(9) a court of competent jurisdiction enters an order or decree under
any Bankruptcy Law that:

(A) is for relief against the Company or any Subsidiary in an
involuntary case or proceeding,

(B) appoints a Custodian of the Company or any Subsidiary or for
all or substantially all of its property, or

and in each case the order or decree remains unstayed and in effect for 60
days; provided, however, that if the entry of such order or decree is
appealed and dismissed on appeal then the Event of Default hereunder by
reason of the entry of such order or decree shall be deemed to have been
cured; or

(10) the Guarantee, if any, ceases to be in full force and effect or
is declared null and void and unenforceable or found to be invalid or any
Guarantor, if any, denies its liability under its Guarantee (other than by
reason of a release of such Guarantor from its Guarantee in accordance with
the terms of this Indenture and the Guarantee).

The term "Bankruptcy Law" means Title 11, U.S. Code or any similar
--------------
Federal, state or foreign law for the relief of debtors. The term "Custodian"
---------
means any receiver, trustee, assignee, liquidator, sequestrator or similar
official under any Bankruptcy Law.

SECTION 1.062. Acceleration.
------------

If an Event of Default with respect to the Securities (other than an
Event of Default with respect to the Company described in clause (8) or (9) of
Section 6.01) shall occur and be continuing, the Trustee or the Holders of at
least 25% in
<PAGE>

-61-

aggregate principal amount of the outstanding Securities may accelerate the
maturity of all Securities; 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 Securities 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 this Indenture. If an Event of Default specified in clause (8) or
(9) of Section 6.01 with respect to the Company occurs, the outstanding
Securities will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder.

After a declaration of acceleration, but before a judgment or decree
of the money due in respect of the Securities has been obtained, the Holders of
not less than a majority in aggregate principal amount of the Securities then
outstanding by written notice to the Trustee may rescind an acceleration and its
consequences if all existing Events of Default (other than the nonpayment of
principal of and interest on the Securities which has become due solely by
virtue of such acceleration) have been cured or waived and if the rescission
would not conflict with any judgment or decree. No such rescission shall affect
any subsequent Default or impair any right consequent thereto.

SECTION 1.063. Other Remedies.
--------------

If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy by proceeding at law or in equity to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.

The Trustee may maintain a proceeding even if it does not possess any
of the Securities or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Securityholder in exercising any right or remedy
maturing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative to the
extent permitted by law.

SECTION 1.064. Waiver of Past Default.
----------------------

Subject to Sections 2.09, 6.07 and 10.02, prior to the declaration of
acceleration of the Securities, the Holders of not less than a majority in
aggregate principal amount of the out-

<PAGE>

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standing Securities by written notice to the Trustee may waive an existing
Default or Event of Default and its consequences, except a Default in the
payment of principal of or interest on any Security as specified in clauses (1)
and (2) of Section 6.01 or a Default in respect of any term or provision of this
Indenture that may not be amended or modified without the consent of each Holder
affected as provided in Section 10.02. The Company shall deliver to the Trustee
an Officers' Certificate stating that the requisite percentage of Holders have
consented to such waiver and attaching copies of such consents. In case of any
such waiver, the Company, the Trustee and the Holders shall be restored to their
former positions and rights hereunder and under the Securities, respectively.
This paragraph of this Section 6.04 shall be in lieu of (S) 316(a)(1)(B) of the
TIA and such (S) 316(a)(1)(B) of the TIA is hereby expressly excluded from this
Indenture and the Securities, as permitted by the TIA.

Upon any such waiver, such Default shall cease to exist and be deemed
to have been cured and not to have occurred, and any Event of Default arising
therefrom shall be deemed to have been cured and not to have occurred for every
purpose of this Indenture and the Securities, but no such waiver shall extend to
any subsequent or other Default or Event of Default or impair any right
consequent thereon.

SECTION 1.065. Control by Majority.
-------------------

Subject to Section 2.09, the Holders of a majority in principal amount
of the outstanding Securities may direct the time, method and place of
conducting any proceeding for any remedy available to the Trustee or exercising
any trust or power conferred on it. However, the Trustee may refuse to follow
any direction that conflicts with law or this Indenture, that the Trustee
determines may be unduly prejudicial to the rights of another Securityholder, or
that may involve the Trustee in personal liability; provided, however, that the
Trustee may take any other action deemed proper by the Trustee which is not
inconsistent with such direction. In the event the Trustee takes any action or
follows any direction pursuant to this Indenture, the Trustee shall be entitled
to indemnification satisfactory to it in its sole discretion against any loss or
expense caused by taking such action or following such direction. This Section
6.05 shall be in lieu of (S) 316(a)(1)(A) of the TIA, and such (S) 316(a)(1)(A)
of the TIA is hereby expressly excluded from this Indenture and the Securities,
as permitted by the TIA.

SECTION 1.066. Limitation on Suits.
-------------------
<PAGE>

-63-

A Securityholder may not pursue any remedy with respect to this
Indenture or the Securities unless:

(1) the Holder gives to the Trustee written notice of a continuing
Event of Default;

(2) the Holders of at least 25% in aggregate principal amount of the
outstanding Securities make a written request to the Trustee to pursue a
remedy;

(3) such Holder or Holders offer and, if requested, provide to the
Trustee indemnity satisfactory to the Trustee against any loss, liability
or expense;

(4) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and

(5) during such 60-day period the Holders of a majority in principal
amount of the outstanding Securities (excluding Affiliates of the Company)
do not give the Trustee a direction which, in the opinion of the Trustee,
is inconsistent with the request.

A Securityholder may not use this Indenture to prejudice the rights of
another Securityholder or to obtain a preference or priority over such other
Securityholder.

SECTION 1.067. Rights of Holders To Receive Payment.
------------------------------------

Notwithstanding any other provision of this Indenture, the right of
any Holder to receive payment of principal of and interest on the Security, on
or after the respective due dates expressed in the Security, or to bring suit
for the enforcement of any such payment on or after such respective dates, shall
not be impaired or affected without the consent of the Holder.

SECTION 1.068. Collection Suit by Trustee.
--------------------------

If an Event of Default in payment of interest or principal specified
in Section 6.01(1) or (2) occurs and is continuing, the Trustee may recover
judgment in its own name and as trustee of an express trust against the Company
or any other obligor on the Securities for the whole amount of principal and
accrued interest remaining unpaid, together with interest overdue on principal
and to the extent that payment of such interest is lawful, interest on overdue
installments of interest, in each case at the rate per annum borne by the
--- -----
Securities and such
<PAGE>

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further amount as shall be sufficient to cover the costs and expenses of
collection, including the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel.

SECTION 1.069. Trustee May File Proofs of Claim.
--------------------------------

The Trustee may file such proofs of claim and other papers or
documents as may be necessary or advisable in order to have the claims of the
Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Securityholders allowed in any judicial proceedings relative to the Company (or
any other obligor upon the Securities), its creditors or its property and shall
be entitled and empowered to collect and receive any monies or other property
payable or deliverable on any such claims and to distribute the same, and any
Custodian in any such judicial proceedings is hereby authorized by each
Securityholder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the
Securityholders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agent and
counsel, and any other amounts due the Trustee under Section 7.07. Nothing
herein contained shall be deemed to authorize the Trustee to authorize or
consent to or accept or adopt on behalf of any Securityholder any plan of
reorganization, arrangement, adjustment or composition affecting the Securities
or the rights of any Holder thereof, or to authorize the Trustee to vote in
respect of the claim of any Securityholder in any such proceeding.

SECTION 6.10. Priorities.
----------

If the Trustee collects any money or property pursuant to this Article
Six, it shall pay out the money or property in the following order:

First: to the Trustee for amounts due under Section 7.07;

Second: to Holders for amounts due and unpaid on the Securities for
principal and interest, ratably, without preference or priority of any
kind, according to the amounts due and payable on the Securities for
principal and interest, respectively; and

Third: to the Company.

<PAGE>

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The Trustee, upon prior written notice to the Company, may fix a
record date and payment date for any payment to Securityholders pursuant to this
Section 6.10.

SECTION 6.11. Undertaking for Costs.
---------------------

In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 shall not apply to a suit by the Trustee, a suit by a Holder
or group of Holders of more than 10% in aggregate principal amount of the
outstanding Securities, or to any suit instituted by any Holder for the
enforcement or the payment of the principal or interest on any Securities on or
after the respective due dates expressed in the Security.

ARTICLE SEVEN

TRUSTEE

SECTION 1.071. Duties of Trustee.
-----------------

(a) If a Default has occurred and is continuing, the Trustee shall
exercise such of the rights and powers vested in it by this Indenture and use
the same degree of care and skill in their exercise as a prudent person would
exercise or use under the circumstances in the conduct of such person's own
affairs.

(b) Except during the continuance of a Default:

(1) The Trustee shall not be liable except for the performance of such
duties as are specifically set forth herein; and

(2) In the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon certificates or opinions conforming to
the requirements of this Indenture; however, the Trustee shall examine the
certificates and opinions to determine whether or not they conform to the
requirements of this Indenture.
<PAGE>

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(c) The Trustee shall not be relieved from liability for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:

(1) This paragraph does not limit the effect of paragraph (b) of this
Section 7.01;

(2) The Trustee shall not be liable for any error of judgment made in
good faith by a Trust Officer, unless it is proved that the Trustee was
negligent in ascertaining the pertinent facts; and

(3) The Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.

(d) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or to take or omit to take any action
under this Indenture or take any action at the request or direction of Holders
if it shall have reasonable grounds for believing that repayment of such funds
is not assured to it or it does not receive an indemnity satisfactory to it in
its sole discretion against such risk, liability, loss, fee or expense which
might be incurred by it in compliance with such request or direction.

(e) Every provision of this Indenture that in any way relates to the
Trustee is subject to paragraphs (a), (b), (c) and (d) of this Section 7.01.

(f) The Trustee shall not be liable for interest on any money or
assets received by it except as the Trustee may agree with the Company. Money
or assets held in trust by the Trustee need not be segregated from other funds
or assets except to the extent required by law.

SECTION 1.072. Rights of Trustee.
-----------------

Subject to Section 7.01:

(a) The Trustee may rely on any document believed by it to be genuine
and to have been signed or presented by the proper person. The Trustee
need not investigate any fact or matter stated in the document.
<PAGE>

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(b) Before the Trustee acts or refrains from acting, it may consult
with counsel and may require an Officers' Certificate and an Opinion of
Counsel, which shall conform to the provisions of Section 13.05. The
Trustee shall not be liable for any action it takes or omits to take in
good faith in reliance on such certificate or opinion.

(c) The Trustee may act through attorneys and agents of its selection
and shall not be responsible for the misconduct or negligence of any agent
or attorney (other than an agent who is an employee of the Trustee)
appointed with due care.

(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith which it reasonably believes to be authorized or
within its rights or powers.

(e) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Inden ture at the request or
direction of any of the Securityholders pursuant to this Indenture, unless
such Securityholders shall have offered to the Trustee reasonable security
or indemnity against the costs, expenses and liabilities which might be
incurred by it in compliance with such request or direction.

SECTION 1.073. Individual Rights of Trustee.
----------------------------

The Trustee in its individual or any other capacity may become the
owner or pledgee of Securities and may otherwise deal with the Company or its
Affiliates with the same rights it would have if it were not Trustee. Any Agent
may do the same with like rights. However, the Trustee is subject to Sections
7.10 and 7.11.

SECTION 1.074. Trustee's Disclaimer.
--------------------

The Trustee shall not be responsible for and makes no representation
as to the validity or adequacy of this Indenture or the Securities, it shall not
be accountable for the Company's use of the proceeds from the Securities, and it
shall not be responsible for any statement of the Company in this Indenture or
any document issued in connection with the sale of Securities or any statement
in the Securities other than the Trustee's certificate of authentication.
<PAGE>

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SECTION 1.075. Notice of Defaults.
------------------

If a Default or an Event of Default occurs and is continuing and the
Trustee knows of such Defaults or Events of Default, the Trustee shall mail to
each Securityholder notice of the Default or Event of Default within 30 days
after the occurrence thereof.

SECTION 1.076. Reports by Trustee to Holders.
-----------------------------

If required by TIA (S) 313(a), within 60 days after each June 15
beginning with the June 15 following the date of this Indenture, the Trustee
shall mail to each Securityholder a report dated as of such June 15 that
complies with TIA (S) 313(a). The Trustee also shall comply with TIA (S)
313(b), (c) and (d).

A copy of each such report at the time of its mailing to
Securityholders shall be filed with the Commission and each stock exchange, if
any, on which the Securities are listed.

The Company shall promptly notify the Trustee in writing if the
Securities become listed on any securities exchange or of any delisting thereof.

SECTION 1.077. Compensation and Indemnity.
--------------------------

The Company shall pay to the Trustee from time to time such
compensation as the Company and the Trustee shall from time to time agree in
writing for its services. The Trustee's compensation shall not be limited by any
law on compensation of a trustee of an express trust. The Company shall
reimburse the Trustee upon request for all reasonable disbursements, expenses
and advances (including fees, disbursements and expenses of its agents and
counsel) incurred or made by it in addition to the compensation for its services
except any such disbursements, expenses and advances as may be attributable to
the Trustee's negligence or bad faith. Such expenses shall include the
reasonable compensation, disbursements and expenses of the Trustee's agents,
accountants, experts and counsel and any taxes or other expenses incurred by a
trust created pursuant to Section 9.01 hereof.

The Company shall indemnify the Trustee and its agents for, and hold
them harmless against any and all loss, damage, claims, liability or expense,
including taxes (other than franchise taxes imposed on the Trustee and taxes
based upon, measured by or determined by the income of the Trustee), arising out
of or in connection with the acceptance or administration of
<PAGE>

-69-

the trust or trusts hereunder, including the costs and expenses of enforcing
this Indenture against the Company (including Section 7.07) and of defending
itself against any claim (whether asserted by any Securityholder or the Company)
or liability in connection with the exercise or performance of any of their
powers or duties hereunder, except to the extent that such loss, damage, claim,
liability or expense is due to their own negligence or bad faith. The Trustee
shall notify the Company promptly of any claim asserted against the Trustee for
which it may seek indemnity. However, the failure by the Trustee to so notify
the Company shall not relieve the Company of its obligations hereunder. The
Company shall defend the claim and the Trustee shall cooperate in the defense
(and may employ its own counsel) at the Company's expense; provided, however,
that the Company's reimbursement obligation with respect to counsel employed by
the Trustee will be limited to the reasonable fees and expenses of such counsel.
The Company need not pay for any settlement made without its written consent,
which consent shall not be unreasonably withheld. The Company need not reimburse
any expense or indemnify against any loss or liability incurred by the Trustee
as a result of the violation of this Indenture by the Trustee.

To secure the Company's payment obligations in this Section 7.07, the
Trustee shall have a Lien prior to the Securities against all money or property
held or collected by the Trustee, in its capacity as Trustee, except money or
property held in trust to pay principal of or interest on particular Securities.

When the Trustee incurs expenses or renders services after an Event of
Default specified in Section 6.01(8) or (9) occurs, the expenses (including the
reasonable fees and expenses of its agents and counsel) and the compensation for
the services shall be preferred over the status of the Holders in a proceeding
under any Bankruptcy Law and are intended to constitute expenses of
administration under any Bankruptcy Law. The Company's obligations under this
Section 7.07 and any claim arising hereunder shall survive the resignation or
removal of any Trustee, the discharge of the Company's obligations pursuant to
Article Nine and any rejection or termination under any Bankruptcy Law.

SECTION 1.078. Replacement of Trustee.
----------------------

The Trustee may resign at any time by so notifying the Company in
writing. The Holders of a majority in principal amount of the outstanding
Securities may remove the Trustee by so
<PAGE>

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notifying the Trustee and the Company in writing and may appoint a successor
Trustee with the Company's consent. The Company may remove the Trustee if:

(1) the Trustee fails to comply with Section 7.10;

(2) the Trustee is adjudged a bankrupt or an insolvent under any
Bankruptcy Law;

(3) a custodian or other public officer takes charge of the Trustee or
its property; or

(4) the Trustee becomes incapable of acting.

If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason (the Trustee in such event being referred to
herein as the retiring Trustee), the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the Securities may appoint a successor
Trustee to replace the successor Trustee appointed by the Company.

A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. As promptly as
practicable after that, the retiring Trustee shall transfer, after payment of
all sums then owing to the Trustee pursuant to Section 7.07, all property held
by it as Trustee to the successor Trustee, subject to the Lien provided in
Section 7.07, the resignation or removal of the retiring Trustee shall become
effective, and the successor Trustee shall have the rights, powers and duties of
the Trustee under this Indenture. A successor Trustee shall mail notice of its
succession to each Securityholder.

If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company or the
Holders of at least 10% in principal amount of the outstanding Securities may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.

If the Trustee fails to comply with Section 7.10, any Securityholder
may petition any court of competent jurisdiction for the removal of the Trustee
and the appointment of a successor Trustee.
<PAGE>

-71-

Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 shall continue for the
benefit of the retiring Trustee.

SECTION 1.079. Successor Trustee by Merger, etc.
--------------------------------

If the Trustee consolidates with, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation or banking corporation, the resulting, surviving or transferee
corporation or banking corporation without any further act shall be the
successor Trustee.

SECTION 7.10. Eligibility; Disqualification.
-----------------------------

This Indenture shall always have a Trustee which shall be eligible to
act as Trustee under TIA (S)(S) 310(a)(1) and 310(a)(5). The Trustee (or in the
case of a corporation included in a bank holding company, the related bank
holding company) shall have a combined capital and surplus of at least
$50,000,000 as set forth in its most recent published annual report of
condition. If the Trustee has or shall acquire any "conflicting interest"
within the meaning of TIA (S) 310(b), the Trustee and the Company shall comply
with the provisions of TIA (S) 310(b); provided, however, that there shall be
excluded from the operation of TIA (S) 310(b)(1) any indenture or indentures
under which other securities, or certificates of interest or participation in
other securities, of the Company are outstanding, if the requirements for such
exclusion set forth in TIA (S) 310(b)(1) are met. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section,
the Trustee shall resign immediately in the manner and with the effect
hereinbefore specified in this Article Seven.

SECTION 7.11. Preferential Collection of Claims
Against Company.
---------------------------------

The Trustee shall comply with TIA (S) 311(a), excluding any creditor
relationship listed in TIA (S) 311(b). A Trustee who has resigned or been
removed shall be subject to TIA (S) 311(a) to the extent indicated therein.
<PAGE>

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ARTICLE EIGHT

SUBORDINATION OF SECURITIES

SECTION 1.082. Securities Subordinated to Senior Debt.
--------------------------------------

The Company covenants and agrees, and the Trustee and each Holder by
acceptance of the Securities likewise covenants and agrees, that all Securities
shall be issued subject to the provisions of this Article; and each person
holding any Security, whether upon original issue or upon transfer, assignment
or exchange thereof, accepts and agrees that all payments of the principal of
and interest on the Securities by the Company shall, to the extent and in the
manner set forth in this Article, be subordinated and junior in right of payment
to the prior payment in full of all Senior Debt of the Company.

SECTION 1.082. No Payment on Securities in
Certain Circumstances.
---------------------------

(a) No direct or indirect payment by or on behalf of the Company of
principal of, premium, if any, or interest on the Securities, whether pursuant
to the terms of the Securities 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 Securities, except from those funds
held in trust for the benefit of the Holders of any Securities 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
<PAGE>

-73-

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 Securities
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.

(b) In the event that, notwithstanding the foregoing, any payment
shall be received by the Trustee or any Holder when such payment is prohibited
by Section 8.02(a), such payment shall be held in trust for the benefit of, and
shall be paid over or delivered to, the holders of Designated Senior Debt or
their respective representatives, or to the trustee or trustees under any
indenture pursuant to which any of such Designated Senior Debt may have been
issued, as their respective interests may appear, but only to the extent that,
upon notice from the Trustee to the holders of Designated Senior Debt that such
prohibited payment has been made, the holders of the Designated Senior Debt (or
their representative or representatives or a trustee) notify the Trustee in
writing of the amounts then due and owing on the Designated Senior Debt, if any,
and only the amounts specified in such notice to the Trustee shall be paid to
the holders of Designated Senior Debt.

SECTION 1.083. Payment Over of Proceeds upon Dissolution, etc.
----------------------------------------------

(a) 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 Securities 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 Securities,
or any
<PAGE>

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payment to acquire any of the Securities for cash, property or securities, or
any distribution with respect to the Securities 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 Securities 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 Securities
or the Trustee on their behalf would be entitled, but for the subordination
provisions of this Indenture, shall be made by the Company or by any receiver,
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.

(b) In the event that, notwithstanding the foregoing provision
prohibiting such payment or distribution, any payment or distribution of assets
or securities of the Company of any kind or character, whether in cash, property
or securities, shall be received by the Trustee or any Holder of Securities at a
time when such payment or distribution is prohibited by Section 8.03(a) and
before all obligations in respect of Senior Debt are paid in full, or payment
provided for, such payment or distribution shall be received and held in trust
for the benefit of, and shall be paid over or delivered to, the holders of
Senior Debt or their respective representatives, or to the trustee or trustees
under any indenture pursuant to which any of such Senior Debt may have been
issued, as their respective interests may appear, for application to the payment
of Senior Debt remaining unpaid until all such Senior Debt has been paid in full
after giving effect to any concurrent payment, distribution or provision
therefor to or for the holders of such Senior Debt.

The consolidation of the Company with, or the merger of the Company
with or into, another corporation or the liquidation or dissolution of the
Company following the conveyance or transfer of its property as an entirety, or
substantially as an entirety, to another corporation upon the terms and
conditions provided in Article Five shall not be deemed a dissolution, winding-
up, liquidation or reorganization for the purposes of this Section if such other
corporation shall, as a part of such
<PAGE>

-75-

consolidation, merger, conveyance or transfer, comply with the conditions stated
in Article Five.

SECTION 1.084. Subrogation.
-----------

Upon the payment in full of all Senior Debt, or provision for payment,
the Holders of the Securities shall be subrogated to the rights of the holders
of Senior Debt to receive payments or distributions of cash, property or
securities of the Company made on such Senior Debt until the principal of and
interest on the Securities shall be paid in full; and, for the purposes of such
subrogation, no payments or distributions to the holders of the Senior Debt of
any cash, property or securities to which the Holders of the Securities or the
Trustee on their behalf would be entitled except for the provisions of this
Article, and no payment over pursuant to the provisions of this Article to the
holders of Senior Debt by Holders of the Securities or the Trustee on their
behalf shall, as between the Company, its creditors other than holders of Senior
Debt, and the Holders of the Securities, be deemed to be a payment by the
Company to or on account of the Senior Debt. It is understood that the
provisions of this Article are and are intended solely for the purpose of
defining the relative rights of the Holders of the Securities, on the one hand,
and the holders of the Senior Debt, on the other hand.

If any payment or distribution to which the Holders of the Securities
would otherwise have been entitled but for the provisions of this Article shall
have been applied, pursuant to the provisions of this Article, to the payment of
all amounts payable under Senior Debt, then and in such case, the Holders of the
Securities shall be entitled to receive from the holders of such Senior Debt any
payments or distributions received by such holders of Senior Debt in excess of
the amount required to make payment in full, or provision for payment, of such
Senior Debt.

SECTION 1.085. Obligations of Company Unconditional.
------------------------------------

Nothing contained in this Article or elsewhere in this Indenture or in
the Securities is intended to or shall impair, as among the Company and the
Holders of the Securities, the obligation of the Company, which is absolute and
unconditional, to pay to the Holders of the Securities the principal of and
interest on the Securities as and when the same shall become due and payable in
accordance with their terms, or is intended to or shall affect the relative
rights of the Holders of the Securities and creditors of the Company other than
the holders of the Senior Debt, nor shall anything herein or therein prevent the
Holder of
<PAGE>

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any Security or the Trustee on their behalf from exercising all remedies
otherwise permitted by applicable law upon default under this Indenture, subject
to the rights, if any, under this Article of the holders of the Senior Debt in
respect of cash, property or securities of the Company received upon the
exercise of any such remedy.

Without limiting the generality of the foregoing, nothing contained in
this Article shall restrict the right of the Trustee or the Holders of
Securities to take any action to declare the Securities to be due and payable
prior to their stated maturity pursuant to Section 6.01 or to pursue any rights
or remedies hereunder; provided, however, that all Senior Debt then due and
payable shall first be paid in full before the Holders of the Securities or the
Trustee are entitled to receive any direct or indirect payment from the Company
of principal of or interest on the Securities.

SECTION 1.086. Notice to Trustee.
-----------------

The Company shall give prompt written notice to the Trustee of any
fact known to the Company which would prohibit the making of any payment to or
by the Trustee in respect of the Securities pursuant to the provisions of this
Article. The Trustee shall not be charged with knowledge of the existence of
any default or event of default with respect to any Senior Debt or of any other
facts which would prohibit the making of any payment to or by the Trustee unless
and until the Trustee shall have received notice in writing at its Corporate
Trust Office to that effect signed by an Officer of the Company, or by a holder
of Senior Debt or trustee or agent therefor; and prior to the receipt of any
such written notice, the Trustee shall, subject to Article Seven, be entitled to
assume that no such facts exist; provided that if the Trustee shall not have
received the notice provided for in this Section 8.06 at least two Business Days
prior to the date upon which by the terms of this Indenture any moneys shall
become payable for any purpose (including, without limitation, the payment of
the principal of or interest on any Security), then, regardless of anything
herein to the contrary, the Trustee shall have full power and authority to
receive any moneys from the Company and to apply the same to the purpose for
which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such prior date. Nothing
contained in this Section 8.06 shall limit the right of the holders of Senior
Debt to recover payments as contemplated by Section 8.03. The Trustee shall be
entitled to rely on the delivery to it of a written notice by a Person
representing himself or itself to be a holder of any Senior Debt
<PAGE>

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(or a trustee on behalf of, or other representative of, such holder) to
establish that such notice has been given by a holder of such Senior Debt or a
trustee or representative on behalf of any such holder.

In the event that the Trustee determines in good faith that any
evidence is required with respect to the right of any Person as a holder of
Senior Debt to participate in any payment or distribution pursuant to this
Article, the Trustee may request such Person to furnish evidence to the
reasonable satisfaction of the Trustee as to the amount of Senior Debt held by
such Person, the extent to which such Person is entitled to participate in such
payment or distribution and any other facts pertinent to the rights of such
Person under this Article, and if such evidence is not furnished, the Trustee
may defer any payment to such Person pending judicial determination as to the
right of such Person to receive such payment.

SECTION 1.087. Reliance on Judicial Order or
Certificate of Liquidating Agent.
--------------------------------

Upon any payment or distribution of assets or securities referred to
in this Article, the Trustee and the Holders of the Securities shall be entitled
to rely upon any order or decree made by any court of competent jurisdiction in
which bankruptcy, dissolution, winding-up, liquidation or reorganization
proceedings are pending, or upon a certificate of the receiver, trustee in
bankruptcy, liquidating trustee, agent or other person making such payment or
distribution, delivered to the Trustee or to the Holders of the Securities for
the purpose of ascertaining the persons entitled to participate in such
distribution, the holders of the Senior Debt and other indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article.

SECTION 1.088. Trustee's Relation to Senior Debt.
---------------------------------

The Trustee and any Paying Agent shall be entitled to all the rights
set forth in this Article with respect to any Senior Debt which may at any time
be held by it in its individual or any other capacity to the same extent as any
other holder of Senior Debt, and nothing in this Indenture shall deprive the
Trustee or any Paying Agent of any of its rights as such holder.

With respect to the holders of Senior Debt, the Trustee undertakes to
perform or to observe only such of its covenants and obligations as are
specifically set forth in this Article,
<PAGE>

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and no implied covenants or obligations with respect to the holders of Senior
Debt shall be read into this Indenture against the Trustee. The Trustee shall
not be deemed to owe any fiduciary duty to the holders of Senior Debt (except as
provided in Section 8.03(b)).

SECTION 1.089. Subordination Rights Not Impaired
by Acts or Omissions of the Company
or Holders of Senior Debt.
-----------------------------------

No right of any present or future holders of any Senior Debt to
enforce subordination as provided herein shall at any time in any way be
prejudiced or impaired by any act or failure to act on the part of the Company
or by any act or failure to act, in good faith, by any such holder, or by any
noncompliance by the Company with the terms of this Indenture, regardless of any
knowledge thereof which any such holder may have or otherwise be charged with.
The provisions of this Article are intended to be for the benefit of, and shall
be enforceable directly by, the holders of Senior Debt.

SECTION 8.10. Securityholders Authorize Trustee To
Effectuate Subordination of Securities.
--------------------------------------

Each Holder of Securities by his acceptance of such Securities
authorizes and expressly directs the Trustee on his behalf to take such action
as may be necessary or appropriate to effectuate the subordination provided in
this Article, and appoints the Trustee his attorney-in-fact for such purposes,
including, in the event of any dissolution, winding up, liquidation or
reorganization of the Company (whether in bankruptcy, insolvency, receivership,
reorganization or similar proceedings or upon an assignment for the benefit of
creditors or otherwise) tending towards liquidation of the business and assets
of the Company, the filing of a claim for the unpaid balance of its or his
Securities in the form required in those proceedings.

SECTION 8.11. This Article Not To Prevent Events of Default.
---------------------------------------------

The failure to make a payment on account of principal of or interest
on the Securities by reason of any provision of this Article shall not be
construed as preventing the occurrence of an Event of Default specified in
clause (1), (2) or (3) of Section 6.01.
<PAGE>

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SECTION 8.12. Trustee's Compensation Not Prejudiced.
-------------------------------------

Nothing in this Article shall apply to amounts due to the Trustee
pursuant to other sections in this Indenture.

SECTION 8.13. No Waiver of Subordination Provisions.
-------------------------------------

Without in any way limiting the generality of Section 8.09, the
holders of Senior Debt may, at any time and from time to time, without the
consent of or notice to the Trustee or the Holders of the Securities, without
incurring responsibility to the Holders of the Securities and without impairing
or releasing the subordination provided in this Article or the obligations
hereunder of the Holders of the Securities to the holders of Senior Debt, do any
one or more of the following: (a) change the manner, place or terms of payment
or extend the time of payment of, or renew or alter, Senior Debt or any
instrument evidencing the same or any agreement under which Senior Debt is
outstanding or secured; (b) sell, exchange, release or otherwise deal with any
property pledged, mortgaged or otherwise securing Senior Debt; (c) release any
Person liable in any manner for the collection of Senior Debt; and (d) exercise
or refrain from exercising any rights against the Company and any other Person.

SECTION 8.14. Subordination Provisions Not Applicable
to Money Held in Trust for Securityholders;
Payments May Be Paid Prior to Dissolution.
------------------------------------------

All money and United States Government Obligations deposited in trust
with the Trustee pursuant to and in accordance with Article Nine shall be for
the sole benefit of the Holders and shall not be subject to this Article Eight.

Nothing contained in this Article or elsewhere in this Indenture shall
prevent (i) the Company, except under the conditions described in Section 8.02,
from making payments of principal of and interest on the Securities, or from
depositing with the Trustee any moneys for such payments or from effecting a
termination of the Company's and the Guarantors' obligations under the
Securities and this Indenture as provided in Article Nine, or (ii) the
application by the Trustee of any moneys deposited with it for the purpose of
making such payments of principal of and interest on the Securities, to the
holders entitled thereto unless at least two Business Days prior to the date
upon which such payment becomes due and payable, the Trustee shall have received
the written notice provided for in Section 8.02(b) or in Section 8.06. The
Company shall give prompt
<PAGE>

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written notice to the Trustee of any dissolution, winding-up, liquidation or
reorganization of the Company.

SECTION 8.15. Acceleration of Securities.
--------------------------

If payment of the Securities is accelerated because of an Event of
Default, the Company shall promptly notify holders of the Senior Debt of the
acceleration.

ARTICLE NINE

DISCHARGE OF INDENTURE

SECTION 1.091. Termination of Company's Obligations.
------------------------------------

(a) Discharge. Subject to the provisions of Article Eight, the
---------
Company may terminate its substantive obligations and the substantive
obligations of the Guarantors, if any, in respect of the Securities by
delivering all outstanding Securities to the Trustee for cancellation and paying
all sums payable by the Company on account of principal of, premium, if any, and
interest on all Securities or otherwise.

(b) Covenant Defeasance. In addition to the provisions of subsection
-------------------
9.01(a), 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 (8) or (9) of Section 6.01, 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 Securities (except for the
Company's obligation to pay the principal of (and premium, if any, on) and the
interest on the Securities and such Guarantors' guarantee thereof) by (i)
depositing with the Trustee, under the terms of an irrevocable trust agreement,
money or direct non-callable obligations of the United States of America for the
payment of which its full faith and credit is pledged ("United States Government
------------------------
Obligations") sufficient (without reinvestment) to pay all remaining
- -----------
indebtedness on the Securities, (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 Securities 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
<PAGE>

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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)
delivering to the Trustee an Officers' Certificate and an Opinion of Counsel
each stating that there has been compliance with all conditions precedent
provided for herein.

(c) Legal Defeasance. In addition to the provisions of subsections
----------------
9.01(a) and (b), 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 (8) or (9) of Section 6.01, 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 Securities
(including the Company's obligation to pay the principal of (and premium, if
any, on) and interest on the Securities 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 Securities, (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 Securities 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 this 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) delivering to the Trustee
an Officers' Certificate and an Opinion each stating that there has been
compliance with all conditions precedent provided for herein.

(d) Notwithstanding the foregoing paragraphs 9.01(b) and (c) above,
the Company's obligations contained in Sections 2.03, 2.05, 2.06, 2.07, 4.02,
7.07, 7.08, 9.03 and 9.04 shall survive until the securities are no longer
outstanding. In addition, notwithstanding the foregoing paragraph 9.01(b), in
<PAGE>

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that instance the Company's obligations contained in Section 4.01 shall also
survive until the Securities are no longer outstanding. Thereafter the Company's
obligations in Section 7.07, 9.03 and 9.04 shall survive. The Company may make
an irrevocable deposit pursuant to this Section 9.01 only if at such time it is
not prohibited from doing so under the subordination provisions of this
Indenture or any 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. After such delivery or irrevocable deposit and
delivery of an Officer's Certificate and Opinion of Counsel, the Trustee upon a
Company Request shall acknowledge in writing the discharge of the Company's and
the Guarantor's (if any) obligations under the Securities, the Guarantee and
this Indenture other than those surviving obligations specified in this
paragraph (d).

SECTION 1.092. Application of Trust Money.
--------------------------

The Trustee shall hold in trust money or United States Government
Obligations deposited with it pursuant to Section 9.01, and shall apply the
deposited money and the money from United States Government Obligations in
accordance with this Indenture solely to the payment of principal of and
interest on the Securities.

SECTION 1.093. Repayment to Company.
--------------------

Subject to Sections 7.07 and 9.01, the Trustee shall promptly pay to
the Company upon receipt by the Trustee of the Company's written request
accompanied by an Officers' Certificate any excess money held by it at any time.
The Trustee shall pay to the Company upon such request any money held by it for
the payment of principal or interest that remains unclaimed for two years;
provided, however, that the Trustee before being required to make any payment
may at the expense of the Company cause to be published once in a newspaper of
general circulation in The City of New York or mail to each Holder entitled to
such money notice that such money remains unclaimed and that, after a date
specified therein which shall be at least 30 days from the date of such
publication or mailing, any unclaimed balance of such money then remaining shall
be repaid to the Company. After payment to the Company, Securityholders
entitled to money must look to the Company for payment as general creditors
unless an applicable abandoned property law designates another person and all
liability of the Trustee or Paying Agent with respect to such money shall
thereupon cease.
<PAGE>

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SECTION 1.094. Reinstatement.
-------------

If the Trustee is unable to apply any money or United States
Government Obligations in accordance with Section 9.01 by reason of any legal
proceeding or by reason of any order or judgment of any court or governmental
authority enjoining, restraining or otherwise prohibiting such application,
the Company's and the Guarantors'(if any) obligations under this Indenture and
the Securities shall be revived and reinstated as though no deposit had occurred
pursuant to Section 9.01 until such time as the Trustee is permitted to apply
all such money or United States Government Obligations in accordance with
Section 9.01; provided, however, that if the Company has made any payment of
interest on or principal of any Securities because of the reinstatement of its
obligations, the Company shall be subrogated to the rights of the Holders of
such Securities to receive such payment from the money or United States
Government Obligations held by the Trustee.

ARTICLE TEN

AMENDMENTS, SUPPLEMENTS AND WAIVERS

SECTION 1.101. Without Consent of Holders.
--------------------------

The Company and the Guarantors, if any, when authorized by a
resolution of their respective Boards of Directors, and the Trustee may amend or
supplement this Indenture or the Securities without notice to or consent of any
Securityholder:

(i) to cure any ambiguity, defect or inconsistency; provided,
however, that such amendment or supplement does not adversely affect the
rights of any Holder;

(ii) to effect the assumption by a successor Person of all
obligations of the Company under the Securities and this Indenture in
connection with any transaction complying with Article Five of this
Indenture;

(iii) to provide for uncertificated Securities in addition to or
in place of certificated Securities;

(iv) to comply with any requirements of the Commission in order
to effect or maintain the qualification of this Indenture under the TIA;

(v) to make any change that would provide any additional
benefit or rights to the Holders;
<PAGE>

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(vi) to make any other change that does not adversely affect
the rights of any Holder under this Indenture;

(vii) to evidence the succession of another Person to any
Guarantor and the assumption by any such successor of the covenants of such
Guarantor herein and in the Guarantee;

(viii) to add to the covenants of the Company or the Guarantors
for the benefit of the Holders, or to surrender any right or power herein
conferred upon the Company or any Guarantor;

(ix) to secure the Securities pursuant to the requirements of
Section 4.18 or otherwise; or

(x) to reflect the release of a Guarantor from its obligations
with respect to its Guarantee in accordance with the provisions of Section
11.03 and to add a Guarantor pursuant to the requirements of Section 11.07;

provided, however, that the Company has delivered to the Trustee an Opinion of
Counsel and an Officers' Certificate each stating that such amendment or
supplement complies with the provisions of this Section 10.01.

SECTION 1.102. With Consent of Holders.
-----------------------

The Company, the Guarantors, if any, and the Trustee may amend or
supplement this Indenture or the Securities with the written consent of the
Holders of at least a majority in principal amount of the outstanding
Securities. However, without the consent of each Holder affected, an amendment,
supplement or waiver may not:

(1) change the Stated Maturity of the principal of or any installment
of interest on any Security or alter the optional redemption or repurchase
provisions of any Security or this Indenture in a manner adverse to the
holders of the Securities;

(2) reduce the principal amount of any Security;

(3) reduce the rate or extend the time for payment of interest on any
Security;

(4) change the place or currency of payment of the principal of or
interest on any Security;
<PAGE>

-85-

(5) modify any provisions of this Indenture relating to the waiver of
past defaults (other than to add sections of this Indenture subject
thereto) or the right of the Holders to institute suit for the enforcement
of any payment on or with respect to any Security or the Guarantee, if any,
or the modification and amendment of this Indenture and the Securities
(other than to add sections of this Indenture or the Securities which may
not be amended, supplemented or waived without the consent of each Holder
affected);

(6) reduce the percentage of the principal amount of outstanding
Securities necessary for amendment to or waiver of compliance with any
provision of this Indenture or the Securities or for waiver of any Default;

(7) waive a default in the payment of principal of, interest on, or
redemption payment with respect to, any Security (except a recision of
acceleration of the Securities by the holders as provided in this Indenture
and a waiver of the payment default that resulted from such acceleration);

(8) modify the ranking or priority of the Securities or the
Guarantee, if any, or modify the definition of Senior Debt or Designated
Senior Debt or amend or modify the subordination provisions of this
Indenture in any manner adverse to the Holders;

(9) release the Guarantors, if any, from any of their respective
obligations under the Guarantee or this Indenture otherwise than in
accordance with this Indenture; or

(10) modify the provisions relating to any Offer to Purchase required
under Section 4.05 or Section 4.14 in a manner materially adverse to the
holders of Securities 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 Securities, on behalf of all holders of Securities, may waive
compliance by the Company with certain restrictive provisions of this Indenture.
Subject to certain rights of the Trustee, as provided in this Indenture, the
Holders of a majority in aggregate principal amount of the outstanding
Securities, on behalf of all Holders of Securities, may waive any past default
under this Indenture, except a default in the payment of principal, premium or
interest or a default arising from failure to purchase any Security tendered
pursuant to an
<PAGE>

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Offer to Purchase, or a default in respect of a provision that under this
Indenture cannot be modified or amended without the consent of the Holder of
each outstanding Security affected.

SECTION 1.103. Compliance with Trust Indenture Act.
-----------------------------------

Every amendment to or supplement of this Indenture or the Securities
shall comply with the TIA as then in effect.

SECTION 1.104. Revocation and Effect of Consents.
---------------------------------

Until an amendment or waiver becomes effective, a consent to it by a
Holder is a continuing consent by the Holder and every subsequent Holder of that
Security or portion of that Security that evidences the same debt as the
consenting Holder's Security, even if notation of the consent is not made on any
Security. Subject to the following paragraph, any such Holder or subsequent
Holder may revoke the consent as to such Holder's Security or portion of such
Security by notice to the Trustee or the Company received before the date on
which the Trustee receives an Officers' Certificate certifying that the Holders
of the requisite principal amount of Securities have consented (and not
theretofore revoked such consent) to the amendment, supplement or waiver.

The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to consent to any amendment,
supplement or waiver. If a record date is fixed, then, notwithstanding the last
sentence of the immediately preceding paragraph, those persons who were Holders
at such record date (or their duly designated proxies), and only those persons,
shall be entitled to consent to such amendment, supplement or waiver or to
revoke any consent previously given, whether or not such persons continue to be
Holders after such record date. No such consent shall be valid or effective for
more than 90 days after such record date.

After an amendment, supplement or waiver becomes effective, it shall
bind every Securityholder, unless it makes a change described in any of clauses
(1) through (10) of Section 10.02. In that case the amendment, supplement or
waiver shall bind each Holder of a Security who has consented to it and every
subsequent Holder of a Security or portion of a Security that evidences the same
debt as the consenting Holder's Security.
<PAGE>

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SECTION 1.105. Notation on or Exchange of Securities.
-------------------------------------

If an amendment, supplement or waiver changes the terms of a Security,
the Trustee may require the Holder of the Security to deliver it to the Trustee.
The Trustee may place an appropriate notation on the Security about the
changed terms and return it to the Holder. Alternatively, if the Company or the
Trustee so determines, the Company in exchange for the Security shall issue and
the Trustee shall authenticate a new Security that reflects the changed terms.
Failure to make the appropriate notation or issue a new Security shall not
affect the validity and effect of such amendment, supplement or waiver.

SECTION 1.106. Trustee To Sign Amendments, etc.
-------------------------------

The Trustee shall be entitled to receive, and shall be fully protected
in relying upon, an Opinion of Counsel and an Officers' Certificate each stating
that the execution of any amendment, supplement or waiver authorized pursuant to
this Article Ten is authorized or permitted by this Indenture and that such
amendment, supplement or waiver constitutes the legal, valid and binding
obligation of the Company and the Guarantors, enforceable in accordance with its
terms (subject to customary exceptions). The Trustee may, but shall not be
obligated to, execute any such amendment, supplement or waiver which affects the
Trustee's own rights, duties or immunities under this Indenture or otherwise.
In signing any amendment, supplement or waiver, the Trustee shall be entitled to
receive an indemnity reasonably satisfactory to it.

ARTICLE ELEVEN

GUARANTEE

SECTION 1.111. Unconditional Guarantee.
-----------------------

Each Guarantor who becomes a party to this Indenture hereby
unconditionally, jointly and severally, guarantees to each Holder of a Security
authenticated and delivered by the Trustee and to the Trustee and its successors
and assigns that: the principal of and interest on the Securities will be
promptly paid in full when due, subject to any applicable grace period, whether
at maturity, by acceleration or otherwise, and interest on the overdue principal
and interest on any overdue interest on the Securities and all other obligations
of the Company to the Holders or the Trustee hereunder or under the Securities
will be promptly paid in full or performed, all in accordance with the terms
hereof and thereof; subject, however, to the limitations
<PAGE>

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set forth in Section 11.04. Each such Guarantor hereby agrees that its
obligations hereunder shall be unconditional, irrespective of the validity,
regularity or enforceability of the Securities or this Indenture, the absence of
any action to enforce the same, any waiver or consent by any Holder of the
Securities with respect to any provisions hereof or thereof, the recovery of any
judgment against the Company, any action to enforce the same or any other
circumstance which might otherwise constitute a legal or equitable discharge or
defense of a guarantor. Each such Guarantor hereby waives diligence,
presentment, demand of payment, filing of claims with a court in the event of
insolvency or bankruptcy of the Company, any right to require a proceeding first
against the Company, protest, notice and all demands whatsoever and covenants
that the Guarantee will not be discharged except by complete performance of the
obligations contained in the Securities, this Indenture, and this Guarantee. If
any Holder or the Trustee is required by any court or otherwise to return to the
Company, any Guarantor, or any custodian, trustee, liquidator or other similar
official acting in relation to the Company or any Guarantor, any amount paid by
the Company or any Guarantor to the Trustee or such Holder, this Guarantee, to
the extent theretofore discharged, shall be reinstated in full force and effect.
Each Guarantor further agrees that, as between each Guarantor, on the one hand,
and the Holders and the Trustee, on the other hand, (x) the maturity of the
obligations guaranteed hereby may be accelerated as provided in Article Six for
the purpose of this Guarantee, notwithstanding any stay, injunction or other
prohibition preventing such acceleration in respect of the obligations
guaranteed hereby, and (y) in the event of any acceleration of such obligations
as provided in Article Six, such obligations (whether or not due and payable)
shall forth become due and payable by each Guarantor for the purpose of this
Guarantee.

SECTION 1.112. Severability.
------------

In case any provision of this Guarantee shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.

SECTION 1.113. Release of a Guarantor.
----------------------

If the Securities are defeased in accordance with Section 9.01(c), or
if all or substantially all of the assets of any Guarantor or all of the Capital
Stock of any Guarantor is sold (including by issuance or otherwise) by the
Company or any of its Subsidiaries in a transaction constituting an Asset
<PAGE>

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Disposition and if (x) the Net Available Proceeds from such Asset Disposition
are used in accordance with Section 4.05 or (y) the Company delivers to the
Trustee an Officers' Certificate covenanting that the Net Available Proceeds
from such Asset Disposition shall be used in accordance with Section 4.05 and
within the time limits specified by such Section 4.05, then such Guarantor (in
the event of a sale or other disposition of all of the Capital Stock of such
Guarantor) or the corporation acquiring such assets (in the event of a sale or
other disposition of all or substantially all of the assets of such Guarantor),
shall be deemed released from all obligations under this Article Eleven without
any further action required on the part of the Trustee or any Holder. The
Trustee shall, at the sole cost and expense of the Company and upon receipt at
the reasonable request of the Trustee of an Opinion of Counsel that the
provisions of this Section 11.03 have been complied with, deliver an appropriate
instrument evidencing such release upon receipt of a request by the Company
accompanied by an Officers' Certificate certifying as to the compliance with
this Section. Any Guarantor not so released remains liable for the full amount
of principal of and interest on the Securities and the other obligations of the
Company hereunder as provided in this Article Eleven.

SECTION 1.114. Limitation of Guarantor's Liability.
-----------------------------------

Each Guarantor, and by its acceptance hereof each Holder and the
Trustee, hereby confirms that it is the intention of all such parties that the
guarantee by such Guarantor pursuant to its Guarantee not constitute a
fraudulent transfer or conveyance for purposes of title 11 of the United States
Code, as amended, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent
Transfer Act or any similar U.S. Federal or state or other applicable law. To
effectuate the foregoing intention, the Holders and such Guarantor hereby
irrevocably agree that the obligations of such Guarantor under the Guarantee
shall be limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Guarantor and after giving effect to
any collections from or payments made by or on behalf of any other Guarantor in
respect of the obligations of such other Guarantor under its Guarantee or
pursuant to Section 11.05, result in the obligations of such Guarantor under the
Guarantee not constituting such fraudulent transfer or conveyance.

SECTION 1.115. Contribution.
------------

In order to provide for just and equitable contribution among the
Guarantors, the Guarantors agree, inter se, that in the
----- --
<PAGE>

-90-

event any payment or distribution is made by any Guarantor (a "Funding
-------
Guarantor") under the Guarantee, such Funding Guarantor shall be entitled to a
- ---------
contribution from all other Guarantors in a pro rata amount, based on the net
assets of each Guarantor (including the Funding Guarantor), determined in
accordance with GAAP, subject to Section 11.04, for all payments, damages and
expenses incurred by that Funding Guarantor in discharging the Company's
obligations with respect to the Securities or any other Guarantor's obligations
with respect to the Guarantee.

SECTION 1.116. Execution of Guarantee.
----------------------

To further evidence their Guarantee to the Holders, any Guarantor
required to Guarantee the Securities pursuant to the terms of Section 4.19 shall
execute the Guarantee in substantially the form set forth in Exhibit A hereto to
be endorsed on each Security ordered to be authenticated and delivered by the
Trustee. Each such Guarantor hereby agrees that its Guarantee set forth in
Section 11.01 shall remain in full force and effect notwithstanding any failure
to endorse on each Security a notation of such Guarantee. Each such Guarantee
shall be signed on behalf of each Guarantor by its Chairman of the Board, its
President or one of its Vice Presidents prior to the authentication of the
Security on which it is endorsed, and the delivery of such Security by the
Trustee, after the authentication thereof hereunder, shall constitute due
delivery of such Guarantee on behalf of such Guarantor. Such signature upon the
Guarantee may be manual or facsimile signature of such officer and may be
imprinted or otherwise reproduced on the Guarantee, and in case such officer who
shall have signed the Guarantee shall cease to be such officer before the
Security on which such Guarantee is endorsed shall have been authenticated and
delivered by the Trustee or disposed of by the Company, such Security
nevertheless may be authenticated and delivered or disposed of as though the
Person who signed the Guarantee had not ceased to be such officer of the
Guarantor.

SECTION 1.117. Subordination of Subrogation and Other Rights.
---------------------------------------------

Each Guarantor hereby agrees that any claim against the Company that
arises from the payment, performance or enforcement of such Guarantor's
obligations under its Guarantee or this Indenture, including, without
limitation, any right of subrogation, shall be subject and subordinate to, and
no payment with respect to any such claim of such Guarantor shall be made
before, the payment in full in cash of all outstanding Securities in accordance
with the provisions provided therefor in this Indenture.
<PAGE>

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ARTICLE TWELVE

SUBORDINATION OF GUARANTEE

SECTION 1.121. Guarantee Obligations Subordinated
to Senior Debt of Guarantor.
----------------------------------

Each Guarantor covenants and agrees, and the Trustee and each Holder
of the Securities by his acceptance thereof likewise covenant and agree, that
the Guarantees shall be issued subject to the provisions of this Article; and
each person holding any Security, whether upon original issue or upon transfer,
assignment or exchange thereof, accepts and agrees that all payments of the
principal of and interest on the Securities pursuant to the Guarantee made by or
on behalf of any Guarantor shall, to the extent and in the manner set forth in
this Article, be subordinated and junior in right of payment to the prior
payment in full of all amounts payable under Senior Debt of such Guarantor.

SECTION 1.122. No Payment on Guarantees in
Certain Circumstances.
---------------------------

(a) No direct or indirect payment by or on behalf of any Guarantor of
principal of, premium, if any, or interest on the Securities pursuant to such
Guarantor's Guarantee, whether pursuant to the terms of the Securities, 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 of such Guarantor 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 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 written notice (the "Guarantor 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 will be
made by or on behalf of such Guarantor on account of or with respect to the
Securities, except from those funds held in trust for the benefit
<PAGE>

-92-

of the Holders of any Securities to such Holders, during a period (a "Guarantor
---------
Blockage Period") commencing on the date of receipt of such notice by the
- ---------------
Trustee and ending 179 days thereafter.

Notwithstanding anything herein or in the Securities to the contrary,
(x) in no event shall a Guarantor Blockage Period extend beyond 179 days from
the date the Guarantor Payment Blockage Notice was given and (y) there must be
180 days in any 365 day period during which no Guarantor Payment Blockage Period
is in effect. Not more than one Guarantor Blockage Period may be commenced with
respect to any Guarantor 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 other Guarantor Blockage Period with respect to the Designated Senior
Debt initiating such Guarantor Payment Blockage Period may be, or be made, the
basis for the commencement of any other Guarantor 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.

(b) In the event that, notwithstanding the foregoing, any payment
shall be received by the Trustee or any Holder when such payment is prohibited
by Section 12.02(a), such payment shall be held in trust for the benefit of, and
shall be paid over or delivered to, the holders of such Designated Senior Debt
or their respective representatives, or to the trustee or trustees under any
indenture pursuant to which any of such Designated Senior Debt may have been
issued, as their respective interests may appear, but only to the extent that,
upon notice from the Trustee to the holders of such Designated Senior Debt that
such prohibited payment has been made, the holders of such Designated Senior
Debt (or their representative or representatives or a trustee) notify the
Trustee in writing of the amounts then due and owing on such Designated Senior
Debt, if any, and only the amounts specified in such notice to the Trustee shall
be paid to the holders of such Designated Senior Debt.

SECTION 1.123. Payment Over of Proceeds upon Dissolution, etc.
----------------------------------------------

(a) Upon any payment or distribution of assets or securities of any
Guarantor 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 such Guarantor, whether voluntary or involuntary or in
bankruptcy, insolvency, receivership or other proceedings, all amounts due or
to
<PAGE>

-93-

become due with respect to all Senior Debt of such Guarantor shall first be paid
in full before the Holders of the Securities or the Trustee on behalf of such
Holders shall be entitled to receive any payment by such Guarantor of the
principal of or interest on the Securities pursuant to such Guarantor's
Guarantee, or any payment to acquire any of the Securities for cash, property or
securities, or any distribution with respect to the Securities of any cash,
property or securities. Before any payment may be made by, or on behalf of, any
Guarantor of the principal of or interest on the Securities upon any such
dissolution or winding-up or liquidation or reorganization, any payment or
distribution of assets or securities of such Guarantor of any kind or character,
whether in cash, property or securities, to which the Holders of the Securities
or the Trustee on their behalf would be entitled, but for the subordination
provisions of this Indenture, shall be made by such Guarantor or by any
receiver, trustee in bankruptcy, liquidating trustee, agent or other Person
making such payment or distribution, directly to the holders of the Senior Debt
of such Guarantor or their representatives or to the trustee or trustees under
any indenture pursuant to which any of 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.

(b) In the event that, notwithstanding the foregoing provision
prohibiting such payment or distribution, any payment or distribution of assets
or securities of any kind or character, whether in cash, property or securities,
shall be received by the Trustee or any Holder of Securities at a time when such
payment or distribution is prohibited by Section 12.03(a) and before all
obligations in respect of the Senior Debt of such Guarantor are paid in full, or
payment provided for, such payment or distribution shall be received and held in
trust for the benefit of, and shall be paid over or delivered to, the holders of
such Senior Debt or their respective representatives, or to the trustee or
trustees under any indenture pursuant to which any of such Senior Debt may have
been issued, as their respective interests may appear, for application to the
payment of such Senior Debt remaining unpaid until all such Senior Debt has been
paid in full after giving effect to any concurrent payment, distribution or
provision therefor to or for the holders of such Senior Debt.

(c) The consolidation of any Guarantor with, or the merger of any
Guarantor with or into, another corporation or the liquidation or dissolution of
any Guarantor following the
<PAGE>

-94-

conveyance or transfer of its property as an entirety, or substantially as an
entirety, to another corporation upon the terms and conditions provided in
Article Five or Section 11.03 shall not be deemed a dissolution, winding-up,
liquidation or reorganization for the purposes of this Section if such other
corporation shall, as a part of such consolidation, merger, conveyance or
transfer, comply with the conditions stated in Article Five or such Guarantor or
successor entity shall be released from the Guarantee pursuant to the terms of
Section 11.03.

SECTION 1.124. Subrogation.
-----------

Upon the payment in full of all Senior Debt of a Guarantor, or
provision for payment, the Holders of the Securities shall be subrogated to the
rights of the holders of such Senior Debt to receive payments or distributions
of cash, property or securities of such Guarantor made on such Senior Debt until
the principal of and interest on the Securities shall be paid in full; and, for
the purposes of such subrogation, no payments or distributions to the holders of
such Senior Debt of any cash, property or securities to which the Holders of the
Securities or the Trustee on their behalf would be entitled except for the
provisions of this Article, and no payment over pursuant to the provisions of
this Article to the holders of such Senior Debt by Holders of the Securities or
the Trustee on their behalf shall, as between such Guarantor, its creditors
other than holders of such Senior Debt, and the Holders of the Securities, be
deemed to be a payment by such Guarantor to or on account of such Senior Debt.
It is understood that the provisions of this Article are and are intended solely
for the purpose of defining the relative rights of the Holders of the
Securities, on the one hand, and the holders of Senior Debt of the Guarantors,
on the other hand.

-95-

SECTION 1.125. Obligations of Guarantors Unconditional.
---------------------------------------

Nothing contained in this Article or elsewhere in this Indenture or in
the Securities or the Guarantee is intended to or shall impair, as among the
Guarantors and the Holders of the Securities, the obligation of each Guarantor,
which is absolute and unconditional, to pay to the Holders of the Securities the
principal of and interest on the Securities as and when the same shall become
due and payable in accordance with the terms of the Guarantee, or is intended to
or shall affect the relative rights of the Holders of the Securities and
creditors of any Guarantor other than the holders of Senior Debt, nor shall
anything herein or therein prevent the Holder of any Security or the Trustee on
their behalf from exercising all remedies otherwise permitted by applicable law
upon default under this Indenture, subject to the rights, if any, under this
Article of the holders of Senior Debt in respect of cash, property or securities
of any Guarantor received upon the exercise of any such remedy.

Without limiting the generality of the foregoing, nothing contained in
this Article shall restrict the right of the Trustee or the Holders of
Securities to take any action to declare the Securities to be due and payable
prior to their stated maturity pursuant to Section 6.01 or to pursue any rights
or remedies hereunder; provided, however, that all Senior Debt of any Guarantor
then due and payable shall first be paid in full before the Holders of the
Securities or the Trustee are entitled to receive any direct or indirect payment
from such Guarantor of principal of or interest on the Securities pursuant to
such Guarantor's Guarantee.

SECTION 1.126. Notice to Trustee.
-----------------

The Company shall give prompt written notice to the Trustee of any
fact known to the Company or such Guarantor which would prohibit the making of
any payment to or by the Trustee in respect of the Securities pursuant to the
provisions of this Article. The Trustee shall not be charged with knowledge of
the existence of any default or event of default with respect to any Senior Debt
or of any other facts which would prohibit the making of any payment to or by
the Trustee unless and until the Trustee shall have received notice in writing
at its Corporate Trust Office to that effect signed by an Officer of the
Company, or by a holder of Senior Debt or trustee or agent therefor; and prior
to the receipt of any such written notice, the Trustee shall, subject to Article
Seven, be entitled to assume that no such facts exist; provided that if the
Trustee shall not have received the notice provided for in this Section at least
two Business
<PAGE>

-96-

Days prior to the date upon which by the terms of this Indenture any moneys
shall become payable for any purpose (including, without limitation, the payment
of the principal of or interest on any Security), then, regardless of anything
herein to the contrary, the Trustee shall have full power and authority to
receive any moneys from any Guarantor and to apply the same to the purpose for
which they were received, and shall not be affected by any notice to the
contrary which may be received by it on or after such prior date. Nothing
contained in this Section 12.06 shall limit the right of the holders of Senior
Debt of a Guarantor to recover payments as contemplated by Section 12.03. The
Trustee shall be entitled to rely on the delivery to it of a written notice by a
Person representing himself or itself to be a holder of any Senior Debt of a
Guarantor (or a trustee on behalf of, or other representative of, such holder)
to establish that such notice has been given by a holder of such Senior Debt of
a Guarantor or a trustee or representative on behalf of any such holder.

In the event that the Trustee determines in good faith that any
evidence is required with respect to the right of any Person as a holder of
Senior Debt of a Guarantor to participate in any payment or distribution
pursuant to this Article, the Trustee may request such Person to furnish
evidence to the reasonable satisfaction of the Trustee as to the amount of such
Senior Debt held by such Person, the extent to which such Person is entitled to
participate in such payment or distribution and any other facts pertinent to the
rights of such Person under this Article, and if such evidence is not furnished,
the Trustee may defer any payment to such Person pending judicial determination
as to the right of such Person to receive such payment.

SECTION 1.127. Reliance on Judicial Order or
Certificate of Liquidating Agent.
--------------------------------

Upon any payment or distribution of assets or securities of a
Guarantor referred to in this Article, the Trustee and the Holders of the
Securities shall be entitled to rely upon any order or decree made by any court
of competent jurisdiction in which bankruptcy, dissolution, winding-up,
liquidation or reorganization proceedings are pending, or upon a certificate of
the receiver, trustee in bankruptcy, liquidating trustee, agent or other person
making such payment or distribution, delivered to the Trustee or to the Holders
of the Securities for the purpose of ascertaining the persons entitled to
participate in such distribution, the holders of Senior Debt of such Guarantor
and other indebtedness of such Guarantor, the amount thereof or payable thereon,
the amount or amounts paid or
<PAGE>

-97-

distributed thereon and all other facts pertinent thereto or to this Article.

SECTION 1.128. Trustee's Relation to
Senior Debt of Guarantors.
-------------------------

The Trustee and any Paying Agent shall be entitled to all the rights
set forth in this Article with respect to any Senior Debt of Guarantors which
may at any time be held by it in its individual or any other capacity to the
same extent as any other holder of such Senior Debt, and nothing in this
Indenture shall deprive the Trustee or any Paying Agent of any of its rights as
such holder.

With respect to the holders of a Guarantor's Senior Debt, the Trustee
undertakes to perform or to observe only such of its covenants and obligations
as are specifically set forth in this Article, and no implied covenants or
obligations with respect to the holders of such Senior Debt shall be read into
this Indenture against the Trustee. The Trustee shall not be deemed to owe any
fiduciary duty to the holders of Senior Debt of Guarantors (except as provided
in Section 12.03(b)).

SECTION 1.129. Subordination Rights Not Impaired by
Acts or Omissions of the Guarantors or
Holders of Senior Debt of Guarantors.
--------------------------------------

No right of any present or future holders of any Senior Debt of
Guarantors to enforce subordination as provided herein shall at any time in any
way be prejudiced or impaired by any act or failure to act on the part of any
Guarantor or by any act or failure to act, in good faith, by any such holder, or
by any noncompliance by any Guarantor with the terms of this Indenture,
regardless of any knowledge thereof which any such holder may have or otherwise
be charged with. The provisions of this Article are intended to be for the
benefit of, and shall be enforceable directly by, the holders of Senior Debt of
Guarantors.

SECTION 1.1201. Securityholders Authorize Trustee To
Effectuate Subordination of Guarantee.
-------------------------------------

-98-

liquidation or reorganization of any Guarantor (whether in bankruptcy,
insolvency, receivership, reorganization or similar proceedings or upon an
assignment for the benefit of creditors or otherwise) tending towards
liquidation of the business and assets of such Guarantor, the filing of a claim
for the unpaid balance of its or his Securities in the form required in those
proceedings.

SECTION 1.121. This Article Not To Prevent Events of Default.
---------------------------------------------

SECTION 1.122. Trustee's Compensation Not Prejudiced.
-------------------------------------

Nothing in this Article shall apply to amounts due to the Trustee
pursuant to other sections in this Indenture.

SECTION 1.123. No Waiver of Guarantee
Subordination Provisions.
------------------------

Without in any way limiting the generality of Section 12.09, the
holders of Senior Debt of Guarantors may, at any time and from time to time,
without the consent of or notice to the Trustee or the Holders of the
Securities, without incurring responsibility to the Holders of the Securities
and without impairing or releasing the subordination provided in this Article or
the obligations hereunder of the Holders of the Securities to the holders of
Senior Debt of Guarantors, do any one or more of the following: (a) change the
manner, place or terms of payment or extend the time of payment of, or renew or
alter, Senior Debt of Guarantors or any instrument evidencing the same or any
agreement under which such Senior Debt is outstanding or secured; (b) sell,
exchange, release or otherwise deal with any property pledged, mortgaged or
otherwise securing such Senior Debt; (c) release any Person liable in any manner
for the collection of such Senior Debt; and (d) exercise or refrain from
exercising any rights against any Guarantor and any other Person.

SECTION 1.124. Payments May Be Paid Prior to Dissolution.
-----------------------------------------

Nothing contained in this Article or elsewhere in this Indenture shall
prevent (i) a Guarantor, except under the conditions described in Section
12.02, from making payments of principal of and interest on the Securities, or
from depositing with
<PAGE>

-99-

the Trustee any moneys for such payments, or (ii) the application by the Trustee
of any moneys deposited with it for the purpose of making such payments of
principal of and interest on the Securities, to the holders entitled thereto
unless at least two Business Days prior to the date upon which such payment
becomes due and payable, the Trustee shall have received the written notice
provided for in Section 12.02(b) or in Section 12.06. A Guarantor shall give
prompt written notice to the Trustee of any dissolution, winding-up, liquidation
or reorganization of such Guarantor.

ARTICLE THIRTEEN

MISCELLANEOUS

SECTION 1.132. Trust Indenture Act Controls.
----------------------------

This Indenture is subject to the provisions of the TIA that are
required to be a part of this Indenture, and shall, to the extent applicable, be
governed by such provisions. If any provision of this Indenture modifies any
TIA provision that may be so modified, such TIA provision shall be deemed to
apply to this Indenture as so modified. If any provision of this Indenture
excludes any TIA provision that may be so excluded, such TIA provision shall be
excluded from this Indenture.

The provisions of TIA (S)(S) 310 through 317 that impose duties on any
Person (including the provisions automatically deemed included unless expressly
excluded by this Indenture) are a part of and govern this Indenture, whether or
not physically contained herein.

SECTION 1.132. Notices.
-------

Any notice or communication shall be sufficiently given if in writing
and delivered in person, by facsimile and confirmed by overnight courier, or
mailed by first-class mail addressed as follows:
<PAGE>

-100-

if to the Company:

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, VA 22630

Attention:

Facsimile: (540) 622-2008
Telephone: (540) 622-2000

with a copy to:

Lance Balk, Esq.
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022

if to the Trustee:

United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532

Attention: Corporate Trust Department

Facsimile: (212)852-1627
Telephone: (212)852-1000

The Company or the Trustee by notice to the other may designate
additional or different addresses for subsequent notices or communications.

Any notice or communication mailed, first class, postage prepaid, to a
Securityholder, including any notice delivered in connection with TIA (S)
310(b), TIA (S) 313(c), TIA (S) 314(a) and TIA (S) 315(b), shall be mailed to
him at his address as set forth on the registration books of the Registrar and
shall be sufficiently given to him if so mailed within the time prescribed. To
the extent required by the TIA, any notice or communication shall also be mailed
to any Person described in TIA (S) 313(c).

Failure to mail a notice or communication to a Securityholder or any
defect in it shall not affect its sufficiency with respect to other
Securityholders. Except for a notice to the Trustee, which is deemed given only
when received, if a notice or communication is mailed in the manner provided
<PAGE>

-101-

above, it is duly given, whether or not the addressee receives it.

SECTION 1.133. Communications by Holders with Other Holders.
--------------------------------------------

Securityholders may communicate pursuant to TIA (S) 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and any other person shall
have the protection of TIA (S) 312(c).

SECTION 1.134. Certificate and Opinion as to Conditions
Precedent.
----------------------------------------

Upon any request or application by the Company to the Trustee to take
or refrain from taking any action under this Indenture, the Company shall
furnish to the Trustee at the request of the Trustee:

(1) an Officers' Certificate in form and substance satisfactory to
the Trustee stating that, in the opinion of the signers, all conditions
precedent, if any, provided for in this Indenture relating to the proposed
action have been complied with;

(2) an Opinion of Counsel in form and substance satisfactory to the
Trustee stating that, in the opinion of such counsel, all such conditions
precedent have been complied with; and

(3) where applicable, a certificate or opinion by an independent
certified public accountant satisfactory to the Trustee that complies with
TIA (S) 314(c).

SECTION 1.135. Statements Required in Certificate or Opinion.
---------------------------------------------

Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture shall include:

(1) a statement that the person making such certificate or opinion
has read such covenant or condition;

(2) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
<PAGE>

-102-

(3) a statement that, in the opinion of such person, he has made such
examination or investigation as is necessary to enable him to express an
informed opinion as to whether or not such covenant or condition has been
complied with; and

(4) a statement as to whether or not, in the opinion of such person,
such condition or covenant has been complied with; provided, however, that
with respect to matters of fact an Opinion of Counsel may rely on an
Officers' Certificate or certificates of public officials.

SECTION 1.136. Rules by Trustee, Paying Agent, Registrar.
-----------------------------------------

The Trustee may make reasonable rules for action by or at a meeting of
Securityholders. The Paying Agent or Registrar may make reasonable rules for
its functions.

SECTION 1.137. Governing Law.
-------------

The laws of the State of New York shall govern this Indenture, the
Securities and the Guarantee without regard to principles of conflicts of law.

SECTION 1.138. No Recourse Against Others.
--------------------------

A director, officer, employee or stockholder, as such, of the Company
or any Guarantor shall not have any liability for any obligations of the Company
or any Guarantor under the Securities, the Guarantee or this Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. Each Securityholder by accepting a Security waives and releases all
such liability.

SECTION 1.139. Successors.
----------

All agreements of the Company in this Indenture and the Securities
shall bind its successor. All agreements of each Guarantor in this Indenture
and Securities shall bind its successor. All agreements of the Trustee in
this Indenture shall bind its successor.

SECTION 13.10. Counterpart Originals.
---------------------

The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
<PAGE>

-103-

SECTION 13.11. Severability.
------------

In case any provision in this Indenture, in the Securities or in the
Guarantee shall be invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions shall not in any way be affected
or impaired thereby, and a Holder shall have no claim therefor against any party
hereto.

SECTION 13.12. No Adverse Interpretation of Other Agreements.
---------------------------------------------

This Indenture may not be used to interpret another indenture, loan or
debt agreement of the Company or a Subsidiary. Any such indenture, loan or debt
agreement may not be used to interpret this Indenture.

SECTION 13.13. Legal Holidays.
--------------

If a payment date is a Legal Holiday at a place of payment, payment
may be made at that place on the next succeeding day that is not a Legal
Holiday, and no interest shall accrue for the intervening period.

[Signature Page Follows]
<PAGE>

-104-

SIGNATURES

IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the date first written above.

PEN-TAB INDUSTRIES, INC.

By: /s/ William Leary
-----------------------------
Name: William Leary
Title: Vice President

UNITED STATES TRUST COMPANY OF NEW YORK, as
Trustee

By: /s/ Margaret M. Ciesmelewski
------------------------------
Name: Margaret M. Ciesmelewski
Title: Vice President
<PAGE>

EXHIBIT A

PEN-TAB INDUSTRIES, INC.

No. $

10 7/8% SENIOR SUBORDINATED NOTE DUE 2007

Pen-Tab Industries, Inc. promises to pay to

or registered assigns the principal sum of

Dollars on the Maturity Date of February 1, 2007.

Interest Payment Dates: February 1 and August 1, beginning
August 1, 1997.

Record Dates: January 15 and July 15, beginning
July 15, 1997.

IN WITNESS WHEREOF, PEN-TAB INDUSTRIES, INC. has caused this
instrument to be executed in its corporate name by a facsimile signature of its
_________________ and its ___________________ and has caused the facsimile of
its corporate seal to be affixed hereunto or imprinted hereon.

PEN-TAB INDUSTRIES, INC.

By______________________________
Name:
Title:

[SEAL]

Dated: By______________________________
Name:
Title:

Certificate of Authentication:

This is one of the 10 7/8% Senior Subordinated Notes due 2007
referred to in the within-mentioned Indenture.

United States Trust Company
of New York, a Trustee

By____________________ Date:
Authorized Signatory

A-1
<PAGE>

(REVERSE OF SECURITY)

PEN-TAB INDUSTRIES, INC.

10 7/8% Senior Subordinated Note due 2007

1. Interest.
--------

Pen-Tab Industries, Inc., a Delaware corporation (the "Company"),
promises to pay interest at the rate of 10 7/8% per annum on the principal
amount of this Security semiannually commencing on August 1, 1997, until the
principal hereof is paid or made available for payment. Interest on the
Securities will accrue from and including the most recent date to which interest
has been paid or, if no interest has been paid, from and including February 1,
1997, through but excluding the date on which interest is paid. If an Interest
Payment Date falls on a day that is not a Business Day, the interest payment to
be made on such Interest Payment Date will be made on the next succeeding
Business Day with the same force and effect as if made on such Interest Payment
Date, and no additional interest will accrue as a result of such delayed
payment. Interest will be computed on the basis of a 360-day year of twelve 30-
day months.

2. Method of Payment.
-----------------

The interest payable on the Securities, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture
(as defined below), be paid to the person in whose name this Security is
registered at the close of business on the regular record date, which shall be
the January 15 or July 15 (whether or not a Business Day) next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly
provided for, and any interest payable on such defaulted interest (to the extent
lawful), will forthwith cease to be payable to the Holder on such regular record
date and shall be paid to the person in whose name this Security is registered
at the close of business on a special record date for the payment of such
defaulted interest to be fixed by the Company, notice of which shall be given to
Holders not less than 15 days prior to such special record date. Payment of the
principal of and interest on this Security will be made at the agency of the
Company maintained for that purpose in New York, New York and at any other
office or agency maintained by the Company for such purpose, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that at the
option of the Company payment of interest may be made by check mailed to the
address of the person entitled thereto as such address shall appear in the
Security register.

A-2
<PAGE>

3. Paying Agent and Registrar.
--------------------------

Initially, United States Trust Company of New York (the "Trustee")
will act as Paying Agent and Registrar. The Company may change any Paying
Agent, Registrar or co-Registrar without notice to the Holders of Securities.
The Company or any of its Subsidiaries may act as Registrar or co-Registrar but
may not act as Paying Agent.

4. Indenture.
---------

This Security is one of a duly authorized issue of Securities of the
Company, designated as its 10 7/8% Senior Subordinated Notes due 2007 (the
"Securities"), limited in aggregate principal amount to $200,000,000 (except for
Securities issued in substitution for destroyed, lost or stolen Securities)
issuable under an indenture dated as of February 1, 1997 (the "Indenture"),
between the Company and the Trustee. The terms of the Securities include those
stated in the Indenture and those made part of the Indenture by the Trust
Indenture Act of 1939 (the "Act") (15 U.S. Code (S)(S) 77aaa-77bbbb) as in
effect on the date of the Indenture. The Securities are subject to all such
terms, and Holders of Securities are referred to the Indenture and the Act for a
statement of them. Each Securityholder, by accepting a Security, agrees to be
bound to all of the terms and provisions of the Indenture, as the same may be
amended from time to time. Payment on each Security is guaranteed on a senior
subordinated basis, jointly and severally, by the Guarantors pursuant to Article
Eleven of the Indenture.

The Securities are subordinated in right of payment to all Senior Debt
of the Company to the extent and in the manner provided in the Indenture. Each
Holder of a Security, by accepting a Security, agrees to such subordination,
authorizes the Trustee to give effect to such subordination and appoints the
Trustee as attorney-in-fact for such purpose.

Capitalized terms contained in this Security to the extent not defined
herein shall have the meanings assigned to them in the Indenture.

A-3
<PAGE>

5. Optional Redemption.
-------------------

The Securities 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 Securities to be redeemed at his address appearing in the register for
the Securities, 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 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 104.625
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 Securities (including, for this purpose, one
or more series of Securities 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
$65,000,000 in aggregate principal amount of the Securities remains outstanding
immediately after any such redemption (excluding any Securities owned by the
Company or any of its Affiliates). Notice of redemption pursuant to this
paragraph must be mailed to holders of Securities not later than 60 days
following the consummation of such public offering.

Selection of Securities for any partial redemption shall be made by
the Trustee, in accordance with the rules of any national securities exchange on
which the Securities may be listed or, if the Securities are not so listed, pro
rata or by lot or in such other manner as the Trustee shall deem appropriate and
fair. Securities 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 Securities to be redeemed at his
or her registered address. On and after the date fixed for redemption, interest
will cease to accrue on Securities or portions thereof called for redemption.

A-4
<PAGE>

The Securities will not have the benefit of any sinking fund.

6. Purchase upon Occurrence of a
Change of Control.
-----------------------------

Within 30 days of the occurrence of a Change of Control, the Company
will offer to purchase the Securities, in whole and not in part, at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon.

7. Notice of Redemption.
--------------------

Notice of redemption will be mailed by first class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his registered address. Securities in
denominations larger than $1,000 may be redeemed in part. On and after the
redemption date, interest ceases to accrue on those Securities or portion of
them called for redemption.

8. Denominations; Transfer; Exchange.
---------------------------------

The Securities are in registered form without coupons in denominations
of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not transfer or exchange any Securities selected
for redemption.

9. Persons Deemed Owners.
---------------------

The registered Holder of a Security may be treated as the owner of it
for all purposes.

10. Unclaimed Funds.
---------------

If funds for the payment of principal or interest remain unclaimed for
two years, the Trustee or Paying Agent will repay the funds to the Company at
its request. After such repayment Holders of Securities entitled to such funds
must look to the Company for payment unless an abandoned property law designates
another person.

11. Discharge Prior to Redemption or Maturity.
-----------------------------------------

The Indenture will be discharged and cancelled except for certain
Sections thereof, subject to the terms of the Indenture, upon the payment of
all the Securities or upon the

A-5
<PAGE>

irrevocable deposit with the Trustee of funds or United States Government
Obligations sufficient for such payment or redemption.

12. Amendment; Supplement; Waiver.
-----------------------------

Subject to certain exceptions, the Indenture or the Securities may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the outstanding Securities, and any past default or
compliance with any provision may be waived with the consent of the Holders of a
majority in principal amount of the outstanding Securities. Without notice to or
the consent of any Holder, the Company, the Guarantors and the Trustee may amend
or supplement the Indenture or the Securities to cure any ambiguity, defect or
inconsistency, or to make any change that does not adversely affect the rights
of any Holder of Securities.

13. Restrictive Covenants.
---------------------

The Indenture restricts, among other things, the ability of the
Company or any of its Subsidiaries to permit any Liens to be imposed on their
assets, to make certain Restricted Payments and Investments, limits the
Indebtedness which the Company and its Subsidiaries may incur and limits the
terms on which the Company may engage in Asset Dispositions. The Company is
also obligated under certain circumstances to make an offer to purchase
Securities with the net cash proceeds of certain Asset Dispositions. The
Company must report quarterly to the Trustee on compliance with the covenants in
the Indenture.

14. Successor Corporation.
---------------------

Pursuant to the Indenture, the ability of the Company to consolidate
with, merge with or into or transfer its assets to another person is conditioned
upon certain requirements, including certain financial requirements applicable
to the surviving Person.

15. Defaults and Remedies.
---------------------

If an Event of Default shall occur and be continuing, the principal of
all of the outstanding Securities, plus all accrued and unpaid interest, if any,
to the date the Securities become due and payable, may be declared due and
payable in the manner and with the effect provided in the Indenture.

16. Trustee Dealings with Company.
-----------------------------

The Trustee in its individual or any other capacity, may become the
owner or pledgee of Securities and make loans to, accept deposits from, and
perform services for the Company or its

A-6
<PAGE>

Affiliates, and may otherwise deal with the Company or its Affiliates, as if it
were not Trustee.

17. No Recourse Against Others.
--------------------------

A director, officer, employee or stockholder, as such, of the Company
or any Guarantor shall not have any liability for any obligations of the Company
or any Guarantor under the Securities, the Guarantee or the Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. Each Holder of a Security by accepting a Security waives and releases
all such liability. The waiver and release are part of the consideration for
the issue of the Securities.

18. Authentication.
--------------

This Security shall not be valid until the Trustee signs the
certificate of authentication on the other side of this Security.

19. Abbreviations.
-------------

Customary abbreviations may be used in the name of Securityholder or
an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).

20. CUSIP Numbers.
-------------

Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures, the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.

21. Governing Law.
-------------

The laws of the State of New York shall govern the Indenture, this
Security and the Guarantee without regard to principles of conflicts of law.

The Company will furnish to any Holder of record of Securities upon
written request and without charge a copy of the Indenture.

A-7
<PAGE>

[FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE]

SENIOR SUBORDINATED GUARANTEE

The Guarantor(s) (as defined in the Indenture referred to in the
Security upon which this notation is endorsed) hereby, jointly and severally,
unconditionally guarantee on a senior subordinated basis (such guarantee by each
Guarantor being referred to herein as the "Guarantee") the due and punctual
payment of the principal of, premium, if any, and interest on the Securities,
whether at maturity, by acceleration or otherwise, the due and punctual payment
of interest on the overdue principal, premium and interest, if any, on the
Securities, and the due and punctual performance of all other obligations of the
Company to the Holders or the Trustee, all in accordance with the terms set
forth in Article Eleven of the Indenture.

The obligations of each Guarantor to the Holders of Securities and to
the Trustee pursuant to the Guarantee and the Indenture are expressly set forth,
and are expressly subordinated and subject in right of payment to the prior
payment in full of all Senior Debt of such Guarantor, to the extent and in the
manner provided, in Article Twelve of the Indenture, and reference is hereby
made to such Indenture for the precise terms of the Guarantee therein made.

The Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Securities upon which the Guarantee is
noted shall have been executed by the Trustee under the Indenture by the manual
signature of one of its authorized officers.

This Guarantee shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflicts of
law.

This Guarantee is subject to release upon the terms set forth in the
Indenture.

[ ]

By:_____________________________
Name:
Title:

A-8
<PAGE>

ASSIGNMENT FORM

If you the Holder want to assign this Security, fill in the form below
and have your signature guaranteed:

I or we assign and transfer this Security to:

________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code and
social security or tax ID number of assignee)

and irrevocably appoint ______________________________________, agent to
transfer this Security on the books of the Company. The agent may substitute
another to act for him.

Dated: __________________ Signed: ______________________
(Sign exactly as
name appears on the
other side of this
Security)

Signature Guarantee: ___________________________________________

A-9
<PAGE>

OPTION OF HOLDER TO ELECT PURCHASE

If you the Holder want to elect to have this Security purchased by the Company,
check the box: [_]

If you want to elect to have only part of this Security purchased by the
Company, state the amount: $___________

Dated: ___________ Your signature: _____________________
(Sign exactly as
name appears on the
other side of this
Security)

Signature Guarantee: _________________________________________

A-10
<PAGE>

EXHIBIT B

FORM OF CERTIFICATE OF TRANSFER

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, VA 22630

Attention:

[Name and Address of Registrar]

Re: 10 7/8% Senior Subordinated Notes due 2007

Reference is hereby made to the Indenture, dated as of February 1,
1997 (the "Indenture"), between Pen-Tab Industries, Inc. (the "Company"), and
---------
United States Trust Company of New York, as trustee. Capitalized terms used but
not defined herein shall have the meanings given to them in the Indenture.

________________, (the "Transferor") owns and proposes to transfer the
----------
Security[s] specified in Annex A hereto in the principal amount of $___ in such
Security[s] (the "Transfer"), to ________ (the "Transferee"), as further
-------- ----------
specified in Annex A hereto. In the event that Transferor holds Physical
Securities, this Certificate is accompanied by one or more certificates
aggregating at least the principal amount of Securities proposed to be
Transferred. In connection with the Transfer, the Transferor hereby certifies
that:

1. [_] CHECK IF TRANSFEREE WILL TAKE AN INTEREST IN THE 144A GLOBAL SECURITY.
---------------------------------------------------------------------
The Transfer is being effected pursuant to and in accordance with Rule 144A
under the United States Securities Act of 1933, as amended (the "Securities
----------
Act"), and, accordingly, the Transferor hereby further certifies that the
- ---
Securities are being transferred to a Person that the Transferor reasonably
believes is purchasing the Securities for its own account, or for one or more
accounts with respect to which such Person exercises sole investment discretion,
and such Person and each such account is a "qualified institutional buyer"
within the meaning of Rule 144A in a transaction meeting the requirements of
Rule 144A and such Transfer is in compliance with any applicable blue sky
securities laws of any state of the United States. Upon consummation of the
proposed Transfer in accordance with the terms of the Indenture, the transferred
Security will be subject to the restrictions on transfer enumerated in the
Securities Act Legend and in the Indenture and the Securities Act.

2. [_] CHECK IF TRANSFEREE WILL TAKE AN INTEREST IN THE REGULATION S GLOBAL
--------------------------------------------------------------------
SECURITY PURSUANT TO REGULATION S. The
- ---------------------------------

B-1
<PAGE>

Transfer is being effected pursuant to and in accordance with Rule 904 under the
Securities Act and, accordingly, the Transferor hereby further certifies that
(i) the Transfer is not being made to a person in the United States and (x) at
the time the buy order was originated, the Transferee was outside the United
States or such Transferor and any Person acting on its behalf reasonably
believed and believes that the Transferee was outside the United States or (y)
the transaction was executed in, on or through the facilities of a designated
offshore securities market and neither such Transferor nor any Person acting on
its behalf knows that the transaction was prearranged with a buyer in the United
States, (ii) no directed selling efforts have been made in contravention of the
requirements of Rule 904(b) of Regulation S under the Securities Act and (iii)
the transaction is not part of a plan or scheme to evade the registration
requirements of the Securities Act. Upon consummation of the proposed transfer
in accordance with the terms of the Indenture, the Security will be subject to
the restrictions on Transfer enumerated in the Securities Act Legend printed on
the Regulation S Global Security and in the Indenture and the Securities Act.

3. [_] CHECK AND COMPLETE IF TRANSFEREE WILL TAKE DELIVERY OF A RESTRICTED
-------------------------------------------------------------------
PHYSICAL SECURITY PURSUANT TO RULE 144A OR REGULATION S. One or more of the
- -------------------------------------------------------
events specified in Section 2.06(a) of the Indenture have occurred and the
Transfer is being effected in compliance with the transfer restrictions
applicable to Securities bearing the Securities Act Legend and pursuant to and
in accordance with the Securities Act, and accordingly the Transferor hereby
further certifies that (check one):

(a) [_] such Transfer is being effected pursuant to and in accordance
with Rule 144A under the Securities Act and the Transferor certifies to the
effect set forth in paragraph 1 above; or

(b) [_] such Transfer is being effected pursuant to and in accordance
with Rule 904 under the Securities Act and the Transferor certifies to the
effect set forth in paragraph 2 above.

4. [_] CHECK IF TRANSFEREE WILL TAKE AN INTEREST IN THE UNRESTRICTED GLOBAL
--------------------------------------------------------------------
SECURITY The Transfer is being effected pursuant to and in accordance with Rule
- --------
144 under the Securities Act and in compliance with the transfer restrictions
contained in the Indenture, and the restrictions on transfer contained in the
Indenture and the Securities Act Legend are not required in order to maintain
compliance with the Securities Act. Upon consummation of the proposed Transfer
in accordance with the terms of the Indenture, the transfer Securities will no
longer be subject to the restrictions on transfer enumerated in the

B-2
<PAGE>

Securities Act Legend and in the Indenture and the Securities Act.

5. [_] CHECK IF TRANSFEREE WILL TAKE AN INTEREST IN THE PHYSICAL GLOBAL
----------------------------------------------------------------
SECURITY THAT DOES NOT BEAR THE SECURITIES ACT LEGEND One or more of the events
- -----------------------------------------------------
specified in Section 2.06(a) of the Indenture have occurred and the Transfer is
being effected pursuant to and in accordance with Rule 144 under the Securities
Act and in compliance with the transfer restrictions contained in the Indenture,
and the restrictions on transfer contained in the Indenture and the Securities
Act Legend are not required in order to maintain compliance with the Securities
Act. Upon consummation of the proposed Transfer in accordance with the terms of
the Indenture, the transferred Securities will no longer be subject to the
restrictions on transfer enumerated in the Securities Act Legend and in the
Indenture and the Securities Act.

B-3
<PAGE>

This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuers.

____________________________________
[Insert Name of Transferor]

By:_________________________________
Name:
Title:

Dated:_________________

B-4
<PAGE>

FORM OF ANNEX A TO CERTIFICATE
OF TRANSFER

1. The Transferor owns and proposes to transfer the following:

[CHECK ONE OF (a) OR (b)]

(a) [_] Interests in the

(i) [_] 144A Global Security (CUSIP _____), or

(ii) [_] Regulation S Global Security (CINS _____).

(b) [_] Physical Security.

2. That the Transferee will hold:

[CHECK ONE]

(a) [_] Interests in the:

(i) [_] 144A Global Security (CUSIP _____), or

(ii) [_] Regulation S Global Security (CINS _____), or

(iii) [_] Unrestricted Global Security (CUSIP _____); or

(b) [_] Physical Securities that bear the Securities Act
Legend;

in accordance with the terms of the Indenture.
<PAGE>

EXHIBIT C

FORM OF CERTIFICATE OF EXCHANGE

Pen-Tab Industries Inc.
167 Kelley Drive
Front Royal, VA 22630

Attention:

[Name and Address of Registrar]

Re: 10 7/8% Senior Subordinated Notes due 2007

(CUSIP _______________)

Reference is hereby made to the Indenture, dated as of February 1,
1997 (the "Indenture"), between Pen Tab Industries Inc. (the "Company") and
---------
United States Trust Company of New York, as trustee. Capitalized terms used but
not defined herein shall have the meanings given to them in the Indenture.

__________, (the "Holder") owns and proposes to exchange the
------
Security[s] specified herein, in the principal amount of $___ in such
Security[s] (the "Exchange"). In the event Holder holds Physical Securities,
--------
this Certificate is accompanied by one or more certificates aggregating at least
the principal amount of Securities proposed to be Exchanged. In connection with
the Exchange, the Holder hereby certifies that:

1. EXCHANGE OF RESTRICTED PHYSICAL SECURITIES OR INTERESTS IN THE INITIAL
GLOBAL SECURITY FOR PHYSICAL SECURITIES THAT DO NOT BEAR THE SECURITIES ACT
LEGEND OR UNRESTRICTED GLOBAL SECURITIES

(A) [_] CHECK IF EXCHANGE IS FROM INITIAL GLOBAL SECURITIES TO THE
----------------------------------------------------------
UNRESTRICTED GLOBAL SECURITY. In connection with the Exchange of the Holder's
- ----------------------------
Initial Global Security to the Unrestricted Global Security in an equal
principal amount, the Holder hereby certifies (i) the Unrestricted Global
Securities are being acquired for the Holder's own account without transfer,
(ii) such Exchange has been effected in compliance with the transfer
restrictions applicable to the Initial Global Securities and pursuant to and in
accordance with the Securities Act of 1933, as amended (the "Securities Act")
--------------
and (iii) the restrictions on transfer contained in the Indenture and the
Securities Act Legend are not required in order to maintain compliance with the
Securities Act.

(B) [_] CHECK IF EXCHANGE IS FROM RESTRICTED PHYSICAL SECURITIES TO AN
--------------------------------------------------------------
INTEREST IN THE UNRESTRICTED GLOBAL SECURITY.
- --------------------------------------------

C-1
<PAGE>

In connection with the Holder's Exchange of Restricted Physical Securities for
Interest in the Unrestricted Global Security, (i) the Interest in the
Unrestricted Global Security are being acquired for the Holder's own account
without transfer, (ii) such Exchange has been effected in compliance with the
transfer restrictions applicable to Restricted Physical Securities and pursuant
to and in accordance with the Securities Act and (iii) the restrictions on
transfer contained in the Indenture and the Securities Act Legend are not
required in order to maintain compliance with the Securities Act.

(C) [_] CHECK IF EXCHANGE IS FROM RESTRICTED PHYSICAL SECURITIES TO
-----------------------------------------------------------
PHYSICAL SECURITIES THAT DO NOT BEAR THE SECURITIES ACT LEGEND. In connection
- --------------------------------------------------------------
with the Holder's Exchange of a Restricted Physical Security for Physical
Securities that do not bear the Securities Act Legend, the Holder hereby
certifies (i) the Physical Securities that do not bear the Securities Act Legend
are being acquired for the Holder's own account without transfer, (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to Restricted Physical Securities and pursuant to and in accordance
with the Securities Act, (iii) the restrictions on transfer contained in the
Indenture and the Securities Act Legend are not required in order to maintain
compliance with the Securities Act and (iv) one or more of the events specified
in Section 2.06(a) of the Indenture have occurred.

2. [_] CHECK IF EXCHANGE IS FROM RESTRICTED PHYSICAL SECURITIES TO INTERESTS
---------------------------------------------------------------------
IN AN INITIAL GLOBAL SECURITY . In connection with the Exchange of the Holder's
- -----------------------------
Restricted Physical Security for interests in the Initial Global Security in the
[CHECK ONE] [_] 144A Global Security, [_] Regulation S Global Security, with an
equal principal amount, (i) the interests in the Initial Global Security are
being acquired for the Holder's own account without transfer and (ii) such
Exchange has been effected in compliance with the transfer restrictions
applicable to the Restricted Physical Security and pursuant to and in accordance
with the Securities Act. Upon consummation of the proposed Exchange in
accordance with the terms of the Indenture, the Initial Global Security issued
will be subject to the restrictions on transfer enumerated in the Securities Act
Legend printed on the Initial Global Securities and in the Indenture and the
Securities Act.

C-2
<PAGE>

This certificate and the statements contained herein are made for your
benefit and the benefit of the Issuers.

____________________________________
[Insert Name of Holder]

By:_________________________________
Name:
Title:

Dated: __________________

C-3

<PAGE>

PEN-TAB INDUSTRIES, INC.

$75,000,000

10 7/8% Senior Subordinated Securities due 2007

Purchase Agreement

January 30, 1997

J.P. Morgan Securities Inc.
Bear, Stearns & Co. Inc.
c/o J.P. Morgan Securities Inc.
60 Wall Street
New York, New York 10260-0060

Ladies and Gentlemen:

Pen-Tab Industries, Inc., a corporation formed under the laws of Delaware
(the "Company"), proposes to issue and sell to J.P. Morgan Securities Inc. and
Bear, Stearns & Co. Inc. (the "Initial Purchasers") $75,000,000 principal amount
of its 10 7/8% Senior Subordinated Securities due 2007 (the "Securities"). The
Securities will be issued pursuant to the provisions of an Indenture to be dated
as of February 1, 1997 (the "Indenture") among the Company and U.S. Trust
Company of New York, as trustee (the "Trustee").

The sale of the Securities to the Initial Purchasers will be made without
registration of the Securities under the Securities Act of 1933, as amended (the
"Securities Act"), in reliance upon the exemption therefrom provided by Section
4(2) of the Securities Act. Holders of the Securities will have the benefits of
a Registration Rights Agreement to be dated as of February 1, 1997 among the
Company and the Initial Purchasers (the "Registration Rights Agreement").

The Company hereby agrees with the Initial Purchasers as follows:

1. The Company agrees to issue and sell the Securities to the Initial
Purchasers as hereinafter provided, and each Initial Purchaser, upon the basis
of the representations and warranties herein contained, but subject to the
conditions hereinafter stated, agrees to purchase, severally and not jointly,
from the Company the respective principal amount of Securities set forth
opposite such Initial Purchaser's name in Schedule I hereto at a price (the
"Purchase Price") equal to 96.75% of their principal amount.

2. The Company understands that the Initial Purchasers intend (i) to
offer privately their respective portions of the Securities as soon after this
Agreement has become effective as in
<PAGE>

the judgment of the Initial Purchasers is advisable and (ii) initially to offer
the Securities upon the terms set forth in the Offering Memorandum (as defined
below).

The Company confirms that it has authorized the Initial Purchasers, subject
to the restrictions set forth below, to distribute copies of the Offering
Memorandum in connection with the offering of the Securities. Each Initial
Purchaser hereby makes to the Company the following representations and
agreements:

(i) it is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act; and

(ii) (A) it will not solicit offers for, or offer to sell, the
Securities by any form of general solicitation or general advertising (as
those terms are used in Regulation D under the Securities Act) and (B) it
will solicit offers for the Securities only from, and will offer the
Securities only to, (1) persons whom it reasonably believes to be
"qualified institutional buyers" within the meaning of Rule 144A under the
Securities Act, (2) institutions which it reasonably believes are
"accredited investors" as defined in Rule 501(a)(1), (2), (3) or (7) of
Regulation D under the Securities Act, who, in the case of purchasers
described in this clause (B)(2), purchase not less than $250,000 principal
amount of Securities for their own account and for any discretionary
account for which they are acquiring Securities and provide it a letter in
the form of Annex A to the Offering Memorandum or (3) upon the terms and
conditions set forth in Annex I to this Agreement.

3. Payment for the Securities shall be made by wire transfer in
immediately available funds, to the account specified by the Company to the
Initial Purchasers no later than noon the Business Day (as defined below) prior
to the Closing Date (as defined below), on February 4, 1997, or at such other
time on the same or such other date, not later than the fifth Business Day
thereafter, as the Initial Purchasers and the Company may agree upon in writing.
The time and date of such payment are referred to herein as the "Closing Date".
As used herein, the term "Business Day" means any day other than a day on which
banks are permitted or required to be closed in New York City.

Payment for the Securities shall be made against delivery to the nominee of
The Depository Trust Company for the account of the Initial Purchasers of the
Securities of one or more global notes representing the Securities
(collectively, the "Global Note"), with any transfer taxes payable in connection
with the transfer to the Initial Purchasers of the Securities duly paid by the
Company. The Global Note will be made available for inspection by the Initial
Purchasers at the office of J.P. Morgan Securities Inc. at the address set forth
above not later than 1:00 P.M., New York City time, on the Business Day prior to
the Closing Date.

4. The Company represents and warrants to each Initial Purchaser that:

(a) A preliminary offering memorandum, dated January 16, 1997 (the
"Preliminary Offering Memorandum") and an offering memorandum, dated
January 30,

-2-
<PAGE>

1997 (the "Offering Memorandum") have been prepared in connection with the
offering of the Securities. Any reference to the Preliminary Offering
Memorandum or the Offering Memorandum shall be deemed to refer to and
include any Rule 144A(d)(4) Information (as defined in Section 5(m))
furnished by the Company prior to the completion of the distribution of the
Securities. The Preliminary Offering Memorandum or the Offering Memorandum
and any amendments or supplements thereto did not and will not, as of their
respective dates, contain an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;

(b) the financial statements, and the related notes thereto, included
in the Offering Memorandum present fairly in conformity with United States
generally accepted accounting principles and practices applied on a
consistent basis, the consolidated financial position of the Company and
its consolidated subsidiaries and Affiliated Company (as defined in the
Offering Memorandum), as of the dates indicated and the results of their
operations and the changes in their consolidated cash flows for the periods
specified; and the pro forma financial information, and the related notes
thereto, included in the Offering Memorandum are based upon good faith
estimates and assumptions believed by the Company to be reasonable;

(c) since the respective dates as of which information is given in
the Offering Memorandum, there has not been any material change in the
capital stock or long-term debt of the Company, or any material adverse
change, or any development which could reasonably be expected to result in
a prospective material adverse change, in the general affairs, business,
prospects, management, financial position, stockholders' equity or results
of operations of the Company, otherwise than as set forth or contemplated
in the Offering Memorandum; and except as set forth or contemplated in the
Offering Memorandum, the Company has not entered into any transaction or
agreement (whether or not in the ordinary course of business) material to
the Company;

(d) the Company has been duly incorporated and is validly existing as
a corporation under the laws of its jurisdiction of incorporation, with
power and authority (corporate and other) to own its properties and conduct
its business as described in the Offering Memorandum, and has been duly
qualified as a foreign corporation for the transaction of business and is
in good standing under the laws of each other jurisdiction in which it owns
or leases properties, or conducts any business, so as to require such
qualification, other than where the failure to be so qualified or in good
standing would not have a material adverse effect on the Company;

(e) the Company has no subsidiaries and will not have any
subsidiaries immediately following consummation of the Transactions;

(f) each of this Agreement and the Registration Rights Agreement has
been duly authorized, executed and delivered by the Company and constitutes
the valid and binding agreement of the Company;

-3-
<PAGE>

(g) the Securities have been duly authorized, and when issued and
delivered pursuant to this Agreement, will have been duly executed,
authenticated, issued and delivered and will constitute valid and binding
obligations of the Company entitled to the benefits provided by the
Indenture; the Indenture has been duly authorized and, when executed and
delivered by each of the Company and the Trustee, the Indenture will
constitute a valid and binding instrument of the Company; and the
Securities and the Indenture will conform, in all material respects, to the
descriptions thereof in the Offering Memorandum;

(h) none of the transactions contemplated by this Agreement
(including, without limitation, the use of the proceeds from the sale of
the Securities) will violate or result in a violation of Section 7 of the
Exchange Act, or any regulation promulgated thereunder, including, without
limitation, Regulations G, T, U, and X of the Board of Governors of the
Federal Reserve System;

(i) the Company is not, or with the giving of notice or lapse of time
or both would be, in violation of or in default under its Certificate of
Incorporation or By-Laws or any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is a party
or by which it or any of its properties is bound, except for violations and
defaults which individually and in the aggregate are not material to the
Company; the issue and sale of the Securities and the performance by the
Company of all of the provisions of its obligations under the Securities,
the Indenture, the Registration Rights Agreement and this Agreement and the
consummation of the transactions herein and therein contemplated will not
conflict with or result in a breach of any of the terms or provisions of,
or constitute a default under, any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the Company is or will
be, following the Transactions, a party or by which it is or will be bound
or to which any of the property or assets of the Company is or will be
subject, except for conflicts, breaches or defaults which individually and
in the aggregate are not material to the Company, nor will any such action
result in any violation of the provisions of the Certificate of
Incorporation or By-Laws of the Company or any applicable law or statute or
any order, rule or regulation of any court or governmental agency or body
having jurisdiction over the Company or any of its properties, except for
violations which individually and in the aggregate are not material to the
Company; and no consent, approval, authorization, order, license,
registration or qualification of or with any such court or governmental
agency or body is required for the issue and sale of the Securities or the
consummation by the Company of the transactions contemplated by this
Agreement or the Indenture, except such consents, approvals,
authorizations, registrations or qualifications as have been obtained or
may be required under any state or non-U.S. securities or Blue Sky Laws in
connection with the purchase and distribution of the Securities by the
Initial Purchasers;

(j) other than as set forth or contemplated in the Offering
Memorandum, there are no legal or governmental investigations, actions,
suits or proceedings pending or, to the knowledge of the Company,
threatened against or affecting the Company or any

-4-
<PAGE>

of its properties or to which the Company is or may be a party following
the Transactions or to which any property of the Company is or may be the
subject which, if determined adversely to the Company, could individually
or in the aggregate have, or reasonably be expected to have, a material
adverse effect on the general affairs, business, prospects, management,
financial position, stockholders' equity or results of operations of the
Company and, to the best of the Company's knowledge, no such proceedings
are threatened or contemplated by governmental authorities or threatened by
others;

(k) neither the Company nor any affiliate (as defined in Rule 501(b)
of Regulation D under the Securities Act ("Regulation D")) of the Company
has directly, or through any agent, sold, offered for sale, solicited
offers to buy or otherwise negotiated in respect of, any security (as
defined in the Securities Act) which is or will be integrated with the sale
of the Securities in a manner that would require the registration under the
Securities Act of the offering contemplated by the Offering Memorandum;

(l) neither the Company nor any person acting on its behalf has
offered or sold the Securities by means of any general solicitation or
general advertising within the meaning of Rule 502(c) under the Act or,
with respect to Securities sold outside the United States to non-U.S.
persons (as defined in Rule 902 under the Act), by means of any directed
selling efforts within the meaning of Rule 902 under the Securities Act and
the Company and any person acting on its behalf has complied with and will
implement the "offering restriction" within the meaning of such Rule 902;

(m) the Company is not, and will not be after giving effect to the
offering and sale of the Securities to be sold and the application of the
proceeds from such sale (as described in the Final Memorandum under the
caption "Use of Proceeds"), an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended;

(n) it is not necessary in connection with the offer, sale and
delivery of the Securities in the manner contemplated by this Agreement to
register the Securities under the Securities Act or to qualify an indenture
under the Trust Indenture Act of 1939, as amended (the "TIA");

(o) the Securities satisfy the requirements set forth in Rule
144A(d)(3) under the Securities Act;

(p) Ernst & Young LLP, who have certified certain financial
statements of the Company and the Subsidiaries, are independent public
accountants as required by the Securities Act;

(q) the Company has good and marketable title in fee simple to all
material items of real property and good and marketable title to all
material personal property owned by it or to be owned by it following the
Transactions, in each case free and clear of all liens, encumbrances and
defects except such as are otherwise described or referred

-5-
<PAGE>

to in the Offering Memorandum or such as do not materially affect the value
of such property and do not interfere with the use made or proposed to be
made of such property by the Company; and after giving effect to the
Transactions, any material real property and buildings held under lease by
the Company are and will be held by it under valid, existing and
enforceable leases with such exceptions as are not material and do not
interfere with the use made or proposed to be made of such property and
buildings by the Company;

(r) the Company has complied with all provisions of Section 517.075,
Florida Statutes (Chapter 92-198, Laws of Florida) relating to doing
business with the Government of Cuba or with any person or affiliate
located in Cuba;

(s) the Company has filed all federal, state, local and foreign tax
returns which have been required to be filed and have paid all taxes shown
thereon and all assessments received by them or any of them to the extent
that such taxes have become due and are not being contested in good faith;
and, except as disclosed in the Offering Memorandum there is no material
tax deficiency which has been or might reasonably be expected to be
asserted or threatened against the Company;

(t) the Company owns, possesses or has obtained all material
licenses, permits, certificates, consents, orders, approvals and other
authorizations from, and has made all declarations and filings with, all
federal, state, local and other governmental authorities (including foreign
regulatory agencies), all self-regulatory organizations and all courts and
other tribunals, domestic or foreign, necessary to own or lease, as the
case may be, and to operate its properties, and the Company has not
received any actual notice, or is not aware, of any proceeding relating to
revocation or modification of any such license, permit, certificate,
consent, order, approval or other authorization, except as described in the
Offering Memorandum; and, the Company is in compliance with all laws and
regulations relating to the conduct of its business as of the date hereof,
except for violations which individually and in the aggregate are not
material to the Company;

(u) there are no existing or, to the best knowledge of the Company,
threatened labor disputes with the employees of the Company which are
likely to have a material adverse effect on the Company;

(v) the Company (i) is in compliance with any and all applicable
federal, state and local laws and regulations relating to the protection of
human health and safety, the environment or hazardous or toxic substances
or wastes, pollutants or contaminants ("Environmental Laws"), (ii) has
received all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct its business and (iii) is in
compliance with all terms and conditions of any such permit, license or
approval, except where such noncompliance with Environmental Laws, failure
to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
would not, individually or in the aggregate, reasonably be expected to have
a material adverse effect on the Company; associated

-6-
<PAGE>

costs and liabilities (including, without limitation, any capital or
operating expenditures required for clean-up, closure of properties or
compliance with Environmental Laws or any permit, license or approval, any
related constraints on operating activities and any potential liabilities
to third parties) would not, individually or in the aggregate, reasonably
be expected to have a material adverse effect on the Company; and

(w) each employee benefit plan, within the meaning of Section 3(3) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
that is or will be maintained, administered or contributed to by the
Company or any affiliates of the Company for employees or former employees
of the Company and its affiliates has been maintained, in all material
respects, in compliance with its terms and the requirements of any
applicable statutes, orders, rules and regulations, including but not
limited to ERISA and the Internal Revenue Code of 1986, as amended (the
"Code"). No prohibited transaction, within the meaning of Section 406 of
ERISA or Section 4975 of the Code has occurred with respect to any such
plan excluding transactions effected pursuant to a statutory or
administrative exemption. For each such plan which is subject to the
funding rules of Section 412 of the Code or Section 302 of ERISA no
"accumulated funding deficiency" as defined in Section 412 of the Code has
been incurred, whether or not waived, and the fair market value of the
assets of each such plan (excluding for these purposes accrued but unpaid
contributions) exceeded the present value of all benefits accrued under
such plan determined using reasonable actuarial assumptions.

5. The Company covenants and agrees with each of the Initial Purchasers
as follows:

(a) before distributing any amendment or supplement to the Offering
Memorandum, to furnish to the Initial Purchasers a copy of the proposed
amendment or supplement for review and not to distribute any such proposed
amendment or supplement to which the Initial Purchasers reasonably object;

(b) if, at any time prior to the completion of the Offering (as
defined in the Offering Memorandum), any event shall occur as a result of
which it is necessary to amend or supplement the Offering Memorandum in
order that the Offering Memorandum does not contain an untrue statement of
a material fact or omit to state a material fact necessary in order to make
the statements therein, in the light of the circumstances when the Offering
Memorandum is delivered to a purchaser, not misleading, or if it is
necessary to amend or supplement the Offering Memorandum to comply with
law, forthwith to prepare and furnish, at the expense of the Company, to
the Initial Purchasers and to the dealers (whose names and addresses the
Initial Purchasers will furnish to the Company) to which Securities may
have been sold by the Initial Purchasers on behalf of the Initial
Purchasers and to any other dealers upon request, such amendments or
supplements to the Offering Memorandum as may be necessary so that the
Offering Memorandum as so amended or supplemented will not contain an
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances when the Offering Memorandum is delivered to a purchaser,
misleading or so that the Offering Memorandum will comply with law;

-7-
<PAGE>

(c) the Company will cooperate with you and your counsel in
connection with the registration or qualification of the Securities for
offering and sale by the Initial Purchasers and by dealers under the
securities or Blue Sky laws of such jurisdictions as you may designate and
will file such consents to service of process or other documents necessary
or appropriate in order to effect such registration or qualification;
provided that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to take
any action that would subject it to taxation or service of process in
suits, other than those arising out of the Offering or sale of the
Securities, in any jurisdiction where it is not now so subject;

(d) for five years from the Closing Date, to furnish to the Initial
Purchasers copies of all reports or other material communications
(financial or other) furnished to holders of Securities, and copies of any
reports and financial statements filed with the Commission (other than
where confidential treatment has been requested) or any national securities
exchange;

(e) during the period beginning on the date hereof and continuing to
and including the Business Day following the Closing Date, not to offer,
sell, contract to sell, or otherwise dispose of any debt securities of or
guaranteed by the Company which are substantially similar to the
Securities;

(f) to use the net proceeds received by the Company from the sale of
the Securities pursuant to this Agreement in the manner specified in the
Offering Memorandum under the caption "Use of Proceeds";

(g) if requested by you, to use its best efforts to cause such
Securities to be eligible for the PORTAL trading system of the National
Association of Securities Dealer, Inc.;

(h) during the period of three years after the Time of Delivery, the
Company will not, and will not permit any of its "affiliates" (as defined
in Rule 144 under the Securities Act) to, resell any of the Securities
which constitute "restricted securities" under Rule 144 that have been
reacquired by any of them;

(i) whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, to pay or cause to be paid
all costs and expenses incident to the performance of its obligations
hereunder, including without limiting the generality of the foregoing, all
costs and expenses (i) incident to the preparation, issuance, execution,
authentication and delivery of the Securities, including any expenses of
the Trustee, (ii) incident to the preparation, printing and distribution of
the Offering Memorandum and any preliminary offering memorandum (including
in each case all exhibits, amendments and supplements thereto), (iii)
incurred in connection with the registration or qualification and
determination of eligibility for investment of the Securities under the
laws of such jurisdictions as the Initial Purchasers may designate
(including fees of counsel for the Initial Purchasers and their
disbursements) provided
-8-
<PAGE>

that in no event shall the Company be liable for any such amounts in excess
of $20,000 in the aggregate, (iv) in connection with the listing of the
Securities on any stock exchange, (v) in connection with the printing
(including word processing and duplication costs) and delivery of the
Preliminary and Supplemental Blue Sky Memoranda and any Legal Investment
Survey and the furnishing to the Initial Purchasers and dealers of copies
of the Offering Memorandum, including mailing and shipping, as herein
provided, (vi) payable to rating agencies in connection with the rating of
the Securities, and (vii) incurred by the Company in connection with a
"road show" presentation to potential investors, (viii) the cost and
charges of any transfer agent; all expenses of the Initial Purchasers
(including, but not limited to the fees and expenses of counsel for the
Initial Purchasers), other than as set forth in this paragraph (i) to be
paid by the Company shall be paid by the Initial Purchasers;

(j) the Company will take all reasonable action that is appropriate
or necessary to assure that its offerings of other securities will not be
integrated for purposes of the Securities Act with the offerings
contemplated hereby;

(k) the Company will not solicit any offer to buy or offer to sell
Securities by means of any form of general solicitation or general
advertising within the meaning of Rule 502(c) of Regulation D under the
Securities Act;

(l) while the Securities remain outstanding and are "restricted
securities" within the meaning of Rule 144(a)(3) under the Securities Act
the Company will, during any period in which it is not subject to Section
13 or 15(d) under the Exchange Act, make available to the Initial
Purchasers and any holder of Securities in connection with any sale thereof
and any prospective purchaser of Securities, in each case upon request, the
information specified in, and meeting the requirements of, Rule 144A(d)(4)
("Rule 144A(d)(4) Information") under the Securities Act (or any successor
thereto); and

(m) the Company will not take any action prohibited by Rule 10b-6
under the Exchange Act, in connection with the distribution of the
Securities contemplated hereby.

6. The several obligations of the Initial Purchasers hereunder to
purchase the Securities on the Closing Date are subject to the performance, in
all material respects, by each of the Company of its obligations hereunder and
to the following additional conditions:

(a) the representations and warranties of the Company contained
herein are true and correct on and as of the Closing Date as if made on and
as of the Closing Date and the Company shall have complied, in all material
respects, with all agreements and all conditions on its part to be
performed or satisfied hereunder at or prior to the Closing Date;

(b) subsequent to the execution and delivery of this Agreement and
prior to the Closing Date, there shall not have occurred any downgrading,
nor shall any notice have been given of (i) any downgrading, (ii) any
intended or potential downgrading or

-9-
<PAGE>

(iii) any review or possible change that does not indicate an improvement,
in the rating accorded any securities of or guaranteed by the Company by
any "nationally recognized statistical rating organization", as such term
is defined for purposes of Rule 436(g)(2) under the Securities Act;

(c) since the respective dates as of which information is given in
the Offering Memorandum there shall not have been any material change in
the capital stock or long-term debt of any of the Company or any material
adverse change, or any development which could reasonably be expected to
result in a prospective material adverse change, in the general affairs,
business, prospects, management, financial position, stockholders' equity
or results of operations of the Company, otherwise than as set forth or
contemplated in the Offering Memorandum, the effect of which in the
judgment of the Initial Purchasers makes it impracticable or inadvisable to
proceed with the offering or the delivery of the Securities on the Closing
Date on the terms and in the manner contemplated in the Offering
Memorandum; and the Company has not sustained since the date of the latest
audited financial statements included in the Offering Memorandum any
material loss or interference with its business from fire, explosion, flood
or other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise than as
set forth or contemplated in the Offering Memorandum;

(d) the Initial Purchasers shall have received on and as of the
Closing Date a certificate of an executive officer of the Company, with
specific knowledge about the Company's financial matters, satisfactory to
the Initial Purchasers to the effect set forth in subsections (a) and (b)
of this Section and to the further effect that there has not occurred any
material adverse change, or any development which could reasonably be
expected to result in a prospective material adverse change, in the general
affairs, business, prospects, management, financial position, stockholders'
equity or results of operations of the Company from those set forth or
contemplated in the Offering Memorandum;

(e) Kirkland & Ellis, Counsel for the Company, shall have furnished
to the Initial Purchasers their written opinion, dated the Closing Date in
form and substance satisfactory to the Initial Purchasers, to the effect
that:

(i) the Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of Delaware
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Offering Memorandum;

(ii) to such counsel's knowledge, no legal or governmental
proceedings are pending or threatened in the United States to which
the Company is a party (i) that would be required under the Securities
Act to be described in a prospectus and are not described in the
Offering Memorandum or (ii) which seek to restrain, enjoin, prevent
the consummation of or otherwise challenge the

-10-
<PAGE>

issuance or sale of the Securities in the manner contemplated by the
Offering Memorandum or the consummation of the Transactions;

(ii) each of this Agreement and the Registration Rights
Agreement has been duly authorized, executed and delivered by the
Company and (assuming due authorization, execution and delivery by the
Company and the Initial Purchasers) is a valid and binding agreement
of the Company;

(iv) the Securities have been duly authorized, executed and
delivered by the Company and, when duly authenticated in accordance
with the terms of the Indenture and delivered to and paid for by the
Purchasers in accordance with the terms of this Agreement, will
constitute valid and binding obligations of the Company entitled to
the benefits provided by the Indenture; and the Securities and the
Indenture conform to the descriptions thereof in the Offering
Memorandum;

(v) the Indenture has been duly authorized, executed and
delivered by the Company and (assuming due authorization, execution
and delivery by the Trustee) constitutes a valid and binding
instrument of the Company;

(vi) to such counsel's knowledge, the Company is not (i) in
violation of its Certificate of Incorporation or By-Laws, (ii) in
breach or violation of any judgment, decree or order to which it is a
named party, except for any such breach or violation which would not,
individually or in the aggregate, have a material adverse effect on
the Company, or (iii) in breach or default under any of the terms or
provisions of any contracts listed on Schedule A to such opinion,
except for any such breach, default, violation or event which would
not, individually or in the aggregate, have a material adverse effect
on the Company; the execution and delivery of this Agreement and the
Indenture and the consummation by the Company of the transactions
contemplated thereby will not conflict with or constitute or result in
a breach or a default under or violation of any of (i) the terms or
provisions of any contracts listed on Schedule A to such opinion,
except for any such conflict, breach, default or violation which would
not, individually or in the aggregate, have a material adverse effect
on the Company, (ii) the Certificate of Incorporation or By-Laws of
the Company, or (iii) any judgment, decree or order known to such
counsel to which the Company is a named party, except for any such
conflict, breach or violation which would not, individually or in the
aggregate, have a material adverse effect on the Company;

(vii) no consent, approval or authorization of any United
States court or governmental agency or body is required for the issue
and sale by the Company of the Securities or the consummation of the
other transactions contemplated by this Agreement or the Indenture,
except as may be required under state securities or Blue Sky laws (as
to which such counsel need

-11-
<PAGE>

not express an opinion), as may be required under the Securities Act
or the TIA (as to which such counsel need not express an opinion in
this clause (vii)) and those which have heretofore been obtained in
connection with the purchase and distribution of the Securities by the
Initial Purchasers;

(viii) no registration under the Act of the Securities is
required in connection with the sale of the Securities to the Initial
Purchasers as contemplated by this Agreement and the Offering
Memorandum or in connection with the initial resale of the Securities
by the Initial Purchasers in accordance with Section 2 (including
Annex I) of this Agreement, and prior to the commencement of the
Exchange Offer (as defined in the Registration Rights Agreement) or
the effectiveness of the Shelf Registration Statement (as defined in
the Registration Rights Agreement), the Indenture is not required to
be qualified under the TIA, in each case assuming (i) that the
purchasers who buy the Securities in the initial resales are Qualified
Institutional Buyers, non-U.S. Persons (as defined in Rule 902 under
the Act) or Accredited Investors, (ii) the accuracy of the Initial
Purchasers' representations and those of the Company contained in this
Agreement regarding the absence of a general solicitation in
connection with the sale of the Securities to the Initial Purchasers
and the initial resales thereof and (iii) the accuracy of the
representations made by each Accredited Investor who purchases
Securities in the initial resale as set forth in the Offering
Memorandum;

(ix) the Securities satisfy the requirements set forth in
Rule 144A(d)(3) under the Securities Act;

(x) the statements in the Final Memorandum under "Business
--Environmental, Health and Safety Matters," "Description of
Securities, " and "Certain Federal Income Tax Considerations," insofar
as such statements constitute a summary of the legal matters referred
to therein, fairly present in all material respects such legal
matters;

(xi) nothing has come to such counsel's attention which
causes such counsel to believe that (except for the financial
statements and other financial and statistical information included
therein as to which such counsel need express no belief) the Offering
Memorandum, as of its date of issuance, and as amended or
supplemented, if applicable, as of the Closing Date, contains any
untrue statement of a material fact or omits to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; and

(xii) the Company is not and, after giving effect to the
offering and sale of the Securities to be sold and the application of
the proceeds from such sale (as described in the Final Memorandum
under the caption "Use of Proceeds") will not be, an "investment
company" as defined in the Investment Company Act of 1940, as amended.

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<PAGE>

In rendering such opinions, such counsel may rely (A) as to matters
involving the application of laws other than the laws of the United States
and the States of Delaware and New York, to the extent such counsel deems
proper and to the extent specified in such opinion, if at all, upon an
opinion or opinions (reasonably satisfactory to the Initial Purchasers'
counsel) of other counsel, reasonably acceptable to the Initial Purchasers'
counsel, familiar with the applicable laws; and (B) as to matters of fact,
to the extent such counsel deems proper, on certificates of responsible
officers of the Company. The opinion of such counsel for the Company shall
state that the opinion of any such other counsel upon which they relied is
in form satisfacto ry to such counsel and, in such counsel's opinion, the
Initial Purchasers and they are justified in relying thereon. With respect
to the matters to be covered in subparagraph (xi) above counsel may state
their opinion and belief is based upon their participation in the
preparation of the Offering Memorandum and any amendment or supplement
thereto but is without independent check or verification except as
specified.

The opinion of Kirkland & Ellis described above shall be rendered to
the Initial Purchasers at the request of the Company and shall so state
therein.

(f) on the date of the issuance of the Offering Memorandum and also
on the Closing Date, Ernst & Young LLP shall have furnished to the Initial
Purchasers letters, dated the respective dates of delivery thereof, in form
and substance satisfactory to you, containing statements and information of
the type customarily included in accountants "comfort letters" to
underwriters with respect to the financial statements and certain financial
information contained in the Offering Memorandum;

(g) the Company shall have executed and delivered the Registration
Rights Agreement substantially in the form attached hereto as Annex II;

(h) the Company shall have previously executed the Credit Agreement
in form and substance reasonably satisfactory to the Initial Purchasers and
each of the other Transactions shall occur substantially simultaneously
with the Closing;

(i) the Initial Purchasers shall have received on and as of the
Closing Date an opinion of Cahill Gordon & Reindel, counsel to the Initial
Purchasers, with respect to the validity of the Indenture and the
Securities, and such other related matters as the Initial Purchasers may
reasonably request, and such counsel shall have received such papers and
information as they may reasonably request to enable them to pass upon such
matters; and

(j) on or prior to the Closing Date, the Company shall have furnished
to the Initial Purchasers such further certificates and documents as the
Initial Purchasers shall reasonably request.

7. The Company agrees to indemnify and hold harmless each Initial
Purchaser and each person, if any, who controls any Initial Purchaser within the
meaning of either Section 15 of

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<PAGE>

the Securities Act or Section 20 of the Exchange Act, from and against any and
all losses, claims, damages and liabilities (including without limitation the
legal fees and other expenses reasonably incurred in connection with any suit,
action or proceeding or any claim asserted) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Offering Memorandum
(and any amendment or supplement thereto if the Company shall have furnished any
amendments or supplements thereto) or any preliminary offering memorandum, or
caused by any omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, except insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or omission or alleged untrue statement or
omission made in reliance upon and in conformity with information relating to
any Initial Purchaser furnished to the Company in writing by such Initial
Purchaser through J.P. Morgan Securities Inc. expressly for use therein.

Each Initial Purchaser agrees, severally and not jointly, to indemnify and
hold harmless the Company, its directors and officers and each person who
controls the Company within the meaning of Section 15 of the Securities Act and
Section 20 of the Exchange Act, to the same extent as the foregoing indemnity
from the Company to each Initial Purchaser, but only with reference to
information relating to such Initial Purchaser furnished to the Company in
writing by such Initial Purchaser through J.P. Morgan Securities Inc. expressly
for use in the Offering Memorandum, any amendment or supplement thereto, or any
preliminary offering memorandum.

If any suit, action, proceeding (including any governmental or regulatory
investigation), claim or demand shall be brought or asserted against any person
in respect of which indemnity may be sought pursuant to either of the two
preceding paragraphs, such person (the "Indemnified Person") shall promptly
notify the person against whom such indemnity may be sought (the "Indemnifying
Person") in writing, and the Indemnifying Person, upon request of the
Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Person may designate in such proceeding and shall pay the fees and
expenses of such counsel related to such proceeding. In any such proceeding,
any Indemnified Person shall have the right to retain its own counsel, but the
fees and expenses of such counsel shall be at the expense of such Indemnified
Person unless (i) the Indemnifying Person and the Indemnified Person shall have
mutually agreed to the contrary, (ii) the Indemnifying Person has failed within
a reasonable time to retain counsel reasonably satisfactory to the Indemnified
Person or (iii) the named parties in any such proceeding (including any
impleaded parties) include both the Indemnifying Person and the Indemnified
Person and representation of both parties by the same counsel would be
inappropriate due to actual or potential differing interests between them. It
is understood that the Indemnifying Person shall not, in connection with any
proceeding or related proceeding in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Indemnified Persons, and that all such fees and expenses shall
be reimbursed as they are incurred, reasonably promptly after the Indemnifying
Person has been provided documentation in customary form therefor. Any such
separate firm for the Initial Purchasers and such control persons of Initial
Purchasers shall be designated in writing by J.P. Morgan Securities Inc. and any
such separate firm for the Company, its directors, its officers and such control
persons of the Company shall be designated in writing by the Company. The

-14-
<PAGE>

Indemnifying Person shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent or if
there be a final judgment for the plaintiff, the Indemnifying Person agrees to
indemnify any Indemnified Person from and against any loss or liability by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an Indemnified Person shall have requested an Indemnifying Person
to approve and consent to a settlement of any proceeding or claim and to
reimburse the Indemnified Person for fees and expenses related thereto
contemplated by the third sentence of this paragraph, the Indemnifying Person
agrees that it shall be liable for any settlement of any proceeding or claim
effected without its written consent if (i) such settlement is entered into more
than 30 days after receipt by such Indemnifying Person of the aforesaid request
and (ii) such Indemnifying Person shall not have given written notice to such
Indemnified Person stating whether or not such Indemnifying Person consents to
such settlement in accordance with such request prior to the date of such
settlement. No Indemnifying Person shall, without the prior written consent of
the Indemnified Person, effect any settlement of any pending or threatened
proceeding in respect of which any Indemnified Person is or could have been a
party and indemnity could have been sought hereunder by such Indemnified Person,
unless such settlement includes an unconditional release of such Indemnified
Person from all liability on claims that are the subject matter of such
proceeding.

If the indemnification provided for in the first and second paragraphs of
this Section 7 is unavailable to an Indemnified Person in respect of any losses,
claims, damages or liabilities referred to therein, then each Indemnifying
Person under such paragraph, in lieu of indemnifying such Indemnified Person
thereunder, shall contribute to the amount paid or payable by such Indemnified
Person as a result of such losses, claims, damages or liabilities (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the Initial Purchasers on the other hand from the
offering of the Securities or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company on the one hand and the Initial
Purchasers on the other in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Initial Purchasers on the other shall be deemed
to be in the same respective proportions as the net proceeds from the offering
(before deducting expenses) received by the Company and the total discounts and
commissions received by the Initial Purchasers, in each case as set forth in the
table on the cover of the Offering Memorandum, bear to the aggregate offering
price of the Securities. The relative fault of the Company on the one hand and
the Initial Purchasers on the other shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by the Company or by the Initial Purchasers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.

The Company and the Initial Purchasers agree that it would not be just and
equitable if contribution pursuant to this Section 7 were determined by pro rata
allocation (even if the Initial Purchasers were treated as one entity for such
purpose) or by any other method of allocation that

-15-
<PAGE>

does not take account of the equitable considerations referred to in the
immediately preceding paragraph. The amount paid or payable by an Indemnified
Person as a result of the losses, claims, damages and liabilities referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses incurred by such
Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 7, in no event shall an
Initial Purchaser be required to contribute any amount in excess of the amount
by which the total price at which the Securities purchased by it were offered
exceeds the amount of any damages that such Initial Purchaser has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Initial Purchasers' obligations to contribute pursuant to
this Section 7 are several in proportion to the respective principal amount of
the Securities set forth opposite their names in Schedule I hereto, and not
joint.

The remedies provided for in this Section 7 are not exclusive and shall not
limit any rights or remedies which may otherwise be available to any indemnified
party at law or in equity.

The indemnity and contribution agreements contained in this Section 7 and
the representations and warranties of the Company set forth in this Agreement
shall remain operative and in full force and effect regardless of (i) any
termination of this Agreement, (ii) any investigation made by or on behalf of
any Initial Purchaser or any person controlling any Initial Purchaser or by or
on behalf of the Company, such Company's officers or directors or any other
person controlling the Company and (iii) acceptance of and payment for any of
the Securities.

8. Notwithstanding anything herein contained, this Agreement may be
terminated in the absolute discretion of the Initial Purchasers, by notice given
to the Company, if after the execution and delivery of this Agreement and prior
to the Closing Date (i) trading generally shall have been suspended or
materially limited on or by, as the case may be, any of the New York Stock
Exchange, the American Stock Exchange, the National Association of Securities
Dealers, Inc., the Chicago Board Options Exchange, the Chicago Mercantile
Exchange or the Chicago Board of Trade, (ii) trading of any securities of or
guaranteed by any of the Company shall have been suspended on any exchange or in
any over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities, or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in the judgment of the Initial Purchasers, is material and adverse and
which, in the judgment of the Initial Purchasers, makes it impracticable to
market the Securities on the terms and in the manner contemplated in the
Offering Memorandum.

9. This Agreement shall become effective upon the execution and delivery
hereof by the parties hereto.

-16-
<PAGE>

If, on the Closing Date either Initial Purchaser shall fail or refuse to
purchase Securities which it or they have agreed to purchase hereunder on such
date, and arrangements satisfactory to the Initial Purchasers and the Company
for the purchase of such Securities are not made within 36 hours after such
default, this Agreement shall terminate without liability on the part of any
non-defaulting Initial Purchaser or the Company. In any such case either the
Initial Purchasers or the Company shall have the right to postpone the Closing
Date, but in no event for longer than seven days, in order that the required
changes, if any, in the Offering Memorandum or in any other documents or
arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Initial Purchaser from liability in respect of any
default of such Initial Purchaser under this Agreement.

10. If this Agreement shall be terminated by the Initial Purchasers, or
any of them, because of any failure or refusal on the part of any of the Company
to comply with the terms or to fulfill any of the conditions of this Agreement,
or if for any reason any of the Company shall be unable to perform its
obligations under this Agreement or any condition of the Initial Purchasers'
obligations cannot be fulfilled, the Company agrees to reimburse the Initial
Purchasers or such Initial Purchasers as have so terminated this Agreement with
respect to themselves, severally, for all out-of-pocket expenses (including the
fees and expenses of their counsel) reasonably incurred by such Initial
Purchasers in connection with this Agreement or the offering contemplated
hereunder.

11. This Agreement shall inure to the benefit of and be binding upon the
Company, the Initial Purchasers, any controlling persons referred to herein and
their respective successors and assigns. Nothing expressed or mentioned in this
Agreement is intended or shall be construed to give any other person, firm or
corporation any legal or equitable right, remedy or claim under or in respect of
this Agreement or any provision herein contained. No purchaser of Securities
from any Initial Purchaser shall be deemed to be a successor by reason merely of
such purchase.

12. Any action by the Initial Purchasers hereunder may be taken by J.P.
Morgan Securities Inc. alone on behalf of the Initial Purchasers, and any such
action taken by J.P. Morgan Securities Inc. alone shall be binding upon the
Initial Purchasers. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given if mailed or transmitted by
any standard form of telecommunication. Notices to the Initial Purchasers shall
be given to the Initial Purchasers c/o J.P. Morgan Securities Inc., 60 Wall
Street, New York, New York 10260; Attention: Syndicate Department. Notices to
the Company shall be given to them at Citicorp Venture Capital, 399 Park Avenue,
14th Floor, New York, New York 10043; Attention: David Howe; with a copy to
Kirkland & Ellis, Citicorp Center, 153 East 53rd Street, New York, New York
10022; Attention: Lance Balk.

13. This Agreement may be signed in counterparts, each of which shall be
an original and all of which together shall constitute one and the same
instrument.

14. This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, without giving effect to the conflicts of
laws provisions thereof.

-17-
<PAGE>

If the foregoing is in accordance with your understanding, please sign and
return four counterparts hereof.

Very truly yours,

PEN-TAB INDUSTRIES, INC.

By: /s/ William Leary
-----------------------------------
Name: William Leary

Title: Vice President

Accepted: January 30, 1997

J.P. MORGAN SECURITIES INC.
BEAR, STEARNS & CO. INC.

By: J.P. Morgan Securities Inc.

By: /s/ S.J. McCrickard
-----------------------------
Name: S.J. McCrickard
Title: Vice President
<PAGE>

ANNEX I

(A) The Securities have not been and will not be registered under the Act
and may not be offered or sold within the United States or to, or for the
account or benefit of, U.S. persons except in accordance with Regulation S under
the Act or pursuant to an exemption from the registration requirements of the
Act. Each Initial Purchaser represents that it has offered and sold the
Securities and will offer and sell the Securities (i) as part of their
distribution at any time and (ii) otherwise until 40 days after the later of the
commencement of the offering and the Time of Delivery, only in accordance with
Rule 903 of Regulation S, Rule 144A or pursuant to paragraph B of this Annex
under the Act. Accordingly, each Initial Purchaser agrees that neither it, its
affiliates nor any persons acting on its or their behalf has engaged or will
engage in any directed selling efforts with respect to the Securities and it and
they have complied and will comply with the offering restrictions requirement of
Regulation S. Each Initial Purchaser agrees that, at or prior to confirmation
of sale of Securities (other than a sale pursuant to Rule 144A or paragraph B of
this Annex), it will have sent to each distributor, dealer or person receiving a
selling concession, fee or other remuneration that purchases Securities from it
during the restricted period a confirmation or notice to substantially the
following effect:

"The Securities covered hereby have not been registered under the U.S.
Securities Act of 1933 (the "Securities Act") and may not be offered and
sold within the United States or to, or for the account or benefit of, U.S.
persons (i) as part of their distribution at any time or (ii) otherwise
until 40 days after the later of the commencement of the offering and the
closing date, except in either case in accordance with Regulation S (or
Rule 144A if available) under the Securities Act. Terms used above have the
meaning given to them by Regulation S."

Terms used in this paragraph have the meanings given to them by Regulation S.

Each Initial Purchaser further agrees that it has not entered and will not
enter into any contractual arrangement with respect to the distribution or
delivery of the Securities, except with its affiliates or with the prior written
consent of the Company.

(B) Notwithstanding the foregoing, Securities in registered form may be
offered, sold and delivered by the Purchasers in the United States and to U.S.
persons pursuant to Section 2 of this Agreement without delivery of the written
statement required by paragraph (A) above.

(C) Each Initial Purchaser further represents and agrees that (i) it has
not offered or sold, and will not offer or sell, in the United Kingdom by means
of any document, any Securities other than to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their business or which it is reasonable
to expect will so do, or in circumstances which do not otherwise constitute an
offer to the public within the meaning of the Public Offers of Securities
Regulations 1995 of Great Britain, (ii) it has complied, and will comply, with
all applicable provisions of the Financial Services Act 1986 and any regulation
promulgated thereto of Great Britain with respect to
<PAGE>

anything done by it in relation to the Securities in, from or otherwise
involving the United Kingdom, and (iii) it has only issued or passed on, and
will only issue or pass on, in the United Kingdom, any document received by it
in connection with the issuance of the Securities to a person who is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1995 of Great Britain or is a person to whom
the document may otherwise lawfully be issued or passed on.

(D) Each Initial Purchaser agrees that it will not offer, sell or deliver
any of the Securities in any jurisdiction outside the United States except under
circumstances that will result in compliance with the applicable laws thereof,
and that it will take at its own expense whatever action is required to permit
its purchase and resale of the Securities in such jurisdictions. Each Initial
Purchaser understands that no action has been taken to permit a public offering
in any jurisdiction outside the United States where action would be required for
such purposes. Each Initial Purchaser agrees not to cause any advertisement of
the Securities to be published in any newspaper or periodical or posted in any
public place and not to issue any circular relating to the Securities.

-2-
<PAGE>

SCHEDULE I

<TABLE>
<CAPTION>
Principal Amount
of Securities
Initial Purchaser To Be Purchased
- ---------------- ---------------
<S> <C>
J.P. Morgan Securities Inc............................. $48,750,000

Bear, Stearns & Co. Inc................................ $26,250,000
----------

Total:.................................. $75,000,000
</TABLE>

<PAGE>

REGISTRATION RIGHTS AGREEMENT

Dated as of February 1, 1997

among

PEN-TAB INDUSTRIES, INC.,

and

J.P. MORGAN SECURITIES INC.

and

BEAR, STEARNS & CO. INC.
<PAGE>

REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (the "Agreement") is dated as of
February 1, 1997, by and among PEN-TAB INDUSTRIES, INC., a corporation formed
under the laws of the State of Delaware (the "Company") and J.P. MORGAN
SECURITIES INC. and BEAR, STEARNS & CO. INC. (collectively, the "Initial
Purchasers").

This Agreement is entered into in connection with the Purchase
Agreement, dated as of January , 1997, among the Company and the Initial
Purchasers (the "Purchase Agreement") relating to the sale by the Company to the
Initial Purchasers, severally, of $75,000,000 aggregate principal amount of
their 10 7/8% Senior Subordinated Notes due 2007 (the "Notes"). In order to
induce the Initial Purchasers to enter into the Purchase Agreement, the Company
has agreed to provide the registration rights set forth in this Agreement for
the equal benefit of both of the Initial Purchasers and their direct and
indirect transferees. The execution and delivery of this Agreement is a
condition to the Initial Purchasers' obligation to purchase the Notes under the
Purchase Agreement.

The parties hereby agree as follows:

1. Definitions
-----------

As used in this Agreement, the following terms shall have the
following meanings:

Additional Interest: See Section 4.
-------------------

Advice: See Section 5.
------

Applicable Period: See Section 2(b).
-----------------

Closing Date: The Closing Date as defined in the Purchase Agreement.
------------

Company: See the introductory paragraph to this Agreement.
-------

Consummation Date: The 165th day after the Closing.
-----------------

Effectiveness Date: The 135th day after the Closing Date.
------------------

Effectiveness Period: See Section 3(a).
--------------------

Event Date: See Section 4(b).
----------
<PAGE>

-2-

Exchange Act: The Securities Exchange Act of 1934, as amended, and
------------
the rules and regulations of the SEC promulgated thereunder.

Exchange Offer: See Section 2(a).
--------------

Exchange Registration Statement: See Section 2(a).
-------------------------------

Exchange Securities: See Section 2(a).
-------------------

Filing Date: The 60th day after the Closing Date.
-----------

Holder: Any record holder of Registrable Securities.
------

Indemnified Person: See Section 7.
------------------

Indemnifying Person: See Section 7.
-------------------

Indenture: The Indenture, dated as of February 1, 1997, between the
---------
Company and United States Trust Company of New York, as trustee, pursuant to
which the Notes are being issued, as amended or supplemented from time to time
in accordance with the terms thereof.

Initial Purchasers: See the introductory paragraph to this Agreement.
------------------

Initial Shelf Registration: See Section 3(a).
--------------------------

Inspectors: See Section 5(p).
----------

Issue Date: The original issue date of the Notes.
----------

NASD: See Section 5(t).
----

Notes: See the preamble to this Agreement.
-----

Participant: See Section 7.
-----------

Participating Broker-Dealer: See Section 2(b).
---------------------------

Person: An individual, corporation, limited or general partnership,
------
joint venture, association, joint stock company, trust, unincorporated
organization or government or any agency or political subdivision thereof.

Private Exchange: See Section 2(b).
----------------
<PAGE>

-3-

Private Exchange Securities: See Section 2(b).
---------------------------

Prospectus: The prospectus included in any Registration Statement
----------
(including, without limitation, a prospectus that includes any information
previously omitted from a prospectus filed as part of an effective registration
statement in reliance upon Rule 430A promulgated under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the terms
of the offering of any portion of the Registrable Securities covered by such
Registration Statement, and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all material incorporated
by reference or deemed to be incorporated by reference in such Prospectus.

Records: See Section 5(p).
-------

Registrable Securities: The Notes upon original issuance of the Notes
----------------------
and at all times subsequent thereto, each Exchange Security as to which Section
2(c)(1)(i) hereof is applicable upon original issuance and at all times
subsequent thereto and, if issued, the Private Exchange Securities, until in the
case of any such Notes, Exchange Securities or Private Exchange Securities, as
the case may be, (i) a Registration Statement (other than, with respect to any
Exchange Security as to which Section 2(c)(1)(i) hereof is applicable, the
Exchange Registration Statement) covering such Notes, Exchange Securities or
Private Exchange Securities has been declared effective by the SEC and such
Notes, Exchange Securities or Private Exchange Securities, as the case may be,
have been disposed of in accordance with such effective Registration Statement,
(ii) such Notes, Exchange Securities or Private Exchange Securities, as the case
may be, are sold in compliance with Rule 144, or (iii) such Notes, Exchange
Securities or Private Exchange Securities, as the case may be, cease to be
outstanding.

Registration Statement: Any registration statement of the Company,
----------------------
including, but not limited to, the Exchange Registration Statement, that covers
any of the Registrable Securities pursuant to the provisions of this Agreement,
including the Prospectus, amendments and supplements to such registration
statement, including post-effective amendments, all exhibits, and all material
incorporated by reference or deemed to be incorporated by reference in such
registration statement.

Rule 144: Rule 144 promulgated under the Securities Act, as such Rule
--------
may be amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter
<PAGE>

-4-

adopted by the SEC providing for offers and sales of securities made in
compliance therewith resulting in offers and sales by subsequent holders that
are not affiliates of an issuer of such securities being free of the
registration and prospectus delivery requirements of the Securities Act.

Rule 144A: Rule 144A promulgated under the Securities Act, as such
---------
Rule may be amended from time to time, or any similar rule (other than Rule 144)
or regulation hereafter
adopted by the SEC.

Rule 415: Rule 415 promulgated under the Securities Act, as such Rule
--------
may be amended from time to time, or any similar rule or regulation hereafter
adopted by the SEC.

SEC: The Securities and Exchange Commission.
---

Securities Act: The Securities Act of 1933, as amended, and the rules
--------------
and regulations of the SEC promulgated thereunder.

Shelf Notice: See Section 2(c).
------------

Shelf Registration: See Section 3(b).
------------------

Subsequent Shelf Registration: See Section 3(b).
-----------------------------

TIA: The Trust Indenture Act of 1939, as amended.
---

Trustee: The trustee as defined in the Indenture and, if existent,
-------
the trustee under any indenture governing the Exchange Securities and Private
Exchange Securities (if any).

Underwritten registration or underwritten offering: A registration in
--------------------------------------------------
which securities of the Company are sold to an underwriter for reoffering to the
public.

2. Exchange Offer
--------------

(a) The Company agrees to file with the SEC as soon as practicable
after the Closing Date, but in no event later than the Filing Date, an offer to
exchange (the "Exchange Offer") any and all of the Registrable Securities for a
like aggregate principal amount of debt securities of the Company which are
identical in all material respects to the Notes (the "Exchange Securities") (and
which are entitled to the benefits of a trust indenture which is identical in
all material respects to the Indenture (other than such changes as are necessary
to comply
<PAGE>

-5-

with any requirements of the SEC to effect or maintain the qualification of such
trust indenture under the TIA) and which has been qualified under the TIA),
except that the Exchange Securities shall have been registered pursuant to an
effective Registration Statement under the Securities Act and shall contain no
restrictive legend thereon. The Company agrees to use its reasonable best
efforts to keep the Exchange Offer open for at least 30 business days (or longer
if required by applicable law) after the date notice of the Exchange Offer is
mailed to Holders and to consummate the Exchange Offer on or prior to the
Effectiveness Date. The Exchange Offer will be registered under the Securities
Act on the appropriate form (the "Exchange Registration Statement") and will
comply with all applicable tender offer rules and regulations under the Exchange
Act. If after such Exchange Registration Statement is initially declared
effective by the SEC, the Exchange Offer or the issuance of the Exchange
Securities thereunder is interfered with by any stop order, injunction or other
order or requirement of the SEC or any other governmental agency or court such
Exchange Registration Statement shall be deemed not to have become effective for
purposes of this Agreement. Each Holder who participates in the Exchange Offer
will be deemed to represent that any Exchange Securities received by it will be
acquired in the ordinary course of its business, that at the time of the
consummation of the Exchange Offer such Holder will have no arrangement with any
person to participate in the distribution of the Exchange Securities in
violation of the provisions of the Securities Act, and that such Holder is not
an affiliate of the Company within the meaning of the Securities Act. Upon
consummation of the Exchange Offer in accordance with this Section 2, the
provisions of this Agreement shall continue to apply, mutatis mutandis, solely
----------------
with respect to Registrable Securities that are Private Exchange Securities and
Exchange Securities held by Participating Broker-Dealers, and the Company shall
have no further obligation to register Registrable Securities (other than
Private Exchange Securities and other than Exchange Securities as to which
clause (c)(1)(i) hereof applies) pursuant to Section 3 of this Agreement. No
securities other than the Exchange Securities shall be included in the Exchange
Registration Statement.

(b) The Company shall include within the Prospectus contained in the
Exchange Registration Statement one or more section(s) reasonably acceptable to
the Initial Purchasers, which shall contain a summary statement of the positions
taken or policies made by the Staff of the SEC with respect to the potential
"underwriter" status of any broker-dealer that is the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act) of Exchange Securities received by
such broker-dealer in the
<PAGE>

-6-

Exchange Offer (a "Participating Broker-Dealer"), whether such positions or
policies have been publicly disseminated by the Staff of the SEC or such
positions or policies, in the reasonable judgment of the Initial Purchasers,
represent the prevailing views of the Staff of the SEC. Such section(s) shall
also allow the use of the prospectus by all persons subject to the prospectus
delivery requirements of the Securities Act, including all Participating Broker-
Dealers, and include a statement describing the means by which Participating
Broker-Dealers may resell the Exchange Securities.

The Company shall use its reasonable best efforts to keep the Exchange
Registration Statement effective and to amend and supplement the Prospectus
contained therein in order to permit such Prospectus to be lawfully delivered by
all persons subject to the prospectus delivery requirements of the Securities
Act for such period of time as such persons must comply with such requirements
in order to resell the Exchange Securities, provided that such period shall not
--------
exceed 180 days (or such longer period if extended pursuant to the last
paragraph of Section 5) (the "Applicable Period").

If, prior to consummation of the Exchange Offer, an Initial Purchaser
holds any Notes acquired by it and having the status of an unsold allotment in
the initial distribution, the Company upon the request of such Initial Purchaser
shall, simultaneously with the delivery of the Exchange Securities in the
Exchange Offer, issue and deliver to each such Initial Purchaser, in exchange
(the "Private Exchange") for the Notes held by such Initial Purchaser, a like
principal amount of debt securities of the Company that are identical in all
material respects to the Exchange Securities (the "Private Exchange Securities")
(and which are issued pursuant to the same indenture as the Exchange Securities)
except for the placement of a restrictive legend on such Private Exchange
Securities. The Private Exchange Securities shall bear the same CUSIP number as
the Exchange Securities. Interest on the Exchange Securities and Private
Exchange Securities will accrue from the last interest payment date on which
interest was paid on the Notes surrendered in exchange therefor or, if no
interest has been paid on the Notes, from the Issue Date.

Any indenture under which the Exchange Securities or the Private
Exchange Securities will be issued shall provide that the holders of any of the
Exchange Securities and the Private Exchange Securities will vote and consent
together on all matters (to which such holders are entitled to vote or consent)
as one class and that none of the holders of the Exchange Securities and
<PAGE>

-7-

the Private Exchange Securities will have the right to vote or consent as a
separate class on any matter (to which such holders are entitled to vote or
consent).

(c) If (1) prior to the consummation of the Exchange Offer, the
Company reasonably determines in good faith or Holders of at least a majority in
aggregate principal amount of the Registrable Securities notify the Company that
they have reasonably determined in good faith that (i) in the opinion of
counsel, the Exchange Securities would not, upon receipt, be tradeable by such
Holders who are not affiliates of the Company without restriction under the
Securities Act and without restrictions under applicable blue sky or state
securities laws or (ii) in the opinion of counsel, the SEC is unlikely to permit
the consummation of the Exchange Offer and/or (2) subsequent to the consummation
of the Private Exchange, holders of at least a majority in aggregate principal
amount of the Private Exchange Securities so request with respect to the Private
Exchange Securities and/or (3) the Exchange Offer is commenced and not
consummated prior to the 45th day following the Consummation Date for any
reason, then the Company shall promptly deliver to the Holders and the Trustee
notice thereof (the "Shelf Notice") and shall thereafter file an Initial Shelf
Registration as set forth in Section 3 (which only in the circumstances
contemplated by clause (2) of this sentence will relate solely to the Private
Exchange Securities) pursuant to Section 3. The parties hereto agree that,
following the delivery of a Shelf Notice to the Holders of Registrable
Securities (only in the circumstances contemplated by clauses (1) and/or (3) of
the preceding sentence), the Company shall not have any further obligation to
conduct the Exchange Offer or the Private Exchange under this Section 2.

3. Shelf Registration
------------------

If a Shelf Notice is delivered as contemplated by Section 2(c), then:

(a) Initial Shelf Registration. The Company shall as promptly as
--------------------------
reasonably practicable prepare and file with the SEC a Registration Statement
for an offering to be made on a continuous basis pursuant to Rule 415 covering
all of the Registrable Securities (the "Initial Shelf Registration"). If the
Company shall have not yet filed an Exchange Offer, the Company shall use its
reasonable best efforts to file with the SEC the Initial Shelf Registration on
or prior to the Filing Date. Otherwise, the Company shall use its reasonable
best efforts to file with the SEC the Initial Shelf Registration
<PAGE>

-8-

within 45 days of the delivery of the Shelf Notice. The Initial Shelf
Registration shall be on Form S-1 or another appropriate form permitting
registration of such Registrable Securities for resale by such holders in the
manner or manners designated by them (including, without limitation, one or more
underwritten offerings). The Company shall not permit any securities other than
the Registrable Securities to be included in the Initial Shelf Registration or
any Subsequent Shelf Registration. The Company shall use its reasonable best
efforts to cause the Initial Shelf Registration to be declared effective under
the Securities Act on or prior to the 75th day after the filing thereof with the
Commission and to keep the Initial Shelf Registration continuously effective
under the Securities Act until the date which is 36 months from the
Effectiveness Date (subject to extension pursuant to the last paragraph of
Section 5 hereof) (the "Effectiveness Period"), or such shorter period ending
when (i) all Registrable Securities covered by the Initial Shelf Registration
have been sold in the manner set forth and as contemplated in the Initial Shelf
Registration or (ii) a Subsequent Shelf Registration covering all of the
Registrable Securities has been declared effective under the Securities Act.

(b) Subsequent Shelf Registrations. If the Initial Shelf
------------------------------
Registration or any Subsequent Shelf Registration ceases to be effective for any
reason at any time during the Effectiveness Period (other than because of the
sale of all of the securities registered thereunder), the Company shall use its
reasonable best efforts to obtain the prompt withdrawal of any order suspending
the effectiveness thereof, and in any event shall within 45 days of such
cessation of effectiveness amend the Shelf Registration in a manner reasonably
expected to obtain the withdrawal of the order suspending the effectiveness
thereof, or file an additional "shelf" Registration Statement pursuant to Rule
415 covering all of the Registrable Securities (a "Subsequent Shelf
Registration"). If a Subsequent Shelf Registration is filed, the Company shall
use its reasonable best efforts to cause the Subsequent Shelf Registration to be
declared effective as soon as practicable after such filing and to keep such
Registration Statement continuously effective for a period equal to the number
of days in the Effectiveness Period less the aggregate number of days during
which the Initial Shelf Registration or any Subsequent Shelf Registration was
previously continuously effective. As used herein the term "Shelf Registration"
means the Initial Shelf Registration and any Subsequent Shelf Registration.

(c) Supplements and Amendments. The Company shall promptly
--------------------------
supplement and amend the Shelf Registration if required
<PAGE>

-9-

by the rules, regulations or instructions applicable to the registration form
used for such Shelf Registration, if required by the Securities Act, or if
reasonably requested by the Holders of a majority in aggregate principal amount
of the Registrable Securities covered by such Registration Statement or by any
underwriter of such Registrable Securities.

4. Additional Interest
-------------------

(a) The Company and the Initial Purchasers agree that the Holders of
Registrable Securities will suffer damages if the Company fails to fulfill its
obligations under Section 2 or Section 3 hereof and that it would not be
feasible to ascertain the extent of such damages with precision. Accordingly,
the Company agrees to pay, as liquidated damages, additional interest on the
Registrable Securities ("Additional Interest") under the circumstances and to
the extent set forth below (each of which shall be given independent effect and
shall not be duplicative):

(i) if neither the Exchange Registration Statement nor the Initial
Shelf Registration has been filed on or prior to the Filing Date,
Additional Interest shall accrue on the Registrable Securities over and
above the stated interest at a rate of .25% per annum for the first 90 days
immediately following the Filing Date, such Additional Interest rate
increasing by an additional .25% per annum at the beginning of each
subsequent 90-day period;

(ii) if neither the Exchange Registration Statement nor the Initial
Shelf Registration is declared effective by the SEC on or prior to the
Effectiveness Date, Additional Interest shall be accrued on the Registrable
Securities included or which should have been included in such Registration
Statement over and above the stated interest at a rate of .25% per annum
for the first 90 days immediately following the day after the Effectiveness
Date, such Additional Interest rate increasing by an additional .25% per
annum at the beginning of each subsequent 90-day period; and

(iii) if (A) the Company has not exchanged Exchange Securities for all
Notes validly tendered in accordance with the terms of the Exchange Offer
on or prior to the Consummation Date or (B) the Exchange 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
has been declared effective and such Shelf Registration ceases to be
effective at any time during
<PAGE>

-10-

the Effectiveness Period, then Additional Interest shall be accrued on the
Registrable Securities (over and above any interest otherwise payable on
the Registrable Securities) at a rate of .25% per annum for the first 90
days commencing on the (x) 166th day after the Issue Date, in the case of
(A) above, or (y) the day the Exchange Registration Statement ceases to be
effective in the case of (B) above, or (z) the day such Shelf Registration
ceases to be effective in the case of (C) above, such Additional Interest
rate increasing by an additional .25% per annum at the beginning of each
such subsequent 90-day period;

provided, however, that the Additional Interest rate on the Registrable
- -------- -------
Securities may not exceed at any one time in the aggregate 1.0% per annum; and
provided, further, that (1) upon the filing of the Exchange Registration
- -------- -------
Statement or a Shelf Registration as required hereunder (in the case of clause
(i) of this Section 4), (2) upon the effectiveness of the Exchange Registration
Statement or the Shelf Registration as required hereunder (in the case of clause
(ii) of this Section 4), or (3) upon the exchange of Exchange Securities for all
Notes tendered (in the case of clause (iii)(A) of this Section 4), or upon the
effectiveness of the Exchange Registration Statement which had ceased to remain
effective (in the case of (iii)(B) of this Section 4), or upon the effectiveness
of the Shelf Registration which had ceased to remain effective (in the case of
(iii)(C) of this Section 4), Additional Interest on the Registrable Securities
as a result of such clause (or the relevant subclause thereof), as the case may
be, shall cease to accrue. It being understood and agreed that, notwithstanding
any provision to the contrary, so long as any Registrable Security is then
covered by an effective Shelf Registration Statement, no Additional Interest
shall accrue on such Registrable Security.

(b) The Company shall notify the Trustee within one business day
after each and every date on which an event occurs in respect of which
Additional Interest is required to be paid (an "Event Date"). The Company shall
pay the Additional Interest due on the Registrable Securities by depositing with
the Trustee, in trust, for the benefit of the Holders thereof, on or before the
applicable semi-annual interest payment date, immediately available funds in
sums sufficient to pay the Additional Interest then due to Holders of
Registrable Securities. The Additional Interest amount due shall be payable on
each interest payment date to the record Holder of Registrable Securities
entitled to receive the interest payment to be made on such date as set forth in
the Indenture. The amount of Additional Interest will be determined by
multiplying the applicable Additional Interest rate
<PAGE>

-11-

by the principal amount of the affected Registrable Securities of such Holders,
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. Each obligation to pay Additional Interest shall be deemed to accrue
immediately following the occurrence of the applicable Event Date. The parties
hereto agree that the Additional Interest provided for in this Section 4
constitutes a reasonable estimate of the damages that may be incurred by Holders
of Registrable Securities by reason of the failure of a Shelf Registration or
Exchange Offer to be filed or declared effective, or a Shelf Registration to
remain effective, as the case may be, in accordance with this Section 4.

5. Registration Procedures
-----------------------

In connection with the registration of any Registrable Securities
pursuant to Sections 2 or 3 hereof, the Company shall effect such registrations
to permit the sale of such Registrable Securities in accordance with the
intended method or methods of disposition thereof, and pursuant thereto the
Company shall:

(a) Use its reasonable best efforts to prepare and file with the SEC,
as soon as practicable after the date hereof but in any event prior to the
Filing Date in the case of the Exchange Registration Statement and the 45th
day following the Consummation Date in the case of the Shelf Registration
Statement, a Registration Statement or Registration Statements as
prescribed by Section 2 or 3, and to use its reasonable best efforts to
cause each such Registration Statement to become effective and remain
effective as provided herein, provided that, if (1) such filing is pursuant
--------
to Section 3, or (2) a Prospectus contained in an Exchange Registration
Statement filed pursuant to Section 2 is required to be delivered under the
Securities Act by any Participating Broker-Dealer who seeks to sell
Exchange Securities during the Applicable Period, before filing any
Registration Statement or Prospectus or any amendments or supplements
thereto, the Company shall upon written request furnish to and afford the
Holders of the Registrable Securities (which in the case of Registrable
Securities in the form of global certificates shall be The Depository Trust
Company ("DTC")) and each such Participating Broker-Dealer, as the case may
be, covered by such Registration Statement, their counsel and the managing
underwriters, if any, a reasonable opportunity to review
<PAGE>

-12-

copies of all such documents (including copies of any documents to be
incorporated by reference therein and all exhibits thereto) proposed to be
filed.

(b) Prepare and file with the SEC such amendments and post-effective
amendments to each Shelf Registration or Exchange Registration Statement,
as the case may be, as may be necessary to keep such Registration Statement
continuously effective for the Effectiveness Period or the Applicable
Period, as the case may be; cause the related Prospectus to be supplemented
by any required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 (or any similar provisions then in force) under the
Securities Act; and comply with the provisions of the Securities Act, the
Exchange Act and the rules and regulations of the SEC promulgated
thereunder applicable to it with respect to the disposition of all
securities covered by such Registration Statement as so amended or in such
Prospectus as so supplemented and with respect to the subsequent resale of
any securities being sold by a Participating Broker-Dealer covered by any
such Prospectus; the Company shall not be deemed to have used its
reasonable best efforts to keep a Registration Statement effective during
the Applicable Period if it voluntarily takes any action that would result
in selling Holders of the Registrable Securities covered thereby or
Participating Broker-Dealers seeking to sell Exchange Securities not being
able to sell such Registrable Securities or such Exchange Securities during
that period unless such action is required by applicable law or unless the
Company complies with this Agreement, including without limitation, the
provisions of paragraph 5(k) hereof and the last paragraph of this Section
5.

(c) If (1) a Shelf Registration is filed pursuant to Section 3, or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, notify the selling Holders of Registrable
Securities, or each such Participating Broker-Dealer, as the case may be,
their counsel and the managing underwriters, if any, who have provided the
Company with their names and addresses promptly (but in any event within
two business days), and confirm such notice in writing, (i) when a
Prospectus or any Prospectus supplement or post-effective amendment has
been filed, and, with respect to a Registration Statement or any
<PAGE>

-13-

post-effective amendment, when the same has become effective under the
Securities Act (including in such notice a written statement that any
Holder may, upon request, obtain, without charge, one conformed copy of
such Registration Statement or post-effective amendment including financial
statements and schedules, documents incorporated or deemed to be
incorporated by reference and exhibits), (ii) of the issuance by the SEC of
any stop order suspending the effectiveness of a Registration Statement or
of any order preventing or suspending the use of any preliminary prospectus
or the initiation of any proceedings for that purpose, (iii) of the receipt
by the Company of any notification with respect to the suspension of the
qualification or exemption from qualification of a Registration Statement
or any of the Registrable Securities or the Exchange Securities to be sold
by any Participating Broker-Dealer for offer or sale in any jurisdiction,
or the initiation or threatening of any proceeding for such purpose, (iv)
of the happening of any event or any information becoming known that makes
any statement made in such Registration Statement or related Prospectus or
any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or that requires the making of any changes
in such Registration Statement, Prospectus or documents so that, in the
case of the Registration Statement, it will not contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein not
misleading, and that in the case of the Prospectus, it will not contain any
untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not
misleading, and (v) of the Company's reasonable determination that a post-
effective amendment to a Registration Statement would be appropriate.

(d) If (1) a Shelf Registration is filed pursuant to Section 3, or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, use its reasonable best efforts to prevent
the issuance of any order suspending the effectiveness of a Registration
Statement or of any order preventing or suspending the use of a Prospectus
or suspending the qualification (or exemption from qualification) of any of
the Registrable Securities or the
<PAGE>

-14-

Exchange Securities to be sold by any Participating Broker-Dealer, for sale
in any jurisdiction, and, if any such order is issued, to use its
reasonable best efforts to obtain the withdrawal of any such order at the
earliest possible moment.

(e) If a Shelf Registration is filed pursuant to Section 3 and if
requested by the managing underwriters, if any, or the Holders of a
majority in aggregate principal amount of the Registrable Securities being
sold in connection with an underwritten offering, (i) promptly incorporate
in a prospectus supplement or post-effective amendment such information as
the managing underwriters, if any, or such Holders or counsel reasonably
request to be included therein, or (ii) make all required filings of such
prospectus supplement or such post-effective amendment as soon as
practicable after the Company has received notification of the matters to
be incorporated in such prospectus supplement or post-effective amendment.

(f) If (1) a Shelf Registration is filed pursuant to Section 3, or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, furnish to each selling Holder of Registrable
Securities and to each such Participating Broker-Dealer who so requests and
to counsel and each managing underwriter, if any, without charge, one
conformed copy of the Registration Statement or Statements and each post-
effective amendment thereto, including financial statements and schedules,
and if requested, all documents incorporated or deemed to be incorporated
therein by reference and all exhibits.

(g) If (1) a Shelf Registration is filed pursuant to Section 3, or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, deliver to each selling Holder of Registrable
Securities, or each such Participating Broker-Dealer, as the case may be,
their counsel, and the underwriters, if any, without charge, as many copies
of the Prospectus or Prospectuses (including each form of preliminary
prospectus) and each amendment or supplement thereto and any documents
incorporated by reference therein as such Persons may reasonably request;
<PAGE>

-15-

and, subject to the last paragraph of this Section 5, the Company hereby
consents to the use of such Prospectus and each amendment or supplement
thereto by each of the selling holders of Registrable Securities or each
such Participating Broker-Dealer, as the case may be, and the underwriters
or agents, if any, and dealers (if any), in connection with the offering
and sale of the Registrable Securities covered by or the sale by
Participating Broker-Dealers of the Exchange Securities pursuant to such
Prospectus and any amendment or supplement thereto.

(h) Prior to any public offering of Registrable Securities or any
delivery of a Prospectus contained in the Exchange Registration Statement
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, to use its reasonable best efforts to
register or qualify, and to cooperate with the selling Holders of
Registrable Securities or each such Participating Broker-Dealer, as the
case may be, the underwriters, if any, and their respective counsel in
connection with the registration or qualification (or exemption from such
registration or qualification) of such Registrable Securities for offer and
sale under the securities or Blue Sky laws of such jurisdictions within the
United States as any selling Holder, Participating Broker-Dealer, or the
managing underwriters reasonably request in writing, provided that where
--------
Exchange Securities held by Participating Broker-Dealers or Registrable
Securities are offered other than through an underwritten offering, the
Company agrees to cause its counsel to perform Blue Sky investigations and
file registrations and qualifications required to be filed pursuant to this
Section 5(h); keep each such registration or qualification (or exemption
therefrom) effective during the period such Registration Statement is
required to be kept effective and do any and all other reasonable acts or
things necessary or advisable to enable the disposition in such
jurisdictions of the Exchange Securities held by Participating Broker-
Dealers or the Registrable Securities covered by the applicable
Registration Statement, provided that the Company shall not be required to
--------
(A) qualify generally to do business in any jurisdiction where it is not
then so qualified, (B) take any action that would subject it to general
service of process in any such jurisdiction where it is not then so subject
or (C) subject itself to taxation in excess of a nominal dollar amount in
any such jurisdiction.
<PAGE>

-16-

(i) If a Shelf Registration is filed pursuant to Section 3,
reasonably cooperate with the selling Holders of Registrable Securities and
the managing underwriters, if any, to facilitate the timely preparation and
delivery of certificates representing Registrable Securities to be sold,
which certificates shall not bear any restrictive legends and shall be in a
form eligible for deposit with DTC; and enable such Registrable Securities
to be registered in such names as the managing underwriter or underwriters,
if any, or Holders may request.

(j) Use its reasonable best efforts to cause the Registrable
Securities covered by the Registration Statement to be registered with or
approved by such other United States governmental agencies or authorities
of the United States as may be necessary to enable the seller or sellers
thereof or the underwriters, if any, to consummate the disposition of such
Registrable Securities, except as may be required solely as a consequence
of the nature of such selling Holder's business, in which case the Company
will cooperate in all reasonable respects with the filing of such
Registration Statement and the granting of such approvals.

(k) If (1) a Shelf Registration is filed pursuant to Section 3, or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, upon the occurrence of any event contemplated
by paragraph 5(c)(iv) or 5(c)(v) above, as promptly as practicable prepare
and (subject to Section 5(a) above) file with the SEC, solely at the
expense of the Company, a supplement or post-effective amendment to the
Registration Statement or a supplement to the related Prospectus or any
document incorporated or deemed to be incorporated therein by reference, or
file any other required document so that, as thereafter delivered to the
purchasers of the Registrable Securities being sold thereunder or to the
purchasers of the Exchange Securities to whom such Prospectus will be
delivered by a Participating Broker-Dealer, any such Prospectus will not
contain an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.

(l) Use its reasonable best efforts to cause the Registrable
Securities covered by a Registration Statement
<PAGE>

-17-

or the Exchange Securities, as the case may be, to be rated with the
appropriate rating agencies, if so requested by the Holders of a majority
in aggregate principal amount of Registrable Securities covered by such
Registration Statement or the Exchange Securities, as the case may be, or
the managing underwriters, if any.

(m) Prior to the effective date of the first Registration Statement
relating to the Registrable Securities, (i) provide the Trustee with
printed certificates for the Registrable Securities in a form eligible for
deposit with DTC and (ii) provide a CUSIP number for the Registrable
Securities.

(n) Use its best efforts to cause all Registrable Securities covered
by such Registration Statement or the Exchange Securities, as the case may
be, to be (i) listed on each securities exchange, if any, on which similar
securities issued by the Company are then listed, or (ii) authorized to be
quoted on the National Association of Securities Dealers Automated
Quotation System ("NASDAQ") or the National Market System of NASDAQ if
similar securities of the Company are so authorized.

(o) In connection with an underwritten offering of Registrable
Securities pursuant to a Shelf Registration, enter into an underwriting
agreement as is customary in underwritten offerings and take all such other
actions as are reasonably requested by the managing underwriters in order
to expedite or facilitate the registration or the disposition of such
Registrable Securities, and in such connection, (i) make such
representations and warranties to the underwriters, with respect to the
business of the Company and its subsidiaries, if any, and the Registration
Statement, Prospectus and documents, if any, incorporated or deemed to be
incorporated by reference therein, in each case, as are customarily made by
issuers to underwriters in underwritten offerings, and confirm the same if
and when requested; (ii) obtain an opinion of counsel to the Company and
updates thereof in form and substance reasonably satisfactory to the
managing underwriters, addressed to the underwriters covering the matters
customarily covered in opinions requested in underwritten offerings and
such other matters as may be reasonably requested by underwriters; (iii)
obtain "cold comfort" letters and updates thereof in form and substance
reasonably satisfactory to the managing underwriters from the independent
certified public accountant(s) of the Company (and, if necessary, any other
<PAGE>

-18-

independent certified public accountants of any subsidiary of the Company
or of any business acquired by the Company for which financial statements
and financial data are, or are required to be, included in the Registration
Statement), addressed to each of the underwriters, such letters to be in
customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with underwritten offerings and such
other matters as may be reasonably requested by underwriters; and (iv) if
an underwriting agreement is entered into, the same shall contain
indemnification provisions and procedures no less favorable than those set
forth in Section 7 hereof (or such other provisions and procedures
acceptable to Holders of a majority in aggregate principal amount of
Registrable Securities covered by such Registration Statement and the
managing underwriters or agents) with respect to all parties to be
indemnified pursuant to said Section. The above shall be done at each
closing under such underwriting agreement, or as and to the extent required
thereunder.

(p) If (1) a Shelf Registration is filed pursuant to Section 3, or
(2) a Prospectus contained in an Exchange Registration Statement filed
pursuant to Section 2 is required to be delivered under the Securities Act
by any Participating Broker-Dealer who seeks to sell Exchange Securities
during the Applicable Period, make available for inspection by any selling
Holder of such Registrable Securities being sold, or each such
Participating Broker-Dealer, as the case may be, any underwriter
participating in any such disposition of Registrable Securities, if any,
and any attorney, accountant or other agent retained by any such selling
holder or each such Participating Broker-Dealer, as the case may be, or
underwriter (collectively, the "Inspectors"), at the offices where normally
kept, during reasonable business hours, all financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries, if any (collectively, the "Records"), as shall be reasonably
necessary to enable them to exercise any applicable due diligence
responsibilities, and cause the officers, directors and employees of the
Company and its subsidiaries, if any to supply all information in each case
reasonably requested by any such Inspector in connection with such
Registration Statement. Records determined in good faith by the Company to
be confidential shall not be disclosed by any Inspector notified of such
determination unless (i) the disclosure of such Records is necessary to
avoid or correct a misstatement or omission in such Registration Statement,
<PAGE>

-19-

(ii) the release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction or (iii) the information in
such Records has been made generally available to the public. Each selling
Holder of such Registrable Securities and each such Participating Broker-
Dealer will be required to agree that information obtained by it as a
result of such inspections shall be deemed confidential and shall not be
used by it as the basis for any market transactions in the securities of
the Company unless and until such is made generally available to the
public. Each selling Holder of such Registrable Securities and each such
Participating Broker-Dealer will be required to further agree that it will,
upon learning that disclosure of such Records is sought in a court of
competent jurisdiction, give notice to the Company and allow it at its
expense to undertake appropriate action to prevent disclosure of the
Records deemed confidential.

(q) Provide an indenture trustee for the Registrable Securities or
the Exchange Securities, as the case may be, and cause the Indenture or the
trust indenture provided for in Section 2(a), as the case may be, to be
qualified under the TIA not later than the effective date of the Exchange
Offer or the first Registration Statement relating to the Registrable
Securities; and in connection therewith, cooperate with the trustee under
any such indenture and the holders of the Registrable Securities, to effect
such changes to such indenture as may be required for such indenture to be
so qualified in accordance with the terms of the TIA; and execute, and use
its reasonable best efforts to cause such trustee to execute, all documents
as may be required to effect such changes, and all other forms and
documents required to be filed with the SEC to enable such indenture to be
so qualified in a timely manner.

(r) Comply in all material respects with all applicable rules and
regulations of the SEC and make generally available to its securityholders
earning statements satisfying the provisions of Section 11(a) of the
Securities Act and Rule 158 thereunder (or any similar rule promulgated
under the Securities Act) no later than 90 days after the end of any 12-
month period (i) commencing at the end of any fiscal quarter in which
Registrable Securities are sold to underwriters in a firm commitment or
best efforts underwritten offering and (ii) if not sold to underwriters in
such an offering, commencing on the first day of the first fiscal quarter
of the Company after the
<PAGE>

-20-

effective date of a Shelf Registration Statement, which statements shall
cover said 12-month periods.

(s) If an Exchange Offer or a Private Exchange is to be consummated,
upon delivery of the Registrable Securities by Holders to the Company (or
to such other Person as directed by the Company) in exchange for the
Exchange Securities or the Private Exchange Securities, as the case may be,
the Company shall mark, or caused to be marked, on such Registrable
Securities that such Registrable Securities are being cancelled in exchange
for the Exchange Securities or the Private Exchange Securities, as the case
may be; in no event shall such Registrable Securities be marked as paid or
otherwise satisfied.

(t) Reasonably cooperate with each seller of Registrable Securities
covered by any Registration Statement and each underwriter, if any,
participating in the disposition of such Registrable Securities and their
respective counsel in connection with any filings required to be made with
the National Association of Securities Dealers, Inc. (the "NASD").

(u) Use its reasonable best efforts to take all other steps necessary
to effect the registration of the Registrable Securities covered by a
Registration Statement contemplated hereby.

The Company may require each seller of Registrable Securities or
Participating Broker-Dealer as to which any registration is being effected to
furnish to the Company such information regarding such seller or Participating
Broker-Dealer and the distribution of such Registrable Securities or Exchange
Securities to be sold by such Participating Broker-Dealer, as the case may be,
as the Company may, from time to time, reasonably request. The Company may
exclude from such registration the Registrable Securities of any seller or
Participating Broker-Dealer who unreasonably fails to furnish such information
within a reasonable time after receiving such request. Each seller as to which
any Shelf Registration is being effected is deemed to agree to furnish promptly
to the Company all information required to be disclosed in order to make the
information previously furnished to the Company by such seller not materially
misleading.

Each Holder of Registrable Securities and each Participating Broker-
Dealer agrees by acquisition of such Registrable Securities or Exchange
Securities to be sold by such
<PAGE>

-21-

Participating Broker-Dealer, as the case may be, that, upon receipt of any
notice from the Company of the happening of any event of the kind described in
Section 5(c)(ii), 5(c)(iii), 5(c)(iv), or 5(c)(v), such Holder will forthwith
discontinue disposition of such Registrable Securities covered by such
Registration Statement or Prospectus or Exchange Securities to be sold by such
Participating Broker-Dealer, as the case may be, until such holder's receipt of
the copies of the supplemented or amended Prospectus contemplated by Section
5(k), or until it is advised in writing (the "Advice") by the Company that the
use of the applicable Prospectus may be resumed, and has received copies of any
amendments or supplements thereto. In the event the Company shall give any such
notice, each of the Effectiveness Period and the Applicable Period shall be
extended by the number of days during such periods from and including the date
of the giving of such notice to and including the date when each seller of
Registrable Securities covered by such Registration Statement or Exchange
Securities to be sold by such Participating Broker-Dealer, as the case may be,
shall have received (x) the copies of the supplemented or amended Prospectus
contemplated by Section 5(k) or (y) the Advice.

6. Registration Expenses
---------------------

(a) All fees and expenses incident to the performance of or
compliance with this Agreement by the Company shall be borne by the Company
whether or not the Exchange Offer or a Shelf Registration is filed or becomes
effective, including, without limitation, (i) all registration and filing fees
(including, without limitation, (A) fees with respect to filings required to be
made with the NASD in connection with an underwritten offering and (B) fees and
expenses of compliance with state securities or Blue Sky laws (including,
without limitation, reasonable fees and disbursements of counsel in connection
with Blue Sky qualifications of the Registrable Securities or Exchange
Securities and determination of the eligibility of the Registrable Securities or
Exchange Securities for investment under the laws of such jurisdictions in the
United States (x) where the holders of Registrable Securities are located, in
the case of the Exchange Securities, or (y) as provided in Section 5(h), in the
case of Registrable Securities or Exchange Securities to be sold by a
Participating Broker-Dealer during the Applicable Period)), (ii) printing
expenses (including, without limitation, expenses of printing certificates for
Registrable Securities or Exchange Securities in a form eligible for deposit
with DTC and of printing prospectuses if the printing of prospectuses is
requested by the managing underwriters, if any, or, in respect of Registrable
Securities or Exchange Securities
<PAGE>

-22-

to be sold by any Participating Broker-Dealer during the Applicable Period, by
the Holders of a majority in aggregate principal amount of the Registrable
Securities included in any Registration Statement or of such Exchange
Securities, as the case may be), (iii) messenger, telephone and delivery
expenses, (iv) fees and disbursements of counsel for the Company and fees and
disbursements of special counsel for the sellers of Registrable Securities
(subject to the provisions of Section 6(b)), (v) fees and disbursements of all
independent certified public accountants referred to in Section 5(o)(iii)
(including, without limitation, the expenses of any special audit and "cold
comfort" letters required by or incident to such performance), (vi) rating
agency fees, (vii) Securities Act liability insurance, if the Company desires
such insurance, (viii) fees and expenses of all other Persons retained by the
Company, (ix) internal expenses of the Company (including, without limitation,
all salaries and expenses of officers and employees of the Company performing
legal or accounting duties), (x) the expense of any annual audit, (xi) the fees
and expenses incurred in connection with the listing of the securities to be
registered on any securities exchange, if applicable, and (xii) the expenses
relating to printing, word processing and distributing all Registration
Statements, underwriting agreements, securities sales agreements, indentures and
any other documents necessary in order to comply with this Agreement.

(b) In connection with any Shelf Registration hereunder, the Company
shall reimburse the Holders of the Registrable Securities being registered in
such registration for the fees and disbursements of not more than one counsel
(in addition to appropriate local counsel) chosen by the Holders of a majority
in aggregate principal amount of the Registrable Securities to be included in
such Registration Statement. Such Holders shall be responsible for any and all
other out-of-pocket expenses of the Holders of Registrable Securities incurred
in connection with the registration of the Registrable Securities.

7. Indemnification
---------------

The Company agrees to indemnify and hold harmless each Holder of
Registrable Securities and each Participating Broker-Dealer selling Exchange
Securities during the Applicable Period, the officers and directors of each such
person, and each person, if any, who controls any such person within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
(each, a "Participant"), from and against any and all losses, claims, damages
and liabilities (including, without limitation, the reasonable legal fees and
other expenses actually
<PAGE>

-23-

incurred in connection with any suit, action or proceeding or any claim
asserted) caused by any untrue statement or alleged untrue statement of a
material fact contained in any Registration Statement (or any amendment thereto)
or Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) or any preliminary prospectus, or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any untrue statement or
omission or alleged untrue statement or omission made in reliance upon and in
conformity with information relating to any Participant furnished to the Company
in writing by such Participant expressly for use therein; provided that the
--------
foregoing indemnity with respect to any preliminary prospectus shall not inure
to the benefit of any Participant (or to the benefit of any person controlling
such Participant) from whom the person asserting any such losses, claims,
damages or liabilities purchased Registrable Securities or Exchange Securities
if such untrue statement or omission or alleged untrue statement or omission
made in such preliminary prospectus is eliminated or remedied in the related
Prospectus (as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) and a copy of the related Prospectus (as so
amended or supplemented) shall not have been furnished to such person at or
prior to the sale of such Registrable Securities or Exchange Securities, as the
case may be, to such person.

Each Participant will be required to agree, severally and not jointly,
to indemnify and hold harmless the Company, its directors, its officers and each
person who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to each Participant, but only with
reference to information relating to such Participant furnished to the Company
in writing by such Participant expressly for use in any Registration Statement
or Prospectus, any amendment or supplement thereto, or any preliminary
prospectus. The liability of any Participant under this paragraph shall in no
event exceed the proceeds received by such Participant from sales of Registrable
Securities giving rise to such obligations.

-24-

notify the person against whom such indemnity may be sought (the "Indemnifying
Person") in writing, and the Indemnifying Person, upon request of the
Indemnified Person, shall retain counsel reasonably satisfactory to the
Indemnified Person to represent the Indemnified Person and any others the
Indemnifying Person may designate in such proceeding and shall pay the
reasonable fees and expenses actually incurred by such counsel related to such
proceeding, provided, that the failure to so notify the Indemnifying Person
--------
shall not relieve it of any obligation or liability which it may have hereunder
or otherwise (unless and only to the extent that such failure directly results
in the loss or compromise of any material rights or defenses). In any such
proceeding, any Indemnified Person shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Indemnified Person unless (i) the Indemnifying Person and the Indemnified
Person shall have mutually agreed to the contrary, (ii) the Indemnifying Person
has failed within a reasonable time to retain counsel reasonably satisfactory to
the Indemnified Person or (iii) the named parties in any such proceeding
(including any impleaded parties) include both the Indemnifying Person and the
Indemnified Person and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them.
It is understood that the Indemnifying Person shall not, in connection with any
proceeding or related proceeding in the same jurisdiction, be liable for the
fees and expenses of more than one separate firm (in addition to any local
counsel) for all Indemnified Persons, and that all such fees and expenses shall
be reimbursed as they are incurred. Any such separate firm for the Participants
and such control persons of Participants shall be designated in writing by
Participants who sold a majority in interest of Registrable Securities sold by
all such Participants and any such separate firm for the Company, its directors,
its officers and such control persons of the Company shall be designated in
writing by the Company. The Indemnifying Person shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final non-appealable judgment for the
plaintiff, the Indemnifying Person agrees to indemnify any Indemnified Person
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an Indemnified Person
shall have requested an Indemnifying Person to reimburse the Indemnified Person
for reasonable fees and expenses actually incurred by counsel as contemplated by
the third sentence of this paragraph, the Indemnifying Person agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days
<PAGE>

-25-

after receipt by such Indemnifying Person of the aforesaid request and (ii) such
Indemnifying Person shall not have reimbursed the Indemnified Person in
accordance with such request prior to the date of such settlement; provided,
--------
however, that the Indemnifying Person shall not be liable for any settlement
- -------
effected without its consent pursuant to this sentence if the Indemnifying Party
is contesting, in good faith, the request for reimbursement. No Indemnifying
Person shall, without the prior written consent of the Indemnified Person,
effect any settlement of any pending or threatened proceeding in respect of
which any Indemnified Person is or could have been a party and indemnity could
have been sought hereunder by such Indemnified Person, unless such settlement
includes an unconditional release of such Indemnified Person from all liability
on claims that are the subject matter of such proceeding.

If the Indemnification provided for in the first and second paragraphs
of this Section 7 is unavailable to an Indemnified Person in respect of any
losses, claims, damages or liabilities referred to therein, then each
Indemnifying Person under such paragraph, in lieu of indemnifying such
Indemnified Person thereunder, shall contribute to the amount paid or payable by
such Indemnified Person as a result of such losses, claims, damages or
liabilities in such proportion as is appropriate to reflect the relative fault
of the Company on the one hand and the Participants on the other in connection
with the statements or omissions that resulted in such losses, claims, damages
or liabilities, as well as any other relevant equitable considerations. The
relative fault of the Company on the one hand and the Participants on the other
shall be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by the Company or by
the Participants and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.

The parties shall agree that it would not be just and equitable if
contribution pursuant to this Section 7 were determined by pro rata allocation
--- ----
(even if the Participants were treated as one entity for such purpose) or by any
other method of allocation that does not take account of the equitable
considerations referred to in the immediately preceding paragraph. The amount
paid or payable by an Indemnified Person as a result of the losses, claims,
damages and liabilities referred to in the immediately preceding paragraph shall
be deemed to include, subject to the limitations set forth above, any reasonable
legal or other expenses actually incurred by such
<PAGE>

-26-

Indemnified Person in connection with investigating or defending any such action
or claim. Notwithstanding the provisions of this Section 7, in no event shall a
Participant be required to contribute any amount in excess of the amount by
which proceeds received by such Participant from sales of Registrable Securities
exceeds the amount of any damages that such Participant has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation.

The indemnity and contribution agreements contained in this Section 7
will be in addition to any liability which the Indemnifying Persons may
otherwise have to the Indemnified Persons referred to above.

8. Rule 144 and Rule 144A
----------------------

The Company covenants that it will file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder in a timely manner and, if at any time
the Company is not required to file such reports, it will, upon the request of
any Holder of Registrable Securities, make publicly available other information
so long as necessary to permit sales pursuant to Rule 144 and Rule 144A under
the Securities Act. The Company further covenants that it will take such
further action as any Holder of Registrable Securities may reasonably request,
all to the extent required from time to time to enable such holder to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 and Rule 144A under the
Securities Act, as such Rules may be amended from time to time, or (b) any
similar rule or regulation hereafter adopted by the SEC.

9. Underwritten Registrations
--------------------------

If any of the Registrable Securities covered by any Shelf Registration
are to be sold in an underwritten offering, the investment banker or investment
bankers and manager or managers that will manage the offering will be selected
by the Holders of a majority in aggregate principal amount of such Registrable
Securities included in such offering and reasonably acceptable to the Company.
<PAGE>

-27-

No Holder of Registrable Securities may participate in any
underwritten registration hereunder unless such Holder (a) agrees to sell such
Holder's Registrable Securities on the basis provided in any underwriting
arrangements approved by the Persons entitled hereunder to approve such
arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents required
under the terms of such underwriting arrangements.

10. Miscellaneous
-------------

(a) Remedies. In the event of a breach by the Company of any of its
--------
obligations under this Agreement, each Holder of Registrable Securities, in
addition to being entitled to exercise all rights provided herein, in the
Indenture or, in the case of the Initial Purchasers, in the Purchase Agreement
or granted by law, including recovery of damages, will be entitled to specific
performance of its rights under this Agreement. The Company agrees that
monetary damages would not be adequate compensation for any loss incurred by
reason of a breach by it of any of the provisions of this Agreement and hereby
further agrees that, in the event of any action for specific performance in
respect of such breach, it shall waive the defense that a remedy at law would be
adequate.

(b) No Inconsistent Agreements. The Company has not, as of the date
--------------------------
hereof, entered and shall not, after the date of this Agreement, enter into any
agreement with respect to any of their securities that is inconsistent with the
rights granted to the Holders of Registrable Securities in this Agreement or
otherwise conflicts with the provisions hereof. The Company has not entered and
will not enter into any agreement with respect to any of its securities which
will grant to any Person piggy-back rights with respect to a Registration
Statement.

(c) Adjustments Affecting Registrable Securities. The Company shall
--------------------------------------------
not, directly or indirectly, take any action with respect to the Registrable
Securities as a class that would adversely affect the ability of the Holders of
Registrable Securities to include such Registrable Securities in a registration
undertaken pursuant to this Agreement.

(d) Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of at least a majority of the then outstanding aggregate principal
<PAGE>

-28-

amount of Registrable Securities. Notwithstanding the foregoing, a waiver or
consent to depart from the provisions hereof with respect to a matter that
relates exclusively to the rights of Holders of Registrable Securities whose
securities are being sold pursuant to a Registration Statement and that does not
directly or indirectly affect, impair, limit or compromise the rights of other
Holders of Registrable Securities may be given by Holders of at least a majority
in aggregate principal amount of the Registrable Securities being sold by such
Holders pursuant to such Registration Statement, provided that the provisions of
--------
this sentence may not be amended, modified or supplemented except in accordance
with the provisions of the immediately preceding sentence.

(e) Notices. All notices and other communications (including without
-------
limitation any notices or other communications to the Trustee) provided for or
permitted hereunder shall be made in writing by hand-delivery, registered first-
class mail, next-day air courier or telecopier:

(i) if to a Holder of Registrable Securities, at the most current
address given by the Trustee to the Company; and

(ii) if to the Company, 167 Kelley Drive, Front Royal, Virginia 22630,
Attention: ; with a copy to Kirkland & Ellis, Citicorp
Center, 153 East 53rd Street, New York, New York 10022, Attention:

All such notices and communications shall be deemed to have been duly
given: when delivered by hand, if personally delivered; five business days
after being deposited in the mail, postage prepaid, if mailed; one business day
after being timely delivered to a next-day air courier; and when receipt is
acknowledged by the addressee, if telecopied.

Copies of all such notices, demands or other communications shall be
concurrently delivered by the Person giving the same to the trustee under the
Indenture at the address specified in such Indenture.

(f) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Registrable Securities; provided, that, with
respect to the indemnity and contribution agreements in Section 7, each Holder
of Registrable Securities subsequent to the Initial Purchasers
<PAGE>

-29-

shall be bound by the terms thereof if such Holder elects to include Registrable
Securities in a Shelf Registration; provided, however, that this Agreement shall
-------- -------
not inure to the benefit of or be binding upon a successor or assign of a Holder
unless and to the extent such successor or assign holds Registrable Securities.

(g) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.

(h) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.

(i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS
MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW. EACH OF THE PARTIES HERETO AGREES TO SUBMIT TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK IN ANY ACTION OR PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT.

(j) Severability. If any term, provision, covenant or restriction of
------------
this Agreement is held by a court of competent jurisdiction to be invalid,
illegal, void or unenforceable, the remainder of the terms, provisions,
covenants and restrictions set forth herein shall remain in full force and
effect and shall in no way be affected, impaired or invalidated, and the parties
hereto shall use their best efforts to find and employ an alternative means to
achieve the same or substantially the same result as that contemplated by such
term, provision, covenant or restriction. It is hereby stipulated and declared
to be the intention of the parties that they would have executed the remaining
terms, provisions, covenants and restrictions without including any of such that
may be hereafter declared invalid, illegal, void or unenforceable.

(k) Entire Agreement. This Agreement, together with the Purchase
----------------
Agreement, is intended by the parties as a final expression of their agreement,
and is intended to be a complete and exclusive statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein.

(l) Securities Held by the Company or Its Affiliates. Whenever the
------------------------------------------------
consent or approval of holders of a specified
<PAGE>

-30-

percentage of Registrable Securities is required hereunder, Registrable
Securities held by the Company or its affiliates (as such term is defined in
Rule 405 under the Securities Act) shall not be counted in determining whether
such consent or approval was given by the Holders of such required percentage.

(m) Subsidiary Guarantor a Party. Immediately upon the designation
----------------------------
of any subsidiary of the Company as a Guarantor (as defined in the Indenture),
the Company shall cause such Guarantor to guarantee the obligations of the
Company hereunder (including, without limitation, the obligation to pay
Additional Interest, if any, pursuant to the terms of Section 4 hereof), by
executing and delivering to the Initial Purchasers an appropriate amendment to
this Agreement.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.

PEN-TAB INDUSTRIES, INC.

By: /s/ William Leary
------------------------------------
Name: William Leary
Title: Vice President

J.P. MORGAN SECURITIES INC.
BEAR, STEARNS & CO. INC.

By: J.P. Morgan Securities Inc.

By: /s/ S.J. McCrickard
------------------------------------
Name: S.J. McCrickard
Title: Vice President

<PAGE>

================================================================================

SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

dated as of February 4, 1997

among

PEN-TAB INDUSTRIES, INC.
as the Borrower

PEN-TAB HOLDINGS, INC.
(FORMERLY KNOWN AS
PEN-TAB INDUSTRIES, INC.)
as the Guarantor

and

BANK OF AMERICA ILLINOIS

as the Bank

================================================================================
<PAGE>

The following Table of Contents has been inserted for convenience only and does
not constitute a part of this Agreement.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . 1
1.1. Defined Terms. . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2. Other Definitional Provisions. . . . . . . . . . . . . . . . . . . 20
1.3. Accounting and Financial Determinations. . . . . . . . . . . . . . 21

ARTICLE II

AMOUNT AND TERMS OF THE COMMITMENTS . . . . . . . . . . . 21
2.1. Revolving Loan Commitment. . . . . . . . . . . . . . . . . . . . . 21
2.2. LC Commitment. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.3. Revolving Loan Borrowing Procedure . . . . . . . . . . . . . . . . 22
2.4. Conversion and Continuation Elections. . . . . . . . . . . . . . . 23
2.5. Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.6. Revolving Note . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.7. Commitment Fee . . . . . . . . . . . . . . . . . . . . . . . . . . 26

ARTICLE III

THE LETTERS OF CREDIT. . . . . . . . . . . . . . . 26
3.1. Request for Issuance of Letters of Credit. . . . . . . . . . . . . 26
3.2. Expiration and other Terms . . . . . . . . . . . . . . . . . . . . 26
3.3. Notification of Demand for Payment . . . . . . . . . . . . . . . . 26
3.4. Funding by Bank. . . . . . . . . . . . . . . . . . . . . . . . . . 26
3.5. Non-Conforming Demand For Payment. . . . . . . . . . . . . . . . . 27
3.6. Return of Letter of Credit . . . . . . . . . . . . . . . . . . . . 27
3.7. Reimbursement Agreement of the Borrower. . . . . . . . . . . . . . 27
3.8. Obligation to Reimburse for Letter of Credit Payments. . . . . . . 27
3.9. Mandatory Payment to Bank of LC Obligations. . . . . . . . . . . . 28
3.10. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

ARTICLE IV

PAYMENTS AND PREPAYMENTS. . . . . . . . . . . . . . 29
4.1. Optional Prepayments . . . . . . . . . . . . . . . . . . . . . . . 29
4.2. Mandatory Prepayments. . . . . . . . . . . . . . . . . . . . . . . 29
4.3. Method of Payment. . . . . . . . . . . . . . . . . . . . . . . . . 30
4.4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . 30
</TABLE>

-i-
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE V

TAXES, YIELD PROTECTION AND ILLEGALITY. . . . . . . . . . 30
5.1. Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
5.2. Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
5.3. Increased Costs and Reduction of Return. . . . . . . . . . . . . . 32
5.4. Funding Losses . . . . . . . . . . . . . . . . . . . . . . . . . . 33
5.5. Inability to Determine Rates . . . . . . . . . . . . . . . . . . . 34
5.6. Survival . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

ARTICLE VI

COLLATERAL AND OTHER SECURITY . . . . . . . . . . . . 34
6.1. Collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
6.2. Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
6.3. Account Warranties . . . . . . . . . . . . . . . . . . . . . . . . 36
6.4. Verification of Accounts . . . . . . . . . . . . . . . . . . . . . 36
6.5. Collection of Accounts and Payments. . . . . . . . . . . . . . . . 37
6.6. Appointment as Attorney-in-Fact. . . . . . . . . . . . . . . . . . 38
6.7. Account Records. . . . . . . . . . . . . . . . . . . . . . . . . . 38
6.8. Governmental Accounts . . . . . . . . . . . . . . . . . . . . . . 38
6.9. Instruments and Chattel Paper. . . . . . . . . . . . . . . . . . . 39
6.10. Inventory Warranties. . . . . . . . . . . . . . . . . . . . . . . 39
6.11. No Liability. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
6.12. Equipment Warranties. . . . . . . . . . . . . . . . . . . . . . . 40
6.13. Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . 40

ARTICLE VII

CONDITIONS PRECEDENT . . . . . . . . . . . . . . 41
7.1. Condition Precedent to Revolving Loan. . . . . . . . . . . . . . . 41
7.2. Conditions Precedent to All Revolving Loans and Letters
of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

ARTICLE VIII

REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . 44
8.1. Incorporation, Good Standing, and Due Qualification. . . . . . . .
8.2. Corporate Power and Authority. . . . . . . . . . . . . . . . . . . 44
8.3. Legally Enforceable Agreement. . . . . . . . . . . . . . . . . . . 45
8.4. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . 45
8.5. Other Agreements . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.6. Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
8.7. No Defaults on Outstanding Judgments or Orders . . . . . . . . . . 46
8.8. Approvals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.9. Ownership and Liens. . . . . . . . . . . . . . . . . . . . . . . . 46
8.10. Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . 46
</TABLE>

-ii-
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
8.11. ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.12. Real Property . . . . . . . . . . . . . . . . . . . . . . . . . 46
8.13. Hazardous Materials . . . . . . . . . . . . . . . . . . . . . . 47
8.14. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.15. Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
8.16. Senior Obligations, etc. . . . . . . . . . . . . . . . . . . . 48
8.17. Investment Company Act. . . . . . . . . . . . . . . . . . . . . 48
8.18. Public Utility Holding Company Act. . . . . . . . . . . . . . . 48

ARTICLE IX

AFFIRMATIVE COVENANTS . . . . . . . . . . . . . 48
9.1. Maintenance of Existence . . . . . . . . . . . . . . . . . . . . 48
9.2. Maintenance of Records . . . . . . . . . . . . . . . . . . . . . 49
9.3. Maintenance of Properties. . . . . . . . . . . . . . . . . . . . 49
9.4. Conduct of Business. . . . . . . . . . . . . . . . . . . . . . . 49
9.5. Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . 49
9.6. Right of Inspection. . . . . . . . . . . . . . . . . . . . . . . 49
9.7. Reporting Requirements . . . . . . . . . . . . . . . . . . . . . 50
9.8. Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . 53
9.9. Maintenance of Bank Accounts . . . . . . . . . . . . . . . . . . 53
9.10. Inventory and Equipment Locations . . . . . . . . . . . . . . . 54
9.11. Places of Business. . . . . . . . . . . . . . . . . . . . . . . 54
9.12. Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
9.13. Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
9.14. Collateral Identification . . . . . . . . . . . . . . . . . . . 55
9.15. Annual Clean-Up . . . . . . . . . . . . . . . . . . . . . . . . 55

ARTICLE X

NEGATIVE COVENANTS 55
10.1. Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
10.2. Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
10.3. Mergers, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 56
10.4. Leases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
10.5. Sale and Leaseback. . . . . . . . . . . . . . . . . . . . . . . 57
10.6. Restricted Payments, etc . . . . . . . . . . . . . . . . . . . 57
10.7. Sale of Assets. . . . . . . . . . . . . . . . . . . . . . . . . 58
10.8. Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 58
10.9. Guaranties, Etc. . . . . . . . . . . . . . . . . . . . . . . . 59
10.10. Transaction With Affiliate . . . . . . . . . . . . . . . . . . 59
10.11. Subsidiary, Etc. . . . . . . . . . . . . . . . . . . . . . . . 60
10.12. Real Property. . . . . . . . . . . . . . . . . . . . . . . . . 60
10.13. Account Settlements. . . . . . . . . . . . . . . . . . . . . . 60
10.14. Modification of Certain Agreements . . . . . . . . . . . . . . 60
10.15. Assets of the Parent . . . . . . . . . . . . . . . . . . . . . 61
</TABLE>

-iii-
<PAGE>

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE XI

FINANCIAL COVENANTS. . . . . . . . . . . . . . 61
11.1. Debt Service Coverage Ratio . . . . . . . . . . . . . . . . . . 61
11.2. Net Worth . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
11.3. Current Ratio . . . . . . . . . . . . . . . . . . . . . . . . . 61

ARTICLE XII

EVENTS OF DEFAULT. . . . . . . . . . . . . . 62
12.1. Events of Default . . . . . . . . . . . . . . . . . . . . . . . 62

ARTICLE XIII

MISCELLANEOUS 66
13.1. Assignments and Participations 66
13.2. Amendments, Etc. . . . . . . . . . . . . . . . . . . . . . . . 67
13.3. Notices, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . 67
13.4. No Waiver; Remedies . . . . . . . . . . . . . . . . . . . . . . 67
13.5. Successors and Assigns. . . . . . . . . . . . . . . . . . . . . 67
13.6. Costs, Expenses, and Taxes. . . . . . . . . . . . . . . . . . . 68
13.7. Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . 68
13.8. Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . 68
13.9. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
13.10. Severability of Provisions . . . . . . . . . . . . . . . . . . 69
13.11. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
13.12. Submission to Jurisdiction; Waiver of Venue;
Service of Process . . . . . . . . . . . . . . . . . . . . . . . 69
13.13. WAIVER OF JURY TRIAL . . . . . . . . . . . . . . . . . . . . . 70
13.14. Reaffirmation and Restatement. . . . . . . . . . . . . . . . . 70
</TABLE>

-iv-
<PAGE>

SCHEDULES
---------

SCHEDULE 6.10 Inventory Locations
SCHEDULE 7.2 Litigation
SCHEDULE 8.12 Real Property
SCHEDULE 8.15 Debt
SCHEDULE 10.1 Liens

EXHIBITS
--------

EXHIBIT A Form of Revolving Note
EXHIBIT B Form of Trademark Agreement
EXHIBIT C Form of Opinion of Counsel for the Parent and the Borrower
EXHIBIT D Form of Borrowing Base Certificate
EXHIBIT E Form of Notice of Borrowing
EXHIBIT F Form of Notice of Conversion/Continuation
EXHIBIT G Form of Assignment and Assumption Agreement
EXHIBIT H Form of Pledge Agreement
EXHIBIT I Form of Guaranty

-v-
<PAGE>

SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT

THIS SECOND AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT, dated as
of February 4, 1997 (the "Effective Date"), among PEN-TAB INDUSTRIES, INC., a
Delaware corporation (the "Borrower"), Pen-Tab Holdings, Inc. (formerly known as
Pen-Tab Industries, Inc.), a Virginia corporation (the "Parent") and BANK OF
AMERICA ILLINOIS (as successor to CONTINENTAL BANK N.A.), having its main
banking house at 231 South LaSalle Street, Chicago, Illinois 60697 (the "Bank").

WHEREAS, the Borrower and the Parent, are parties to a certain
Assignment and Assumption Agreement (a copy of which is attached here to as
Exhibit G, the "Assignment and Assumption Agreement"), dated as of February 3,
- ---------
1997 and consented to by the Bank, whereby the Borrower assumed all of the
Liabilities (as such term is defined in the Existing Loan and Security Agreement
referred to below) from the Parent under the Existing Loan and Security
Agreement;

WHEREAS, the Borrower (as assignee of the Parent pursuant to the
Assignment and Assumption Agreement) and the Bank are parties to that certain
Amended and Restated Loan and Security Agreement, dated as of March 24, 1995 (as
amended and modified through the date hereof, the "Existing Loan and Security
Agreement"), whereby the Bank has agreed to make revolving loans to and issue
letters of credit in favor of the Borrower; and

WHEREAS, the Parent, the Borrower and the Bank desire to enter into
this Agreement in amendment and restatement of the Existing Loan and Security
Agreement, subject to the terms and conditions contained in this Agreement;

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

ARTICLE I

DEFINITIONS AND ACCOUNTING TERMS
--------------------------------

SECTION 1.1. Defined Terms. As used in this Agreement the following
-------------
terms have the following meanings (terms defined in the singular to have the
same meaning when used in the plural and vice versa):
<PAGE>

"Account" shall mean any and all accounts, whether now owned or
hereafter acquired by the Borrower.

"Account Debtor" shall mean any Person who is or who may become
obligated to the Borrower under, with respect to, or on account of an Account.

"Affiliate" shall mean any Person which, directly or indirectly, owns
or controls, on an aggregate basis, including all beneficial ownership and
ownership or control as a trustee, guardian or other fiduciary, at least ten
percent (10%) of the outstanding securities having ordinary voting power to
elect directors (regardless of whether, at the time, securities of any other
class or classes of such corporation shall have or might have voting power by
reason of the happening of any contingency) of any corporation or managing
general partners of any partnership or any Subsidiary thereof, or which is
controlled by or is under common control with the Borrower, any corporation, or
any stockholder of such corporation, or any Subsidiary. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to direct or cause the direction of management and policies, whether through the
ownership of voting securities, by contract or otherwise.

"Agreement" means this Second Amended and Restated Loan and Security
Agreement, as the same may be further amended, modified, restated, refinanced,
refunded or renewed from time to time in whole or in part.

"Applicable Margin" shall be (i) until receipt by the Bank of the
certificate required pursuant to Section 9.7(3) for the Borrower's 1997 fiscal
--------------
year, 1.75% with respect to Offshore Rate Loans, and .25% with respect to Base
Rate Loans, and (ii) thereafter, based on the Debt Service Coverage Ratio, as
follows:

<TABLE>
<CAPTION>
=====================================================================
Tier Debt Service Offshore Base Rate
Coverage Ratio Rate Applicable
Applicable Margin
Margin
---------------------------------------------------------------------
<S> <C> <C> <C>
I Less than 1.75:1 2.00% 0.50%
---------------------------------------------------------------------
II Greater than or 1.75% 0.25%
equal to 1.75:1 but
less than 2.25:1
---------------------------------------------------------------------
III Greater than or 1.50% 0.00%
equal to 2.25:1 but
less than 3.25:1
=====================================================================
</TABLE>

-2-
<PAGE>

<TABLE>
<CAPTION>
=====================================================================
Tier Debt Service Offshore Base Rate
Coverage Ratio Rate Applicable
Applicable Margin
Margin
---------------------------------------------------------------------
<S> <C> <C> <C>
IV Greater than or 1.25% 0.00%
equal to 3.25:1 but
less than 4.75:1
---------------------------------------------------------------------
V Greater than equal 1.00% 0.00%
to 4.75:1
=====================================================================
</TABLE>

With respect to clause (ii) above, the Applicable Margin shall be
adjusted on the fifteenth day following receipt by the Bank of the certificate
pursuant to Section 9.7(3), based on the Debt Service Coverage Ratio as of the
--------------
last day of the fiscal period most recently ended; it being understood, with
-- ----- ----------
respect to clause (i) and (ii) above, that if the Borrower fails to timely
---------- ----
deliver the certificate in accordance with Section 9.7(3), then, until receipt
--------------
of such certificate by the Bank, the Applicable Margin shall be 2.00% with
respect to Offshore Rate Loans and .050% with respect to Base Rate Loans.

"Assignment and Assumption Agreement" - see Recitals.

"Attorneys' Fees" shall mean the reasonable value of the services (and
costs, charges and expenses related thereto) of the attorneys (and all
paralegals, secretaries, accountants and other staff employed by such attorneys)
employed by the Bank from time to time to negotiate and/or prepare documentation
for the loans made and the Letters of Credit issued hereunder, and/or to
commence, defend or intervene in any court proceeding, or to file a petition,
complaint, answer, motion or other pleadings, or to take any other action in or
with respect to any suit or proceeding (bankruptcy or otherwise) relating to the
Collateral or this Agreement or guarantees of any of the Liabilities; to
protect, collect, lease, sell, take possession of, or liquidate any of the
Collateral; to attempt to enforce any security interest in any of the Collateral
or to give any advice with respect to such enforcement; and to enforce any of
the Bank's rights to collect any of the Liabilities.

"Authorized Representative" means any one of the following individuals
of the Parent or the Borrower, as the case may be: Chairman, Vice Chairman,
President, Executive Vice President, Vice President, Chief Financial Officer,
Treasurer, Secretary, Controller or Assistant Controller.

"Bank" - see Preamble.

-3-
<PAGE>

"Base Rate" means, for any day, the higher of:

(a) the rate of interest in effect for such day as publicly announced
from time to time by the Bank in Chicago, Illinois, as its "reference
rate." (It is a rate set by the Bank based upon various factors including
the Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans, which may
be priced at, above, or below such announced rate.); and

(b) 0.50% per annum above the latest Federal Funds Rate.

Any change in the reference rate announced by the Bank shall take
effect at the opening of business on the day specified in the public
announcement of such change.

"Base Rate Loan" means a Revolving Loan that bears interest based on
the Base Rate.

"Beneficiary" shall mean the beneficiary under any Letter of Credit.

"Bond" or "Bonds" means the Industrial Development Revenue Bonds (Pen-
Tab Industries, Inc. Project) Series 1995, of the Authority (as defined in the
Reimbursement Agreement) in the original aggregate principal amount of
$7,500,000 issued under the Indenture (as defined in the Reimbursement
Agreement), the liabilities of which have been assigned to and assumed by the
Borrower under the Assignment and Assumption Agreement.

"Borrower" means Pen-Tab Industries, Inc., a Delaware corporation.

"Borrowing" means a borrowing hereunder consisting of Revolving Loans
of the same Type made to the Borrower on the same day by the Bank under Article
-------
II.
- --

"Borrowing Base" means (1) the sum of

(a) an amount equal to 85% of the net amount (after deduction of
such reserves and allowances as the Bank deems proper and necessary in
its sole discretion) of the Borrower's Eligible Accounts; plus
----

(b) an amount equal to the lesser of (i) 55% of the net value
(as determined by the Bank and after deduction of such reserves and
allowances, as the Bank deems proper and necessary in its sole
discretion on a

-4-
<PAGE>

first-in first-out basis in accordance with GAAP) of the Borrower's
Eligible Inventory and (ii) $20,000,000; plus
----

(c) an amount equal to the greater of (i) $11,445,000 or (ii)
50% of the forced liquidation value of the Borrower's Eligible
Equipment (as determined by an independent appraiser selected by the
Bank with knowledge and skill in appraising Equipment of the type used
by the Borrower in its business) which amortizes over a period of
sixty (60) months or less; provided that until such determination is
made by such independent appraiser such amount shall equal
$11,445,000; minus
-----

(2) the sum of (a) the aggregate undrawn amount of any outstanding Letters
of Credit; plus (b) the aggregate face amount of any LC Applications; plus (c)
---- ----
the aggregate unreimbursed amounts drawn under any Letters of Credit or paid
under any LC Application; plus (d) without duplication, the aggregate
----
outstanding amount of all Revolving Loans; plus (e) $2,500,000 reserved in
----
connection with the IRB Letter of Credit.

Notwithstanding anything contained in the foregoing to the contrary, the Bank
reserves the right, in its sole and absolute discretion to at any time reduce or
increase any of the percentages or dollar amounts set forth above. Nothing
contained herein shall (1) be construed as the Bank's agreement to resort or
look to any particular type or item of Collateral as security for any specific
Revolving Loan, Letter of Credit or advance or in any way limit the Bank's right
to resort to any or all of the Collateral as security for any of the
Liabilities, or (2) be deemed to limit or reduce any Lien in or upon any portion
of the Collateral or other security for the Liabilities.

"Borrowing Date" means any date on which a Borrowing occurs under
Section 2.3.
- -----------

"Business Day" means any day other than a Saturday, Sunday, or other
day on which commercial banks in Chicago, Illinois are authorized or required to
close under the laws of the State of Illinois.

"Capital Adequacy Regulation" means any guideline, request or
directive of any central bank or other Governmental Authority, or any other law,
rule or regulation, whether or not having the force of law, in each case,
regarding capital adequacy of any bank or of any corporation controlling a bank.

-5-
<PAGE>

"Capital Lease" means all leases which have been or should be
capitalized on the books of the lessee in accordance with GAAP.

"Casualty Event" means the damage, destruction or condemnation, as the
case may be, of property of the Borrower or any of its Subsidiaries.

"Change in Control" shall be deemed to have occurred at such times as:
(a) Alan Hodes is no longer a member of the Board of Directors of the Parent,
(b) with respect to the Parent, that Alan Hodes and Michael Greenberg
collectively ceases to own, free and clear of all Liens 35% of the outstanding
shares of voting stock of the Parent on a fully diluted basis, or (c) with
respect to the Borrower, the Parent ceases to own, free and clear of all Liens
100% of the outstanding shares of voting stock of the Borrower on a fully
diluted basis.

"Code" means the Internal Revenue Code of 1986, as amended.

"Collateral" means all property which is subject to, or is to be
subject to, the Lien granted hereunder or under the Trademark Agreement or under
the Pledge Agreement.

"Commitment(s)" means, collectively, the Revolving Loan Commitment and
the LC Commitment.

"Consolidated Capital Expenditure" means, for any period, the capital
expenditures of the Borrower and its consolidated Subsidiaries for such period,
as the same are (or would in accordance with GAAP be) set forth in the
consolidated statement of cash flows of the Borrower and its consolidated
Subsidiaries for such period.

"Consolidated EBITDA" means, for any period, the consolidated net
earnings of the Borrower and its consolidated Subsidiaries plus the aggregate
----
amounts actually deducted in determining such net earnings for such period in
respect of (1) gross interest charges, (2) imputed interest charges related to
any Capital Leases, and (3) provision for income taxes, amortization and
depreciation. For fiscal year 1996 net earnings shall be calculated on a last-
in-first-out basis in accordance with GAAP and thereafter shall be calculated on
a first-in-first-out basis in accordance with GAAP.

"Consolidated Fixed Charges" means, for any period, the consolidated
cash interest expense (including all imputed interest related to any Capital
Lease) of the Borrower and its consolidated Subsidiaries for such period, plus
----
all required

-6-
<PAGE>

principal payments on any Debt (including, without duplication, all payments
related to any Capital Lease) made by the Borrower and its consolidated
Subsidiaries for such period.

"Consolidated Net Worth" means, at any time, the sum of the total of
stockholders' equity (including capital stock, additional paid-in capital and
retained earnings after deducting treasury stock) of the Borrower and its
consolidated Subsidiaries, calculated in accordance with GAAP.

"Contract Right" shall mean any right to payment under a contract not
yet earned by performance and not evidenced by an instrument or chattel paper.

"Conversion/Continuation Date" means any date on which, under Section
-------
2.4, the Borrower (a) converts Revolving Loans of one Type to another Type, or
- ---
(b) continues as Revolving Loans of the same Type, but with a new Interest
Period, Loans having Interest Periods maturing on such date.

"Debt" means: (1) indebtedness or liability for borrowed money, or
for the deferred purchase price of property or services (including trade
obligations); (2) obligations as lessee under Capital Leases; (3) current
liabilities in respect of unfunded vested benefits under any Plan; (4)
obligations under letters of credit issued for the account of any Person; (5)
all obligations arising under acceptance facilities; (6) all guaranties,
endorsements (other than for collection or deposit in the ordinary course of
business), and other contingent obligations to purchase, to provide funds for
payment, to supply funds to invest in any Person, or otherwise to assure a
creditor against loss; and (7) obligations secured by any Lien on property owned
by the Person, whether or not the obligations have been assumed.

"Debt Service Coverage Ratio" means the ratio set forth in Section
-------
11.1.
- -----

"Default" means any of the events specified in Section 12.1, whether
------------
or not any requirement for the giving of notice, the lapse of time, or both, or
any other condition, has been satisfied.

"Effective Date" shall mean the date of this Agreement as set forth in
the Preamble.

"Eligible Account" shall mean an Account owing to the Borrower which
meets each of the following requirements; provided that nothing contained in the
following requirements shall be

-7-
<PAGE>

deemed to limit or restrict in any manner whatsoever the Bank's discretion in
determining which Accounts are eligible hereunder:

(1) it is genuine and in all respects what it purports to be;

(2) it arises from: (a) the performance of services by the
Borrower and such services have been fully performed and acknowledged
and accepted by the Account Debtor with respect thereto; or (b) the
sale or lease of goods by the Borrower, including cash on delivery
sales, and such goods have been completed in accordance with such
Account Debtor's specifications (if any) and delivered to and accepted
by such Account Debtor, and the Borrower has possession of, or has
delivered to the Bank, at the Bank's request, shipping and delivery
receipts evidencing such shipment;

(3) it is evidenced by an invoice or invoices (dated not later
than the date of shipment or performance and having payment terms
which are customary in the industry) rendered to the Account Debtor
with respect thereto and is due and payable in full within 90 days of
the date of such invoice, and is not evidenced by any instrument or
chattel paper;

(4) it is not subject to any Lien, other than the Lien of the
Bank hereunder;

(5) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor with respect thereto, and is not
subject to setoff, counterclaim, credit, allowance, adjustment or
other defense by such Account Debtor with respect thereto, or to any
claim by such Account Debtor denying liability thereunder in whole or
in part, and such Account Debtor has not refused to accept and/or has
not returned or offered or attempted to return any of the goods or
services which are the subject of such Account;

(6) there are no proceedings or actions (including, without
limitation, any insolvency or bankruptcy proceeding or action) which
are then threatened or pending against the Account Debtor which might
result in any material adverse change in such Account Debtor's
financial condition or in its ability to pay any Account in full when
due;

(7) it does not arise out of a contract or order which, by its
terms, forbids or makes void or

-8-
<PAGE>

unenforceable the assignment by the Borrower to the Bank of the
Account arising with respect thereto;

(8) the Account Debtor is not a director, officer, employee,
agent, Subsidiary, or Affiliate of the Borrower;

(9) the Account Debtor is a resident or citizen of and is
located within the United States of America, other than Account
Debtors located in Canada which Accounts do not in the aggregate
exceed $5,000,000 at any time;

(10) it is not an Account arising from a "sale on approval,"
"sale or return," "consignment," or subject to any other repurchase or
return agreement;

(11) it is not an Account with respect to which possession and/or
control of the goods sold giving rise thereto is held, maintained or
retained by the Borrower (or by any agent or custodian of the
Borrower) for the account of or subject to further and/or future
direction from the Account Debtor thereof;

(12) it is not an Account which in any way fails to meet or
violates any warrant, representation, or covenant contained in this
Agreement relating directly or indirectly to the Borrower's Accounts;

(13) the Account Debtor thereunder is not located in the State of
New Jersey, Minnesota or any other state denying creditors access to
its courts unless the Borrower has filed a Notice of Business
Activities Report or similar filing with the applicable state agency
for the then current year;

(14) it is not owing by any Account Debtor who shall have failed
to pay in full any invoice evidencing any Account within 90 days after
the due date of such invoice, unless the total invoices of such
Account Debtor which have not been paid within 90 days of the due date
represent less than 10% of the total invoice amounts then outstanding
of such Account Debtor.

An Account which is at any time an Eligible Account, but which subsequently
fails to meet any of the foregoing requirements, shall forthwith cease to be an
Eligible Account until such time, if any, as such Account no longer fails to
meet any of the foregoing requirements. Furthermore, with respect to any
Account, if the Bank at any time or times hereafter determines in

-9-
<PAGE>

its sole discretion that the prospect of payment or performance by the Account
Debtor with respect thereto is or will be impaired, notwithstanding anything to
the contrary contained above, such Account shall forthwith cease to be an
Eligible Account. Furthermore, with respect to invoices for which the Borrower
has granted specific dated terms, no invoice shall be considered an Eligible
Account if it is more than 90 days past due as to any regularly scheduled due
date.

"Eligible Equipment" means Equipment of the Borrower which meets each
of the following requirements; provided that nothing contained in the following
requirements shall be deemed to limit or restrict in any manner whatsoever the
Bank's discretion in determining which Equipment is eligible hereunder:

(1) it is in good and workable condition, ordinary wear and tear
excepted;

(2) no portion of the purchase price thereof remains unpaid, as
established by documentation satisfactory to the Bank;

(3) it is not subject to any Lien, other than the Lien in favor
of the Bank;

(4) it complies with the Borrower's specifications and has been
delivered to and accepted by the Borrower;

(5) there exists no dispute with respect thereto between the
Borrower and the manufacturer or supplier thereof including, without
limitation, disputes regarding warranty, representation or other
claims; and

(6) it is not Equipment which in any way fails to meet or
violates any warranty, representation or covenant contained in this
Agreement or any Other Agreement relating directly or indirectly to
the Borrower's Equipment.

Equipment which at any time is Eligible Equipment, but which subsequently fails
to meet any of the foregoing requirements, shall forthwith cease to be Eligible
Equipment.

"Eligible Inventory" shall mean Inventory of the Borrower which meets
each of the following requirements; provided that nothing contained in the
following requirements shall be deemed to limit or restrict in any manner
whatsoever the Bank's discretion in determining which Inventory is eligible
hereunder:

-10-
<PAGE>

(1) it is owned by the Borrower, and is not subject to any Lien,
other than the Lien of the Bank hereunder;

(2) if held for sale or lease or furnishing under contracts of
service, it is (except as the Bank may otherwise consent in writing)
finished, new and unused;

(3) it is not now and shall not at any time or times hereafter
be stored with a bailee, warehouseman or similar party without the
Bank's prior written consent, and in such event, the Borrower will
concurrently therewith cause any such bailee, warehouseman or similar
party to issue and deliver to the Bank, in form and substance
acceptable to the Bank, warehouse receipts therefor in the Bank's
name;

(4) the Bank has in good faith determined in accordance with the
Bank's prudent business practices that it is not unacceptable due to
age, type, category, quality and/or quantity;

(5) it is not Inventory which in any way fails to meet or
violates any warranty, representation or covenant contained in this
Agreement relating directly or indirectly to the Borrower's Inventory;

(6) it consists of raw materials or finished goods which are in
marketable condition.

Inventory of the Borrower which is at any time Eligible Inventory, but which
subsequently fails to meet any of the foregoing requirements, shall forthwith
cease to be Eligible Inventory.

"Environmental Laws" means any and all federal, state, local laws,
regulations, ordinances, rules, judgments, orders, decrees, permits,
concessions, grants, franchises, licenses, agreements or other governmental
restrictions relating to the environment or to emissions, discharges, releases
or threatened releases of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes into the environment including, without
limitation, ambient air, surface water, ground water, or land, or otherwise
relating to the manufacture, processing, distribution, use, treatment, storage,
disposal, transport, or handling of pollutants, contaminants, chemicals, or
industrial, toxic or hazardous substances or wastes.

-11-
<PAGE>

"Equipment" shall mean all of the Borrower's now owned or hereafter
acquired fixtures and equipment, including, without limitation, furniture,
vehicles and trade fixtures.

"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations and published interpretations
thereof.

"ERISA Affiliate" means any trade or business (whether or not
incorporated) which together with the Parent or the Borrower, as the case may
be, would be treated as a single employer under Section 4001 of ERISA.

"Eurodollar Reserve Percentage" has the meaning specified in the
definition of "Offshore Rate".

"Event of Default" means any of the events specified in Section 12.1,
------------
provided that any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.

"Existing Loan and Security Agreement" - see Recitals.

"FDIC" means the Federal Deposit Insurance Corporation, and any
Governmental Authority succeeding to any of its principal functions.

"Federal Funds Rate" means, for any day, the rate set forth in the
weekly statistical release designated as H.15(519), or any successor
publication, published by the FRB (including any such successor, "H.15(519)") on
the preceding Business Day opposite the caption "Federal Funds (Effective)"; or,
if such rate is not so published on any such preceding Business Day, the rate
for such day will be the arithmetic mean as determined by the Bank of the rates
for the last transaction in overnight Federal funds arranged prior to 9:00 a.m.
(New York City time) on that day by each of three leading brokers of Federal
funds transactions in New York City selected by the Bank.

"Fixtures" means all fixtures of the Borrower of every description and
all substitutions and replacements of any thereof.

"FRB" means the Board of Governors of the Federal Reserve System, and
any Governmental Authority succeeding to any of its principal functions.

"Further Taxes" means any and all present or future taxes, levies,
assessments, imposts, duties, deductions, fees, withholdings or similar charges
(including, without limitation,

-12-
<PAGE>

net income taxes and franchise taxes), and all liabilities with respect thereto,
imposed by any jurisdiction on account of amounts payable or paid pursuant to
Section 5.1.
- -----------

"GAAP" - see Section 1.3.
-----------

"Guaranty" means a guaranty issued by the Parent in favor of the Bank,
substantially in the form of Exhibit I.
---------

"General Intangibles" shall mean all choses in action, causes of
action and all other intangible personal property of the Borrower of every kind
and nature (other than Accounts) now owned or hereafter acquired by the
Borrower, including, without limitation, corporate or other business records,
inventions, designs, patents, patent applications, trademarks, trade names,
trade secrets, goodwill, copyrights, registrations, licenses, franchises, tax
refund claims and any guarantee claims, security interests (regardless of
whether, at the time, stock of any other class or classes of such corporation
shall have or might have voting power by reason of the happening of any
contingency) is at the time, directly or indirectly, owned by any Person and/or
one or more Subsidiaries of such Person.

"Governmental Authority" means any nation or government, any state or
other political subdivision thereof, any central bank (or similar monetary or
regulatory authority) thereof, any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government,
and any corporation or other entity owned or controlled, through stock or
capital ownership or otherwise, by any of the foregoing.

"Head Office" means the principal office of the Bank at 231 South
LaSalle Street, Chicago, IL 60697.

"Indenture" means that certain Indenture, dated as of February 1,
1997, between the Borrower and U.S. Trust Company of New York, as Trustee.

"Interest Payment Date" means, as to any Loan other than a Base Rate
Loan, the last day of each Interest Period applicable to such Loan and, as to
any Base Rate Loan, the last day of each calendar quarter and each date such
Loan is converted into another Type of Loan, provided, however, that if any
-------- -------
Interest Period for an Offshore Rate Loan exceeds three months, the date that
falls three months after the beginning of such Interest Period and after each
Interest Payment Date thereafter is also an Interest Payment Date.

-13-
<PAGE>

"Interest Period" means, with respect to any Offshore Rate Loan, the
period commencing on the Business Day the Loan is disbursed or on the
Conversion/Continuation Date on which the Loan is converted into or continued as
an Offshore Rate Loan, and ending on the date one, two or three months
thereafter as selected by the Borrower in its Notice of Borrowing or Notice of
Conversion/Continuation;

provided that:
--------

(i) if any Interest Period would otherwise end on a day that is
not a Business Day, that Interest Period shall be extended to the
following Business Day unless the result of such extension would be to
carry such Interest Period into another calendar month, in which event
such Interest Period shall end on the preceding Business Day;

(ii) any Interest Period that begins on the last Business Day of
a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of the calendar month at
the end of such Interest Period; and

(iii) no Interest Period for any Revolving Loan shall extend
beyond Termination Date.

"Inventory" shall mean any and all goods, merchandise and other
personal property, including, without limitation, goods in transit, wheresoever
located and whether now owned or hereafter acquired by the Borrower which is or
may at any time be held for sale or lease, furnished under any contract of
service, or held as raw materials, work in process, supplies or materials used
or consumed in the Borrower's business, and any property of the Borrower the
sale or other disposition of which has given rise to an Account and which has
been returned to or repossessed or stopped in transmit by the Borrower.

"IRB Letter of Credit" means that certain Letter of Credit issued by
the Bank on behalf of the Borrower pursuant to the Reimbursement Agreement, as
the same may be amended, modified, restated, refinanced, refunded or renewed
from time to time in whole or in part.

"LC Administrative Fee" - see Section 3.10.
------------

"LC Application" - see Section 3.1.
-----------

"LC Commitment" - see Section 2.2.
-----------

-14-
<PAGE>

"LC Facing Fee" - see Section 3.10.
------------

"LC Obligations" shall mean any and all obligations of every
description of the Borrower in connection with the Letters of Credit issued
pursuant to this Agreement, including without limitation all reimbursement
obligations (whether absolute or contingent) under any LC Application, and all
obligations in respect of related fees or expenses.

"Lending Office" means the office or offices of the Bank specified as
its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office",
as the case may be, beneath its name on the signature page hereto, or such other
office or offices as the Bank may from time to time notify the Company.

"Letter of Credit" - see Section 2.2.
-----------

"Letter of Credit Commitment" - Section 2.2.
-----------

"Liabilities" shall mean all of the Parent's and the Borrower's
liabilities, obligations and indebtedness to the Bank, or to any Affiliate of
the Bank, of any and every kind and nature (including, without limitation,
interest, charges, expenses, Attorneys' Fees and other sums chargeable to the
Parent or the Borrower by the Bank and future advances made to or for the
benefit of the Borrower) whether arising under this Agreement, the Reimbursement
Agreement, under any other Loan Document or any of the Other Agreements or
acquired by the Bank from any other sources, whether heretofore, now or
hereafter owing, arising, due, or payable from the Borrower to the Bank, or to
any Affiliate of the Bank, and howsoever evidenced, created, incurred, acquired
or owing, whether primary, secondary, direct, contingent, fixed, or otherwise,
including obligations of performance. Liabilities shall also include any and all
extensions, replacements, refinancings or renewals of any of the foregoing.

"Lien" means any mortgage, deed of trust, pledge, security interest,
hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or
other), or preference, priority, or other security agreement, or preferential
arrangement, charge, or encumbrance of any kind or nature whatsoever (including,
without limitation, any conditional sale or other title retention agreement, any
financing lease having substantially the same economic effect as any of the
foregoing, and the filing of any financing statement under the Uniform
Commercial Code or comparable law of any jurisdiction to evidence any of the
foregoing).

-15-
<PAGE>

"Loan Documents" means this Agreement, the Revolving Note, the LC
Applications, the Letters of Credit, the Trademark Agreement, the Pledge
Agreement, the Reimbursement Agreement, the Guaranty and any and all other
documents or instruments furnished or required to be furnished or delivered from
time to time in connection herewith.

"Material Adverse Change" or "Material Adverse Effect" shall mean any
change, event, action, condition or effect which individually or in the
aggregate (1) impair the validity or enforceability of this Agreement or any
other Loan Document, or (2) subject any officer of the Parent or the Borrower to
criminal liability or (3) materially and adversely affect the consolidated
business, operations, prospects or financial condition of the Parent or the
Borrower and any Subsidiary taken as a whole or (4) the ability of the Parent or
the Borrower or any Subsidiary to perform their respective obligations under
this Agreement and the other Loan Documents.

"Material Litigation" or "Material Litigation Development" shall mean
any Litigation, or development in any Litigation, as the case may be (1) which
involves this Agreement, any other Loan Document or other transactions
contemplated hereby or thereby, or (2) which could have a Material Adverse
Effect.

"Maximum Loan Availability" means, at any time, the lesser of (1) the
Borrowing Base as of the date of the most recent Borrowing Base certificate
delivered pursuant to Section 9.7(11) and (2) the Total Commitment Amount.
---------------

"Minimum Consolidated Net Worth" means, an amount which shall equal
the sum of (a) $-26,400,000, plus (b) with respect to each fiscal quarter ending
----
June 30 (commencing after the Effective Date), the greater of (i) 50% of
consolidated net income for such quarter and the immediately preceding fiscal
quarter, or (ii) $500,000, plus (c) with respect to each fiscal quarter ending
----
September 30 (commencing after the Effective Date), the greater of (i) 50% of
the consolidated net income for such fiscal quarter, or (ii) $1,000,000, and
plus (d) with respect to each fiscal quarter ending December 31 (commencing
- ----
after the Effective Date), the greater of (i) 50% of the Consolidated Net Worth
as of the end of such fiscal quarter, or (ii) $500,000.

"Multiemployer Plan" means a Plan described in Section 4001(a)(3) of
ERISA which covers employees of the Parent or the Borrower, as the case may be,
or any ERISA Affiliate.

"Notice of Borrowing" means a notice in substantially the form of
Exhibit E.
- ---------

-16-
<PAGE>

"Notice of Conversion/Continuation" means a notice in substantially
the form of Exhibit F.
---------

"Offshore Rate" means, for any Interest Period with respect to
Offshore Rate Loans comprising part of the same Borrowing, the rate of interest
per annum (rounded upward to the nearest 1/16th of 1%) determined by the Bank as
follows:

Offshore Rate = IBOR
------------------------------------
1.00 - Eurodollar Reserve Percentage

Where,

"Eurodollar Reserve Percentage" means for any day for any Interest
Period the maximum reserve percentage (expressed as a decimal, rounded
upward to the nearest 1/100th of 1%) in effect on such day (whether or
not applicable to the Bank) under regulations issued from time to time
by the FRB for determining the maximum reserve requirement (including
any emergency, supplemental or other marginal reserve requirement)
with respect to Eurocurrency funding (currently referred to as
"Eurocurrency liabilities") having a term comparable to such Interest
Period; and

"IBOR" means the rate of interest per annum determined by the
Bank to be the rate of interest at which dollar deposits in the
approximate amount of the amount of the Revolving Loan to be made or
continued as, or converted into, an Offshore Rate Loan and having a
maturity comparable to such Interest Period would be offered to the
Bank (or such affiliate of the Bank as may be designated for such
purpose by the Bank) in the interbank eurodollar market at their
request at approximately 10:00 a.m. (Chicago time) two Business Days
prior to the commencement of such Interest Period.

"Offshore Rate Loan" means a Loan that bears interest based on the
Offshore Rate.

"Organic Document" means, with respect to any Person, its certificate
of incorporation or other organizational document, its bylaws and all
shareholder agreements, voting trusts and similar arrangements applicable to any
of its capital stock.

"Other Agreements" shall mean all agreements, instruments, documents,
financing statements, warehouse receipts, bills of lading, notices of assignment
of Accounts, schedules of Accounts assigned, mortgages and other written matter
necessary

-17-
<PAGE>

or requested by the Bank to perfect and maintain perfected the Bank's security
interest in the Collateral, and all agreements, instruments and documents,
including, without limitation, notes, guarantees, mortgages, deeds of trust,
chattel mortgages, pledges, powers of attorney, consents, assignments,
contracts, notices, security agreements, leases, financing statements,
subordination agreements, trust account agreements and all other written matter
whether heretofore, now, or hereafter delivered to the Bank, or to any Affiliate
of the Bank, with respect to this Agreement and executed by or on behalf of the
Parent or the Borrower or any similar agreements which have been assigned to and
assumed by the Borrower pursuant to the Assignment and Assumption Agreement.

"Other Taxes" means any present or future stamp, court or documentary
taxes or any other excise or property taxes, charges or similar levies which
arise from any payment made hereunder or from the execution, delivery,
performance, enforcement or registration of, or otherwise with respect to, this
Agreement or any other Loan Documents.

"Parent" - see Recitals.

"Participant" means any Person acquiring a participation in the
Liabilities in accordance Section 13.1 of this Agreement.
------------

"PBGC" means the Pension Benefit Guaranty Corporation or any entity
succeeding to any or all of its functions under ERISA.

"Permitted Liens" - see Section 10.1.
------------

"Person" means an individual, sole proprietorship, partnership,
corporation, limited liability company, business trust, joint stock company,
trust, unincorporated association, joint venture, governmental authority, or
other entity of whatever nature.

"Plan" means any plan established, maintained, or to which
contributions have been made by the Parent or the Borrower or any ERISA
Affiliate.

"Pledge Agreement" means a Pledge Agreement, substantially in the form
of Exhibit H, executed by the Parent in favor of the Bank, covering among other
---------
things all of the capital stock of the Borrower.

-18-
<PAGE>

"Prohibited Transaction" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Internal Revenue Code of 1954, as amended
from time to time.

"Recapitalization Agreement" means that certain Recapitalization
Agreement, dated January 9, 1997, by and among Citicorp Venture Capital, Ltd.,
the Parent, Alan Hodes and Michael Greenberg.

"Reimbursement Agreement" means that certain Reimbursement Agreement
dated as of April 1, 1995, as amended and modified through the date hereof,
among the Borrower (as assignee of Parent pursuant to the Assignment and
Assumption Agreement) and the Bank pursuant to which the Bank issued the IRB
Letter of Credit, as the same may be further amended, modified, restated,
refinanced, refunded or renewed from time to time in whole or in part.

"Reportable Event" means any of the events set forth in Section 4043
of ERISA.

"Revolving Loan(s)" has the meaning specified in Section 2.1, and may
-----------
be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Revolving Loan).

"Revolving Loan Commitment" shall have the meaning assigned to such
term in Section 2.1.
-----------

"Revolving Note" shall have the meaning assigned to such term in
Section 2.5.
- -----------

"Subordinated Debt" means all Debt of the Borrower issued pursuant to
the Indenture.

"Subsidiary" means, as to any Person, a Person (other than an
individual) of which shares of stock, partnership units or other equity
interests having ordinary voting power (other than stock having such power only
by reason of the happening of a contingency) to elect a majority of directors,
general partners or other managers of such Person are at the time owned, or the
management of which is otherwise controlled, directly or indirectly through one
or more intermediaries, or both, by such Person. Unless the context otherwise
clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of
the Borrower.

"Supplemental Documentation" shall have the meaning assigned to such
term in Section 6.13.
------------

-19-
<PAGE>

"Tax Distributions" shall have the meaning assigned to such term in
Section 10.6.
- ------------

"Taxes" means any and all present or future taxes, levies,
assessments, imposts, duties, deductions, fees, withholdings or similar charges,
and all liabilities with respect thereto, excluding, in the case of the Bank,
taxes imposed on or measured by its net income by the jurisdiction (or any
political subdivision thereof) under the laws of which the Bank is organized or
maintains a lending office.

"Termination Date" means February 4, 2000.

"Total Commitment Amount" means $35,000,000.

"Trademark Agreement" means an Amended and Restated Trademark
Agreement, substantially in the form of Exhibit B, covering among other things,
---------
trademarks and trade names of the Borrower.

"Type" has the meaning specified in the definition of "Revolving
Loan."

SECTION 1.2. Other Definitional Provisions.
-----------------------------

(1) All terms defined in this Agreement shall have the above-
defined meanings when used in any Loan Document, or any certificate,
report or other document made or delivered pursuant to this Agreement,
unless the context therein shall clearly otherwise require.

(2) The words "hereof," "herein," "hereunder" and similar terms
when used in this Agreement shall refer to this Agreement as a whole
and not to any particular provision of this Agreement.

(3) The words "amended or modified" when used in this Agreement
or any other Loan Document shall mean with respect to this Agreement
or any other Loan Document such document as from time to time, in
whole or in part, amended, modified, supplemented, restated,
refinanced, refunded or renewed.

(4) In the computation of periods of time in this Agreement from
a specified date to a later specified date, the word "from" means
"from and including" and the words "to" and "until" each means "to but
excluding."

-20-
<PAGE>

SECTION 1.3. Accounting and Financial Determinations. For purposes of
---------------------------------------
this Agreement, unless otherwise specified, all accounting terms used herein or
in any other Loan Document shall be interpreted, all accounting determinations
and computations hereunder or thereunder shall be made, and all financial
statements required to be delivered hereunder or thereunder shall be prepared in
accordance with, those generally accepted accounting principles ("GAAP") applied
in the preparation of the financial statements referred to in Section 9.7. In
-----------
the event any "Accounting Changes" (as defined below) shall occur and such
changes affect financial covenants, standards or terms in this Agreement, then
Borrower and Bank agree to enter into negotiations in order to amend such
provisions of this Agreement so as to equitably reflect such Accounting Changes
with the desired result that the criteria for evaluating the financial condition
of Borrower shall be the same as if such Accounting Changes had not been made,
and until such time as such an amendment shall have been executed and delivered
by Borrower and the Bank, (A) all financial covenants, standards and terms in
this Agreement shall be calculated and/or construed as if such Accounting
Changes had not been made, and (B) Borrower shall prepare footnotes to each
Borrowing Base certificate and the financial statements required to be delivered
hereunder that show the differences between the financial statements delivered
(which reflect such Accounting Changes) and the basis for calculating financial
covenant compliance (without reflecting such Accounting Changes) and the basis
for calculating financial covenant compliance (without reflecting such
Accounting Changes). "Accounting Changes" means: (x) changes in accounting
principles required by GAAP and implemented by Borrower and (y) changes in
accounting principles recommended by Borrower's certified public accountants.
All effects of purchase accounting principles (A.P.B. 16 and/or 17 and EITF 88-
16 and FASB 109) and all adjustments for transaction expenses in connection with
the Recapitalization Agreement shall be excluded for purposes of preparation of
financial statements and other calculations and information to be provided to
the Bank.

ARTICLE II

AMOUNT AND TERMS OF THE COMMITMENTS
-----------------------------------

SECTION 2.1. Revolving Loan Commitment. Subject to the terms and
-------------------------
conditions set forth in this Agreement and the other Loan Documents, the Bank
agrees to make loans to the Borrower on a revolving basis (herein collectively
called the "Revolving Loans," and individually called a "Revolving Loan") from
time to time from the Effective Date to the Termination Date, at such times and
in such amounts as the Borrower may

-21-
<PAGE>

request; provided, however, that the aggregate principal amount of all Revolving
Loans which the Bank shall be committed to have outstanding to the Borrower
shall not at any one time exceed (when added to the aggregate undrawn face
amount of all Letters of Credit issued and outstanding pursuant to Section 2.2
-----------

or drawn and not reimbursed pursuant to Section 3.7, it being understood that
-----------
such amount does not include the IRB Letter of Credit issued under the
Reimbursement Agreement) the Maximum Loan Availability. The foregoing commitment
of the Bank is herein called its "Revolving Loan Commitment."

SECTION 2.2. LC Commitment. The Bank agrees to issue from time to
-------------
time before the Termination Date such commercial and import letters of credit
(such letters of credit being herein collectively called "Letters of Credit" and
individually a "Letter of Credit") as the Borrower may request. The aggregate
undrawn face amount of all Letters of Credit issued and outstanding pursuant to
this Section 2.2 or drawn and not reimbursed pursuant to Section 3.7 shall not
----------- -----------
at any one time exceed (when added with the aggregate principal amount of the
Revolving Loans then outstanding) the Maximum Loan Availability. The foregoing
commitment of the Bank is herein called its "LC Commitment," and collectively
the "LC Commitments."

SECTION 2.3. Revolving Loan Borrowing Procedure.
----------------------------------

(a) Each Borrowing of Revolving Loans shall be made upon the
irrevocable written notice of an Authorized Representative of the Borrower
delivered to the Bank in the form of a Notice of Borrowing (which notice must be
received by the Bank (i) prior to 10:00 a.m. (Chicago time) two Business Days
prior to the requested Borrowing Date, in the case of Offshore Rate Loans, and
(ii) prior to 12:00 noon (Chicago time) on the requested Borrowing Date, in the
case of Base Rate Loans, specifying:

(A) the amount of the Borrowing, which shall be (x) in the
case of Base Rate Loans, in a minimum amount of $100,000 or an
integral multiple of $50,000 in excess thereof and (y) in the case of
Offshore Rate Loans, in a minimum amount of $500,000 or an integral
multiple of $500,000 in excess thereof;

(B) the requested Borrowing Date, which shall be a Business
Day;

-22-
<PAGE>

(D) in the case of an Offshore Rate Loan, the duration of
the Interest Period applicable to such Revolving Loans included in
such notice. If the Notice of Borrowing fails to specify the duration
of the Interest Period for any Borrowing of Offshore Rate Loans, such
Interest Period shall be three months.

(b) Subject to satisfaction of the applicable conditions precedent
set forth in Article VII hereof, the Bank shall make the proceeds of each
-----------
Revolving Loan available to the Borrower by causing an amount of same day funds
equal to the principal amount of such Revolving Loan to be credited to the
account of the Borrower at the Bank unless otherwise required pursuant to the
terms of this Agreement.

2.4. Conversion and Continuation Elections.
-------------------------------------

(a) Borrower may, upon irrevocable written notice to the Bank:

(i) elect, on any Business Day, in the case of Base Rate Loans,
or on the last day of the applicable Interest Period, in the case of any
Offshore Rate Loans, to convert any of its Revolving Loans (or any part
thereof in an amount not less than (x) in the case of Base Rate Loans, a
minimum amount of $100,000 or an integral multiple of $50,000 in excess
thereof and (y) in the case of Offshore Rate Loans, a minimum amount of
$500,000 or an integral multiple of $500,000 in excess thereof) into
Revolving Loans of any other Type; or

(ii) elect to renew on the last day of the applicable Interest
Period any Revolving Loans having Interest Periods maturing on such day (or
any part thereof in an amount not less than (x) in the case of Base Rate
Loans, a minimum amount of $100,000 or an integral multiple of $50,000 in
excess thereof and (y) in the case of Offshore Rate Loans, a minimum amount
of $500,000 or an integral multiple of $500,000 in excess thereof);

provided, that if at any time the aggregate amount of Offshore Rate Loans in
- --------
respect of any Borrowing is reduced, by payment, prepayment, or conversion of
part thereof to be less than $500,000, such Offshore Rate Loans shall
automatically convert into Base Rate Loans, and on and after such date the right
of the Borrower to continue such Revolving Loans as, and convert such Revolving
Loans into, Offshore Rate Loans shall terminate.

-23-
<PAGE>

(b) the Borrower shall deliver a Notice of Conversion/Continuation to
be received by the Bank not later than 10:00 a.m. (Chicago time) at least (i)
two Business Days in advance of the Conversion/Continuation Date, if the
Revolving Loans are to be converted into or continued as Offshore Rate Loans;
and (ii) on the Conversion/Continuation Date, if the Revolving Loans are to be
converted into Base Rate Loans, specifying:

(A) the proposed Conversion/Continuation Date;

(B) the aggregate amount of Revolving Loans to be converted
or renewed;

(D) other than in the case of conversions into Base Rate
Loans, the duration of the requested Interest Period.

(c) If upon the expiration of any Interest Period applicable to
Offshore Rate Loans, the Borrower has failed to select timely a new Interest
Period to be applicable to such Offshore Rate Loans, or if any Default or Event
of Default then exists, the Borrower shall be deemed to have elected to convert
such Offshore Rate Loans into Base Rate Loans effective as of the expiration
date of such Interest Period.

(d) During the existence and continuation of a Default or Event of
Default, the Borrower may not elect to have a Revolving Loan converted into or
continued as an Offshore Rate Loan.

(e) After giving effect to any conversion or continuation of
Revolving Loans, there may not be more than five different Interest Periods in
effect.

SECTION 2.5. Interest.
--------

(a) Each Revolving Loan shall bear interest on the outstanding
principal amount thereof from the applicable Borrowing Date at a rate per annum
equal to the Offshore Rate plus the Applicable Margin or the Base Rate plus the
Applicable Margin, as the case may be (and subject to the Borrower's right to
convert to other Types of Loans under Section 2.4).
-----------

(b) Interest on each Revolving Loan shall be paid in arrears on each
Interest Payment Date (or if such Interest

-24-
<PAGE>

Payment Date is not a Business Day, then on the next Business Day following such
Interest Payment Date; provided, however, such extension of time in such case
-------- -------
shall not be included in the computation of the payment of interest) to the Bank
at the Head Office. Interest shall also be paid on the date of any prepayment
of Loans under Section 4.1 or 4.2 for the portion of the Loans so prepaid and
----------- ---
upon payment (including prepayment) in full thereof and, during the existence of
any Event of Default, interest shall be payable on demand.

(c) Any principal amount not paid when due (at maturity, by
acceleration, or otherwise) shall bear interest thereafter until paid in full,
payable on demand, at a rate which shall be two percent (2.0%) above the rate
which would otherwise be applicable.

(d) Interest and all fees hereunder shall be calculated on the basis
of a year of 360 days for the actual number of days elapsed.

(e) Anything herein to the contrary notwithstanding, the obligations
of the Company hereunder shall be subject to the limitation that payments of
interest shall not be required, for any period for which interest is computed
hereunder, to the extent (but only to the extent) that contracting for or
receiving such payment by the Bank would be contrary to the provisions of any
law applicable to the Bank limiting the highest rate of interest that may be
lawfully contracted for, charged or received by the Bank, and in such event the
Company shall pay the Bank interest at the highest rate permitted by applicable
law.

(f) Each determination of an interest rate by the Bank shall be
conclusive and binding on the Borrower in the absence of manifest error.

SECTION 2.6. Revolving Note. All Revolving Loans made by the Bank
--------------
under this Agreement shall be evidenced by, and repaid with interest in
accordance with, a single amended and restated promissory note of the Borrower,
in substantially the form of Exhibit A, duly completed, in the principal amount
---------
of Thirty-Five Million Dollars ($35,000,000), payable to the Bank (the
"Revolving Note"). The Bank is hereby authorized by the Borrower to endorse on
the schedule attached to the Revolving Note the amount of each Revolving Loan
and the Borrower thereof and of each payment of principal received by the Bank
on account of such Revolving Loans, which endorsement shall, in the absence of
manifest error, be conclusive as to the outstanding balance of the Revolving
Loans made by the Bank; provided, however, that the failure to make such
notation with respect to any Revolving Loan

-25-
<PAGE>

or payment shall not limit or otherwise affect the obligations of the Borrower
under this Agreement or the Revolving Note.

SECTION 2.7. Commitment Fee. The Borrower agrees to pay the Bank a
--------------
non-refundable unused commitment fee at the rate of .25% per annum on the
average daily amount by which the Total Commitment Amount exceeds the
outstanding Revolving Loans plus the undrawn face amount of the Letters of
Credit, for the period commencing on the date hereof and continuing to but not
including the Termination Date, payable quarterly in arrears on the last day of
March, June, September and December of each year and at maturity (or if such day
is not a Business Day, then on the next Business Day thereafter; provided,
--------
however, such extension of time in such case shall not be included in the
- -------
computation of the payment of the commitment fee).

ARTICLE III

THE LETTERS OF CREDIT

SECTION 3.1. Request for Issuance of Letters of Credit. The Bank
-----------------------------------------
shall receive at least 5 Business Days' prior written notice of a request for
issuance of each Letter of Credit, each such request to be accompanied by an
application for issuance of letter of credit substantially in the form then used
by the Bank (an "LC Application") duly executed by the Borrower and in all
respects in form and substance satisfactory to the Bank, together with such
other documentation as the Bank may request in support thereof.

SECTION 3.2. Expiration and other Terms. Each Letter of Credit shall
--------------------------
expire on or before the Termination Date unless such Letter of Credit is cash
collateralized pursuant to documentation in form and substance satisfactory to
the Bank; provided that in no event shall the expiration date exceed more than
one year from the date of issuance of such Letter of Credit.

SECTION 3.3. Notification of Demand for Payment. The Bank shall
----------------------------------
promptly notify the Borrower of the amount of each demand for payment under a
Letter of Credit and of the date on which such payment is to be made.

SECTION 3.4. Funding by Bank. With respect to each demand for
---------------
payment pursuant to a Letter of Credit, the Bank shall, promptly following its
receipt thereof, examine all documents purporting to represent such demand to
ascertain that the same appear on their face to be in conformity with the terms
and conditions of such Letter of Credit. If the Bank determines that a demand
for payment under a Letter of Credit conforms to

-26-
<PAGE>

the terms and conditions of such Letter of Credit, then the Bank shall make
payment to the Beneficiary in accordance with the terms of such Letter of
Credit.

SECTION 3.5. Non-Conforming Demand For Payment. If, after
---------------------------------
examination of a demand for payment under a Letter of Credit, the Bank shall
have determined that such demand does not conform to the terms and conditions of
such Letter of Credit, then the Bank shall, as soon as reasonably practicable,
give notice to the related Beneficiary and to the Borrower to the effect that
demand was not in accordance with the terms and conditions of such Letter of
Credit, stating the reasons therefor and that the relevant document is being
held at the disposal of the Beneficiary or is being returned to the Beneficiary,
as the Bank may elect. The Beneficiary may attempt to correct any such non-
conforming demand for payment under such Letter of Credit if, and to the extent
that, the Beneficiary is entitled (without regard to the provisions of this
sentence) and able to do so.

SECTION 3.6. Return of Letter of Credit. With respect to each Letter
--------------------------
of Credit, the Bank shall have the right, provided the Bank is not then in
default under such Letter of Credit by reason of its having wrongfully failed to
honor a demand for payment previously made by the Beneficiary under such Letter
of Credit, to require the Beneficiary to surrender such Letter of Credit to the
Bank on the stated expiration date. The Borrower agrees, if necessary, to use
its best efforts to cause the Beneficiary to surrender such Letter of Credit.

SECTION 3.7. Reimbursement Agreement of the Borrower. The Borrower
---------------------------------------
hereby unconditionally and irrevocably agrees to reimburse the Bank, immediately
upon demand, for each payment made by the Bank under a Letter of Credit honoring
a demand for payment made by the Beneficiary thereunder, with interest on the
amount so paid by the Bank from and including the date paid by the Bank to the
date the Bank is reimbursed therefor, at a rate per annum equal to the Base Rate
from time to time in effect (but not less than the Base Rate in effect on the
date of such payment by the Bank). Interest shall be computed for the actual
number of days elapsed on the basis of a year consisting of 360 days.

SECTION 3.8. Obligation to Reimburse for Letter of Credit Payments.
-----------------------------------------------------
The Borrower's obligation to reimburse the Bank for payments made by the Bank
under any Letter of Credit honoring a demand for payment by the Beneficiary
thereunder, shall be irrevocable, absolute and unconditional under any and all
circumstances including, without limitation, any of the following circumstances:

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<PAGE>

(1) any lack of legality, validity, regularity or
enforceability of this Agreement, any Letter of Credit or any
other Loan Document;

(2) the existence of any claim, setoff, defense or other
right which the Borrower may have or have had at any time against
any Beneficiary, the Bank, any transferee of any Letter of Credit
(or any Person for whom any such transferee may be acting) or any
other Person, whether in connection with this Agreement, any
Letter of Credit, the transactions contemplated herein or any
unrelated transactions (including any underlying transaction
between the Borrower and the Beneficiary of any Letter of
Credit);

(3) any draft, certificate or any other document presented
under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect;

(4) the surrender or impairment of any security for the
performance or observance of any of the terms of any of the Loan
Documents;

(5) payment by the Bank under any Letter of Credit against
presentation of a draft or certificate or other document that
does not comply with the terms of such Letter of Credit unless
such payment by the Bank constituted gross negligence or willful
misconduct of the Bank; or

(6) the occurrence of any Default or Event of Default;

provided, however, that the Borrower shall not be obligated to reimburse the
Bank for any wrongful payment made by the Bank under any Letter of Credit as a
result of acts or omissions constituting gross negligence or willful misconduct
on the part of the Bank or any of its officers, employees or agents.

SECTION 3.9. Mandatory Payment to Bank of LC Obligations. The
-------------------------------------------
Borrower agrees that, on any termination of the LC Commitments pursuant to
Section 12, it will pay to the Bank in dollars and in same day funds an amount
- ----------
equal to the principal amount of all LC Obligations under any LC Application,
whether or not the related Letter of Credit has been drawn (which amount shall
be retained by the Bank in a separate collateral account as security for the LC
Obligations and the other Liabilities).

-28-
<PAGE>

SECTION 3.10. Fees. The Borrower agrees to pay the following fees
----
(all such fees being non-refundable and in the aggregate):

(1) The Borrower agrees to pay to the Bank a facing fee for
the Letter of Credit (the "LC Facing Fee") in an amount equal to
.25% of the aggregate outstanding face amount of the Letter of
Credit, such fee to be payable on the date of issuance of such
Letter of Credit.

(2) The Borrower agrees to pay such other standard,
published fees and amounts ("LC Administrative Fees") as the Bank
shall customarily require in connection with the amendment,
processing and/or administration of letters of credit, such fees
to be in addition to the fees payable under Section 3.10(1), with
---------------
respect to the issuance and/or negotiation of the Letter of
Credit.

ARTICLE IV

PAYMENTS AND PREPAYMENTS
------------------------

SECTION 4.1. Optional Prepayments. Subject to Section 5.4, the
-------------------- ------------
Borrower may, without penalty or premium, at any time, or from time to time,
upon irrevocable notice to the Banks on any Business Day, prepay Revolving Loans
in whole or in part, in minimum amounts (x) in the case of Base Rate Loans, of
$50,000 or an integral multiple of $50,000 in excess thereof and (y) in the case
of Offshore Rate Loans, of $500,000 or any multiple of $500,000 in excess
thereof. Such notice of prepayment shall specify the date and amount of such
prepayment and the Type(s) of Revolving Loans to be prepaid. If such notice is
given by the Borrower, the Borrower shall make such prepayment and the payment
amount specified in such notice shall be due and payable on the date specified
therein, together with accrued interest to each such date on the amount prepaid
and any amounts required pursuant to Section 5.4.
-----------

SECTION 4.2. Mandatory Prepayments. In the event the aggregate
---------------------
outstanding principal balance of all Revolving Loans plus the aggregate undrawn
face amount of Letters of Credit issued and outstanding pursuant to Section 2.2
-----------
or drawn and not reimbursed exceeds the Maximum Loan Availability, the Borrower
shall, unless the Bank shall otherwise consent, without notice or demand of any
kind, immediately make such repayments of the Revolving Loans and the LC
Obligations or take such other actions as shall be necessary to eliminate such
excess. All Revolving

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<PAGE>

Loans and LC Obligations (including accrued and unpaid interest thereon) shall
be repaid by the Borrower on the Termination Date, unless payable sooner
pursuant to the provisions of this Agreement.

SECTION 4.3. Method of Payment. The Borrower shall make each payment
-----------------
under this Agreement, under the Revolving Note and under the Letters of Credit
not later than 12:00 noon, Chicago time, on the date when due in lawful money of
the United States to the Bank at the Head Office in immediately available funds.
Borrower hereby authorizes the Bank, if and to the extent payment is not made
when due under this Agreement, under the Revolving Note, under the Letters of
Credit and the other Loan Documents and Other Agreements, to charge from time to
time against any account of the Borrower with the Bank any amount so due from
the Borrower. Subject to the provisions set forth in the definition of
"Interest Period" herein, whenever any payment to be made under this Agreement,
under the Revolving Note and under the Letters of Credit shall be stated to be
due on a Saturday, Sunday, or a public holiday, or the equivalent for banks
generally under the laws of the State of Illinois, such payment shall be made on
the next succeeding Business Day, and such extension of time in such case shall
-----
be included in the computation of the payment of interest.

SECTION 4.4. Use of Proceeds. The proceeds of the Revolving Loans
---------------
and the Letters of Credit shall be used by the Borrower for working capital and
general corporate purposes. Borrower will not, directly or indirectly, use any
part of such proceeds for the purpose of purchasing or carrying any margin stock
within the meaning of Regulation U of the FRB or to extend credit to any Person
for the purpose of purchasing or carrying any such margin stock.

ARTICLE V

TAXES, YIELD PROTECTION AND ILLEGALITY
--------------------------------------

5.1 Taxes. (a) Any and all payments by the Borrower to the Bank
-----
under this Agreement and any other Loan Document shall be made free and clear
of, and without deduction or withholding for, any Taxes. In addition, the
Borrower shall pay all Other Taxes.

(b) If the Borrower shall be required by law to deduct or withhold
any Taxes, Other Taxes or Further Taxes from or in respect of any sum payable
hereunder to the Bank, then:

-30-
<PAGE>

(i) the sum payable shall be increased as necessary so that,
after making all required deductions and withholdings (including deductions
and withholdings applicable to additional sums payable under this Section),
the Bank receives and retains an amount equal to the sum it would have
received and retained had no such deductions or withholdings been made;

(ii) the Borrower shall make such deductions and withholdings;

(iii) the Borrower shall pay the full amount deducted or
withheld to the relevant taxing authority or other authority in accordance
with applicable law; and

(iv) the Borrower shall also pay to the Bank for the account of
the Bank, at the time interest is paid, Further Taxes in the amount that
the Bank specifies as necessary to preserve the after-tax yield the Bank
would have received if such Taxes, Other Taxes or Further Taxes had not
been imposed.

(c) The Borrower agree to indemnify and hold harmless the Bank for
the full amount of i) Taxes, ii) Other Taxes, and iii) Further Taxes in the
amount that the Bank specifies as necessary to preserve the after-tax yield the
Bank would have received if such Taxes, Other Taxes or Further Taxes had not
been imposed, and any liability (including penalties, interest, additions to tax
and expenses) arising therefrom or with respect thereto, whether or not such
Taxes, Other Taxes or Further Taxes were correctly or legally asserted;
provided, however, the Borrower shall not indemnify the Bank for increases in
the Bank's income tax rate. Payment under this indemnification shall be made
within 30 days after the date the Bank makes written demand therefor.

(d) Within 30 days after the date of any payment by the Borrower of
Taxes, Other Taxes or Further Taxes, the Borrower shall furnish to the Bank the
original or a certified copy of a receipt evidencing payment thereof, or other
evidence of payment satisfactory to the Bank.

(e) If the Borrower is required to pay any amount to the Bank
pursuant to subsection (b) or (c) of this Section, then the Bank shall use
reasonable efforts (consistent with legal and regulatory restrictions) to change
the jurisdiction of its Lending Office so as to eliminate any such additional
payment by the Borrower which may thereafter accrue, if such change in the sole
judgment of the Bank is not otherwise disadvantageous to the Bank.

-31-
<PAGE>

5.2 Illegality.
----------

(a) If the Bank determines that the introduction of any Requirement
of Law, or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is unlawful,
for the Bank or its applicable Lending Office to make Offshore Rate Loans, then,
on notice thereof by the Bank to the Borrower, any obligation of the Bank to
make Offshore Rate Loans shall be suspended until the Bank notifies the Borrower
that the circumstances giving rise to such determination no longer exist.

(b) If the Bank determines that it is unlawful to maintain any
Offshore Rate Loan, the Borrower shall, upon receipt of notice of such fact and
demand from the Bank, prepay in full such Offshore Rate Loans of the Bank then
outstanding, together with interest accrued thereon and amounts required under
Section 5.4, either on the last day of the Interest Period thereof, if the Bank
- -----------
may lawfully continue to maintain such Offshore Rate Loans to such day, or
immediately, if the Bank may not lawfully continue to maintain such Offshore
Rate Loan. If the Borrower is required to so prepay any Offshore Rate Loan,
then concurrently with such prepayment, the Borrower shall borrow from the Bank,
in the amount of such repayment, a Base Rate Loan.

(c) Before giving any notice under this Section, the Bank shall
designate a different Lending Office with respect to its Offshore Rate Loans if
such designation will avoid the need for giving such notice and will not, in the
judgment of the Bank, be illegal or otherwise disadvantageous to the Bank.

5.3 Increased Costs and Reduction of Return.
----------------------------------------

(a) If the Bank determines that, due to either (i) the introduction
of or any change (other than any change by way of imposition of or increase in
reserve requirements included in the calculation of the Offshore Rate or in
respect of the assessment rate payable by the Bank to the FDIC for insuring U.S.
deposits) in or in the interpretation of any law or regulation or (ii) the
compliance by the Bank with any guideline or request from any central bank or
other Governmental Authority (whether or not having the force of law), there
shall be any increase in the cost to the Bank of agreeing to make or making,
funding or maintaining any Offshore Rate Loans or any increase in the cost to
the Bank of agreeing to issue, issuing or maintaining any Letter of Credit or of
agreeing to make or making, funding or maintaining any unpaid drawing under any
Letter of Credit, then the Borrower shall be liable for, and shall from time to
time, upon demand,

-32-
<PAGE>

pay to the Bank, additional amounts as are sufficient to compensate the Bank for
such increased costs.

(b) If the Bank shall have determined that (i) the introduction of
any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental Authority
charged with the interpretation or administration thereof, or (iv) compliance by
the Bank (or its Lending Office) or any corporation controlling the Bank with
any Capital Adequacy Regulation, affects or would affect the amount of capital
required or expected to be maintained by the Bank or any corporation controlling
the Bank and (taking into consideration the Bank's or such corporation's
policies with respect to capital adequacy and the Bank's desired return on
capital) determines that the amount of such capital is increased as a
consequence of its Commitment, loans, credits or obligations under this
Agreement, then, upon demand of the Bank to the Borrower, the Borrower shall pay
to the Bank, from time to time as specified by the Bank, additional amounts
sufficient to compensate the Bank for such increase.

5.4 Funding Losses. The Borrower shall reimburse the Bank and hold
--------------
the Bank harmless from any loss or expense which the Bank may sustain or incur
as a consequence of:

(a) the failure of the Borrower to make on a timely basis any payment
of principal of any Offshore Rate Loan;

(b) the failure of the Borrower to borrow, continue or convert a Loan
after the Borrower has given (or is deemed to have given) a Notice of Borrowing
or a Notice of Conversion/ Continuation;

(c) the failure of the Borrower to make any prepayment in accordance
with any notice delivered under Section 4.1;
-----------

(d) the prepayment (including pursuant to Section 4.1 or 4.2) or
------------------
other payment (including after acceleration thereof) of an Offshore Rate Loan on
a day that is not the last day of the relevant Interest Period; or

(e) the automatic conversion under Section 2.4 of any Offshore Rate
-----------
Loan to a Base Rate Loan on a day that is not the last day of the relevant
Interest Period;

including any such loss or expense arising from the liquidation or reemployment
of funds obtained by it to maintain its Offshore Rate Loans or from fees payable
to terminate the deposits from

-33-
<PAGE>

which such funds were obtained. For purposes of calculating amounts payable by
the Borrower to the Bank under this Section and under Section 5.3(a), each
--------------
Offshore Rate Loan made by the Bank (and each related reserve, special deposit
or similar requirement) shall be conclusively deemed to have been funded at the
LIBOR used in determining the Offshore Rate for such Offshore Rate Loan by a
matching deposit or other borrowing in the interbank eurodollar market for a
comparable amount and for a comparable period, whether or not such Offshore Rate
Loan is in fact so funded.

5.5 Inability to Determine Rates. If the Bank determines that for
----------------------------
any reason adequate and reasonable means do not exist for determining the
Offshore Rate for any requested Interest Period with respect to a proposed
Offshore Rate Loan, or that the Offshore Rate applicable pursuant to Section
-------
2.5(a) for any requested Interest Period with respect to a proposed Offshore
- ------
Rate Loan does not adequately and fairly reflect the cost to the Bank of funding
such Loan, the Bank will promptly so notify the Borrower. Thereafter, the
obligation of the Bank to make or maintain Offshore Rate Loans hereunder shall
be suspended until the Bank revokes such notice in writing. Upon receipt of
such notice, the Borrower may revoke any Notice of Borrowing or Notice of
Conversion/Continuation then submitted by it. If the Borrower does not revoke
such Notice, the Bank shall make, convert or continue the Loans, as proposed by
the Borrower, in the amount specified in the applicable notice submitted by the
Borrower, but such Loans shall be made, converted or continued as Base Rate
Loans instead of Offshore Rate Loans.

5.6 Survival. The agreements and obligations of the Borrower in this
--------
Article V shall survive the payment of all other Liabilities.
- ---------

ARTICLE VI

COLLATERAL AND OTHER SECURITY
-----------------------------

SECTION 6.1. Collateral. As security for (1) the payment of all
----------
loans and advances now or hereafter made by the Bank to the Borrower under this
Agreement or to the Borrower (as assignee of the Parent) under the Existing Loan
and Security Agreement, or under the other Loan Documents (including without
limitation the Reimbursement Agreement) or Other Agreements, and (2) the payment
or other satisfaction of all other Liabilities, to the Bank whether now or
hereafter existing, direct or indirect or due or to become due, the Parent and
the Borrower each hereby grants to the Bank a first priority security interest,
subject to Permitted Liens, in and to the following property of the Parent

-34-
<PAGE>

and the Borrower, whether now owned or existing, or hereafter acquired or coming
into existence, wherever now or hereafter located (hereinafter referred to as
"Collateral"):

(i) Accounts;

(ii) Equipment;

(iii) Inventory;

(iv) General Intangibles;

(v) Contract Rights, instruments, financial assets, documents and
chattel paper;

(vi) All monies, residues, and property of any kind, now or at
any time or times hereafter, in the possession or under the control of
the Bank or a bailee of the Bank, or any Participant;

(vii) All books and records (including, without limitation,
customer lists, credit files, computer programs) printouts and other
computer materials and records; of the Parent and the Borrower
pertaining to any of the foregoing.

Such security interest includes a continuing Lien in, on, and to all said
Collateral and the products and proceeds thereof, and any replacements,
additions, accessions, or substitutions thereof, after acquired property, and
the Accounts of other proceeds arising from the sale or other disposition of any
Inventory or Equipment of the Parent and the Borrower including any returns
thereof, including, where applicable, the proceeds of insurance covering any of
said Collateral. Collateral also includes any property of the Parent and the
Borrower subject to a separate security agreement or pledge in favor of the Bank
or any Affiliate of the Bank. Upon the indefeasible payment in full of the
Liabilities and termination of the Commitments (as such term is defined under
this Agreement and under the Reimbursement Agreement), the security interest
granted hereby shall terminate and all rights to the Collateral shall revert to
the Parent and/or the Borrower, as the case may be. Upon any such termination,
the Bank will, at the Borrower's expense, execute and deliver to the Parent and
the Borrower such documents as the Parent and/or the Borrower shall reasonably
request to evidence such termination and shall terminate its financing
statements with regard to the Collateral wherever filed. Solely for the
purposes of this Section 6.1 references to "Borrower" in the definitions of
-----------
"Accounts", "Equipment", "Inventory" and "General

-35-
<PAGE>

Intangibles" shall be deemed to reference both the Borrower and the Parent.

SECTION 6.2. Accounts. If required by the Bank, the Borrower shall
--------
advise the Bank promptly of any Inventory items which are returned by or
repossessed from any Account Debtor, or otherwise recovered, shall receive them
in trust and, unless instructed to deliver them to the Bank, shall resell them
for the Bank. If required by the Bank, the Borrower shall notify the Bank
immediately of all disputes and claims by any Account Debtor and settle or
adjust them at no expense to the Bank. If the Bank directs after the occurrence
and during the continuance of an Event of Default, no discount or credit
allowance shall be granted by the Borrower to any Account Debtor. After the
occurrence and during the continuance of an Event of Default, all Account Debtor
payments and all net amounts received by the Bank in settlement, adjustment or
liquidation of any Accounts may be applied by the Bank to the Borrower's
indebtedness hereunder or credited to the Borrower's bank account (subject to
collection) with the Bank or any Affiliate of the Bank, as the Bank may deem
appropriate. If requested, the Borrower will have proper entries in its books,
disclosing the assignment of Accounts to the Bank.

SECTION 6.3. Account Warranties. The Borrower warrants and covenants
------------------
that: (1) all of the Accounts are and will be bona fide existing obligations
created by the sale and actual delivery of Inventory or other property or the
rendition of services or the furnishing of other good and sufficient
consideration to Account Debtors in the ordinary course of business consistent
with past practices; (2) all shipping or delivery receipts and other documents
furnished or to be furnished to the Bank in connection therewith are and will be
genuine; (3) none of the Accounts are or will be at any time subject to any Lien
except for Permitted Liens; and (4) the Borrower will not make any further
assignment of any thereof or create or permit to exist any further Lien therein,
nor permit any of the Bank's rights therein to be defeated by attachment, levy,
garnishment or other judicial process; and, except as the Borrower shall notify
the Bank, none of the Accounts are subject to setoff, credit, allowance or
adjustment by the Account Debtor thereon.

SECTION 6.4. Verification of Accounts. The Bank is authorized and
------------------------
empowered at any time or times hereafter in its sole discretion:

(1) To require the Borrower to notify, or the Bank itself
may notify, either in its own name, in the name of a nominee of
the Bank or in the Borrower's name, any Account Debtor obligated
in respect of any of

-36-
<PAGE>

the Accounts or any party obligated under contracts involved in
any of the Contract Rights assigned to the Bank, of the fact of
this assignment or to request in the Bank's name, in the name of
a nominee of the Bank, in the Borrower's name or in the name of a
third party, confirmation from any such Account Debtor or party
of the amount shown by the Accounts to be payable or any other
matter stated therein;

(2) To demand, collect or compromise any and all sums which
are now or may hereafter become due or owning upon any of the
Accounts;

(3) To enforce payment or performance of any of the
Collateral in the Bank's own name, in the name of a nominee of
the Bank or in the name of the Borrower; and

(4) To endorse in the Borrower's name and to collect any
instruments tendered or received in payment of any obligation
owing to the Borrower. Under no circumstances shall the Bank be
under any duty to act in regard to any of the foregoing matters.
The costs of such collection and enforcement, including
Attorneys' Fees and out-of-pocket expenses, and the cost of any
special bank account or accounts which may be required hereunder,
shall be borne solely by the Borrower whether the same are
incurred by the Bank or the Borrower.

SECTION 6.5. Collection of Accounts and Payments. At the request
-----------------------------------
of the Bank, after the occurrence and during the continuance of an Event of
Default, the Borrower will forthwith upon receipt of all checks, drafts, cash
and other remittances in payment or on account of any of the Accounts, deposit
the same in a special bank account with the Bank or an Affiliate of the Bank,
over which the Bank alone has power of withdrawals, and will designate with each
such deposit the particular Accounts upon which the remittance was made. The
Borrower acknowledges that the maintenance of such a bank account will be solely
for the convenience of the Bank in facilitating its own operations and the
Borrower has not and shall not have any right, title or interest in any such
bank account or in the amount at any time appearing to the credit thereof. Said
proceeds shall be deposited in precisely the form received except for the
Borrower's endorsement where necessary to permit collection of items, which
endorsement the Borrower agrees to make. Pending such deposit, the Borrower
agrees not to commingle any such checks, drafts, case and other remittances with
any of its funds or property, but will hold them separate and apart therefrom
and upon and express trust for the Bank until deposit

-37-
<PAGE>

thereof is made in the special bank account. Upon the full and final liquidation
of all Liabilities, the Bank will pay over to the Borrower any excess received
by the Bank from the Borrower, whether received by the Bank or an Affiliate of
the Bank as deposit in the special bank account or received by the Bank as a
direct payment on any of the sums due hereunder.

SECTION 6.6. Appointment as Attorney-in-Fact. The Borrower appoints
-------------------------------
the Bank, with full power of substitution, as the Borrower's attorney with
power: (1) to notify the post office authorities to change the address for
delivery of the Borrower's mail to an address designated by the Bank; to
receive, open and dispose of all mail addressed to the Borrower; (2) to send
requests for verification of Accounts to Account Debtors; (3) to open an escrow
account or assignee deposit account for the collection of Accounts, if not
required contemporaneously with the execution hereof; and (4) to do all things
necessary to carry out the terms of this Agreement. Neither the Bank nor its
attorney will be liable for any acts of commission or omission not for any error
in judgment or mistake of fact or law, unless the same shall have resulted from
the Bank's gross negligence or willful misconduct. This power, being coupled
with an interest, is irrevocable until either (a) all Liabilities are
indefeasibly paid in full, or (b) this Agreement is terminated, whichever shall
last occur. The Borrower expressly waives presentment, demand, notice of
dishonor and protest of all instruments and any other notice to which they or it
might otherwise be entitled. Notwithstanding anything contained in the foregoing
to the contrary, the Bank agrees that it will not exercise any of its rights
granted under this Section 6.6 prior to the occurrence of an Event of Default.
-----------

SECTION 6.7. Account Records. The Borrower will at all times keep
---------------
accurate and complete records of its Accounts and Inventory in accordance with
sound accounting practices and GAAP and will cause its books and records as at
the end of any calendar month to be posted and closed not more than thirty (30)
days after the last business day of such month. The Bank, or any of its agents,
shall have the right to call at the Borrower's place or places of business at
intervals to be determined by the Bank and without hindrance or delay, to
inspect the Borrower's Inventory and to inspect, audit, check and make copies
and/or extracts from the books, records, journals, orders, receipts,
correspondence and other data relating to Inventory, Accounts, Equipment,
Contract Rights, General Intangibles or to any other transactions between the
parties hereto. Any and all such inspections and/or audits shall be at the
Borrower's expense.

SECTION 6.8. Governmental Accounts. If any Accounts arise out of
---------------------
contracts with the United States or any department,

-38-
<PAGE>

agency, or instrumentality thereof, the Borrower will immediately notify the
Bank in writing and execute any instruments and take any steps required by the
Bank in order that all monies due and to become due under such contracts shall
be assigned to the Bank and notice thereof given to the Government under the
Federal Assignment of Claims Act.

SECTION 6.9. Instruments and Chattel Paper. If any Accounts should
-----------------------------
be evidenced by promissory notes, trade acceptances, or other instruments or
chattel paper for the payment of money, the Borrower will, unless otherwise
directed by the Bank, deliver the same to the Bank appropriately endorsed to its
order and, regardless of the form of such endorsement, the Borrower hereby
expressly waives presentment, demand, notice of dishonor, protest and notice of
protest and all other notices with respect thereto.

SECTION 6.10. Inventory Warranties. The Borrower warrants and
--------------------
covenants that: (1) all of the Inventory is and at all times shall be owned by
it, free of all Liens (except Permitted Liens); (2) the Borrower will not make
any further assignment of any thereof or create or permit to exist any further
Lien therein, nor permit any of the Bank's rights therein to be defeated by
attachment, levy, garnishment or other judicial process; (3) that, subject to
the following sentence, all Inventory shall be kept by the Borrower only at the
address of the Borrower at the address or addresses shown in Schedule 6.10
-------------
attached hereto. The Borrower shall promptly advise the Bank of the removal of
such Inventory to any other location at which it shall be stored. If the
Borrower sells Inventory for cash, and if requested by the Bank, all full and
partial payments therefor shall immediately be delivered by the Borrower to the
Bank in their original form. All proceeds shall be held by the Borrower in
trust for the Bank and shall be remitted to the Bank at the end of the day
received, or at such other time as the Bank may designate.

SECTION 6.11. No Liability. The Bank shall not be liable or
------------
responsible in any way for the safekeeping of any Inventory delivered to it, to
any bailee appointed by or for it, to any warehouseman, or under any other
circumstances. The Bank shall not be responsible for collection of any proceeds
or for losses in collected proceeds held by the Borrower in trust for the Bank.
Any and all risk of loss for any or all of the foregoing shall be upon the
Borrower, except for such loss as shall result from the Bank's gross negligence
or willful misconduct. The Bank shall have the right, but shall not be
obligated, to discharge any Liens and any taxes at any time levied or placed
upon any of all Inventory, including, without limitation, those arising under
statute or in favor of landlords,

-39-
<PAGE>

taxing authorities, government, public and/or private warehousemen, common
and/or private carriers, processors, finishers, draymen, coopers, dryers,
mechanics, artisans, laborers, attorneys, courts, or others; the Bank may also
pay for maintenance and preservation of Inventory. The Bank may charge to the
Borrower as a Revolving Loan any payment made or expense incurred by it under
this Section 6.11.
------------

SECTION 6.12. Equipment Warranties. The Borrower warrants and
--------------------
covenants: (1) that all of the Equipment is and at all times shall be owned by
it free of all Liens except for Permitted Liens; (2) that the Borrower will not
make any further assignment of any thereof or create or permit to exist any
further Lien therein, nor permit any of the Bank's rights therein to be defeated
by attachment, levy, garnishment or other judicial process; that all Equipment
shall be kept by the Borrower only at the address or addresses of Borrower shown
in Schedule 6.10 hereto, and shall not (without the Bank's prior written
-------------
approval) be removed therefrom. The Borrower shall at all times keep the
Equipment in good condition and repair (ordinary wear and tear expected), and
the Borrower shall not, without the prior written consent of the Bank, sell,
lease, or otherwise dispose of Equipment, or any part thereof, except in the
ordinary course of the Borrower's business. The Bank shall have the right, but
shall not be obligated, to discharge any Liens and any taxes at any time levied
or placed on any or all the Equipment, including, without limitation, those
arising under statue or in favor of landlords, taxing authorities, government,
public and/or private warehousemen, common and/or private carriers, processors,
finishers, draymen, coopers, dryers, mechanics, artisans, laborers, attorneys,
courts, or others; the Bank may also pay for the maintenance and preservation of
the Equipment. The Bank may charge to the Borrower as a Revolving Loan any
payment made or expense incurred by it under this Section 6.12.
------------

SECTION 6.13. Further Assurances. At the Bank's request, the
------------------
Borrower shall execute and/or deliver to the Bank, at any time or times
hereafter, such agreements, documents, financing statements, warehouse receipts,
bills of lading, notices of assignment of Accounts, schedules of Accounts
assigned, and other written matter necessary or requested by the Bank to perfect
and maintain perfected the Bank's security interest in the Collateral (all the
above hereinafter referred to as "Supplemental Documentation"), in form and
substance acceptable to the Bank, and pay the costs of any recording or filing
of the same. Upon the occurrence of an Event of Default, the Borrower hereby
irrevocably makes, constitutes and appoints the Bank (and all Persons designated
by the Bank for that purpose) as the Borrower's true and lawful attorney (and
agent-in-fact) to sign the name of the Borrower on any of the

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<PAGE>

Supplemental Documentation and to deliver any of the Supplemental Documentation
to such Persons as the Bank in its sole discretion, may elect. The Borrower
agrees that a carbon, photographic, photostatic, or other reproduction of this
Agreement or of a financing statement is sufficient as a financing statement.

ARTICLE VII

CONDITIONS PRECEDENT
--------------------

SECTION 7.1. Condition Precedent to Revolving Loan. The effectiveness
-------------------------------------
of this Agreement and the obligation of the Bank to continue to make Revolving
Loans or to continue to issue Letters of Credit to or for the account of the
Borrower is subject to the condition precedent that the Bank shall have received
on or before the day of such Revolving Loan or issuance of such Letter of Credit
(or with respect to any continuing Revolving Loan or Letter of Credit, on or
prior to the date hereof) each of the following, in form and substance
satisfactory to the Bank and its counsel (unless waived by the Bank):

(1) Revolving Note. The Revolving Note duly executed by the
--------------
Borrower;

(2) Trademark Agreement. The Trademark Agreement duly
-------------------
executed by the Borrower;

(3) Pledge Agreement. The Pledge Agreement duly executed by
----------------
the Parent, together with stock certificate(s) pledged thereunder
and related undated blank stock power(s);

(4) Guaranty. The Guaranty duly executed by the Parent;
--------

(5) Insurance. Evidence of the existence of insurance on
---------
all property of the Borrower, together with evidence establishing
the Bank as a loss payee and/or additional insured on all related
insurance policies;

(6) Certificate of the Parent. A certificate (dated as of
-------------------------
the date of this Agreement) of the Secretary of the Parent
certifying: (a) a copy of the Parent's Organic Documents as
theretofore amended; (b) copies of all corporate action taken by
the Parent, including resolutions of its Board of Directors,
authorizing the execution, delivery, and performance of the Loan
Documents by the Parent and each other

-41-
<PAGE>

document to be delivered pursuant to this Agreement (to the
extent the Parent is a party to such documents); (c) the names
and true signatures of the officers of the Parent authorized to
sign the Loan Documents to which it is a party and the other
documents to be delivered by the Parent under this Agreement; and
(d) an executed copy of the Recapitalization Agreement;

(7) Certificate of the Borrower. A certificate (dated as of
---------------------------
the date of this Agreement) of the Secretary of the Borrower
certifying: (a) a copy of the Borrower's Organic Documents as
theretofore amended; (b) copies of all corporate action taken by
the Borrower, including resolutions of its Board of Directors,
authorizing the execution, delivery, and performance of the Loan
Documents by the Borrower and each other document to be delivered
pursuant to this Agreement (to the extent the Borrower is a party
to such documents) and authorizing borrowings by each of the
Authorized Officers; (c) the names and true signatures of the
officers of the Borrower authorized to sign the Loan Documents to
which it is a party and the other documents to be delivered by
the Borrower under this Agreement; (d) an executed copy of the
Assignment and Assumption Agreement consented to by the Bank; and
(e) an executed copy of the Indenture;

(8) Chief Financial Officers Certificate of the Parent.
--------------------------------------------------
Certificate of the Chief Financial Officer of the Parent
certifying as to (a) receipt of all proceeds in accordance with
the Recapitalization Agreement, and (b) receipt of $75,000,000 in
proceeds from the issuance of the Subordinated Debt;

(9) Certified Charter and Good Standing. A certificate of
-----------------------------------
the due formation, valid existence and good standing of the
Parent and the Borrower in its respective state of incorporation,
issued by the appropriate authorities of such jurisdictions, and
certificates of the Parent's and the Borrower's good standing and
due qualification to do business, issued by appropriate officials
in any states in which the Parent or the Borrower, as the case
may be, owns property subject to this Agreement;

(10) Opinion of Counsel for the Parent and the Borrower. (a)
--------------------------------------------------
A favorable opinion of Kirkland & Ellis, special counsel for the
Parent and the Borrower, in substantially the form of Exhibit C
---------
and as to such other matters as the Bank may reasonably request,
and

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<PAGE>

(b) reliance letter from Rudnick & Wolfe with respect to its
opinion delivered pursuant to the Recapitalization Agreement;

(11) Public Filings. Evidence of each filing, registration
--------------
or recordation (and payment of any necessary fee, tax or expense
relating thereto) with respect to each document (including,
without limitation, any UCC financing statement) required by the
Loan Documents or under law or requested by the Bank to be filed,
registered or recorded in order to create, in favor of the Bank a
perfected first Lien on the Collateral;

(12) Reimbursement Agreement. An amendment to the
-----------------------
Reimbursement Agreement (as such term is defined under the
Existing Loan and Security Agreement) as to such matters as the
Bank may request;

(13) Closing Fee. Payment to the Bank of a non-refundable
-----------
closing fee of $50,000; and

(14) Miscellaneous. Such other information and documents as
-------------
may reasonably be required by the Bank and the Bank's counsel.

SECTION 7.2. Conditions Precedent to All Revolving Loans and Letters
-------------------------------------------------------
of Credit. The obligation of the Bank to make each Revolving Loan and to issue
- ---------
each Letter of Credit shall be subject to the further conditions precedent that
on the date of such Revolving Loan or the issuance of such Letter of Credit:

(1) The Bank shall have received a Notice of Borrowing with
respect to each request for a Revolving Loan or an LC Application
with respect to each request for the issuance of a Letter of
Credit.

(2) No Default or Event of Default exists or will result
from the making of such Revolving Loan or issuance of such Letter
of Credit.

(3) The representations and warranties of the Borrower and
the Parent contained in the Loan Documents (including without
limitation, Article VIII of this Agreement) are true and correct
------------
with the same effect as though made on the date of the making of
such Revolving Loan or issuance of such Letter of Credit, except
to the extent such representation and warranty expressly speaks
to an earlier date.

-43-
<PAGE>

(4) No Material Litigation exists except as disclosed on
Schedule 7.2, and since the Effective Date of this Agreement no
------------
Material Litigation Development has occurred with respect to any
Litigation so disclosed on Schedule 7.2.
------------

(5) No Material Adverse Change has occurred since the date
of the most recent financial statements delivered or required to
be delivered pursuant to the terms of this Agreement.

ARTICLE VII

REPRESENTATIONS AND WARRANTIES
------------------------------

The Parent and the Borrower each represents and warrants to the Bank,
all of which shall survive the closing that

SECTION 8.1. Incorporation, Good Standing, and Due Qualification. It
---------------------------------------------------
and each of its Subsidiaries: (1) is a corporation duly incorporated, validly
existing and in good standing under the laws of the jurisdiction of its
incorporation; (2) has the corporate power and authority, and has all material
governmental licenses, authorizations, consents and approvals necessary to own
its assets and to transact the business in which it is now engaged or proposed
to be engaged; and (3) is duly qualified as a foreign corporation and in good
standing under the laws of each other jurisdiction in which such qualification
is required. The Parent conducts business in its name exclusively and has no
trade names, styles or doing business forms. The Borrower conducts business in
its name exclusively and has no trade names, styles or doing business forms
other than the trade style "Pen-Tab" and "Vinylweld."

SECTION 8.2. Corporate Power and Authority. The execution, delivery,
-----------------------------
and performance by it of the Loan Documents to which it is a party have been
duly authorized by all necessary corporate and stockholder action (if required)
and do not and will not (1) contravene the Parent's or the Borrower's charter or
bylaws; (2) violate any provision of any law, rule, regulation (including,
without limitation, Regulation U of the FRB), order, writ, judgment, injunction,
decree, determination, or award presently in effect having applicability to the
Parent or the Borrower; (3) result in a breach of or constitute a default under
any indenture or loan or credit agreement or any other agreement, lease, or
instrument to which the Parent or the Borrower is a party or by which it or its
properties may be bound or affected; (4) result in, or require, the creation or
imposition of any Lien (except Liens in favor of the Bank), upon or with respect
to any

-44-
<PAGE>

of the properties now owned or hereafter acquired by the Parent or the
Borrower; or (5) cause the Parent or the Borrower to be in default
under any such law, rule, regulation, order, writ, judgment,
injunction, decree, determination, or award or any such indenture,
agreement, lease, or instrument.

SECTION 8.3. Legally Enforceable Agreement. This Agreement is, and
-----------------------------
each of the other Loan Documents when delivered under this Agreement will be,
legal, valid, and binding obligations of the Parent and the Borrower (to the
extent such Person is a party to such Loan Documents) enforceable against the
Parent and the Borrower in accordance with their respective terms.

SECTION 8.4. Financial Statements. Borrower's audited consolidated
--------------------
financial statements as at December 30, 1995 and its unaudited consolidated
financial statements as at November 24, 1996, copies of which have been
furnished to the Bank, have been prepared in conformity with GAAP and accurately
present the financial condition of the Borrower and its Subsidiaries as at such
dates and the results of operations for the periods then ended, and since
November 24, 1996, there has been no Material Adverse Change. There are no
liabilities of the Borrower or any Subsidiary, fixed or contingent, which are
material but are not reflected in the financial statements or in the notes
thereto, other than liabilities arising in the ordinary course of business since
November 24, 1996. No information, exhibit, or report furnished by the Parent
or the Borrower to the Bank in connection with the negotiation of this Agreement
contained any material misstatement of fact or omitted to state a material fact
or any fact necessary to make the statements contained therein not materially
misleading.

SECTION 8.5. Other Agreements. Neither the Parent, the Borrower nor
----------------
any Subsidiary is a party to any indenture, loan, or credit agreement, or to any
lease or other agreement or instrument, or subject to any charter or corporate
restriction which could have a Material Adverse Effect, or restrict the ability
of the Parent or the Borrower to carry out their respective obligations under
the Loan Documents or the Other Agreements. Neither the Parent, the Borrower
nor any Subsidiary is in default in any respect in the performance, observance,
or fulfillment of any of the obligations, covenants, or conditions contained in
any agreement or instrument material to its business to which it is a party.

SECTION 8.6. Litigation. There is no pending or threatened action or
----------
proceeding against or affecting the Parent, the Borrower or any Subsidiary
before any court, governmental

-45-
<PAGE>

agency, or arbitrator, which may, in any one case or in the aggregate have a
Material Adverse Effect.

SECTION 8.7. No Defaults on Outstanding Judgments or Orders. The
----------------------------------------------
Parent, the Borrower, and each Subsidiary has satisfied all judgments, and no
such Person is in default with respect to any judgment, writ, injunction,
decree, rule, or regulation of any court, arbitrator, or federal, state,
municipal, or other governmental authority, commission, board, bureau, agency,
or instrumentality, domestic or foreign.

SECTION 8.8. Approvals. Except for filings and recordings of Liens
---------
created pursuant to this Agreement, the Trademark Agreement and the Pledge
Agreement, no authorizations, approvals or consents of, and no filings or
registrations with, any governmental or regulatory authority or agency are
necessary for the execution, delivery or performance by the Borrower of the Loan
Documents or for the validity or enforceability thereof.

SECTION 8.9. Ownership and Liens. The Parent, the Borrower and each
-------------------
Subsidiary has title to, or valid leasehold interests in, all of its properties
and assets, real and personal, including the properties and assets and leasehold
interest reflected in the financial statements referred to in Section 8.4 (other
-----------
than any properties or assets disposed of in the ordinary course of business),
and none of the properties and assets owned by such Person and none of their
leasehold interests is subject to any Lien, except for Permitted Liens.
Notwithstanding the foregoing, the Parent has no properties or assets other than
its ownership of 100% of the stock of the Borrower.

SECTION 8.10. Subsidiaries. As of the date hereof, the Borrower has
------------
no Subsidiaries and, other than the Borrower which is a wholly owned Subsidiary
of the Parent, the Parent has no Subsidiaries.

SECTION 8.11. ERISA. The Parent, the Borrower and the ERISA
-----
Affiliates have fulfilled their respective obligations under the minimum funding
standards of ERISA and the Code with respect to each Plan and are in compliance
in all material respects with the presently applicable provisions of ERISA and
the Code, and have not incurred any liability to the PBGC or any Plan or
Multiemployer Plan (other than to make contributions in the ordinary course of
business).

SECTION 8.12. Real Property. Schedule 8.12 hereto sets forth, as of
------------- -------------
the date hereof, a complete and accurate list of (1) the address and legal
descriptions of any real property owned or leased by the Borrower or on which
any Fixtures are

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<PAGE>

located and (2) in the case of Fixtures located on property not owned by the
Borrower, the name(s) and mailing addresses of the record owners of such
property. The Parent does not own or lease any real property.

SECTION 8.13. Hazardous Materials. The Parent, the Borrower and each
-------------------
Subsidiary has obtained all permits, licenses and other authorizations which are
required under all Environmental Laws, except to the extent failure to have any
such permit, license or authorization would not have a Material Adverse Effect.
The Parent, the Borrower and each Subsidiary is in compliance with the terms and
conditions of all such permits, licenses and authorizations, and are also in
compliance with all other limitations, restrictions, conditions, standards,
prohibitions, requirements, obligations, schedules and timetables contained in
any applicable Environmental Law or in any regulation, code, plan, order,
decree, judgment, injunction, notice or demand letter issued, entered,
promulgated or approved thereunder, except to the extent failure to comply would
not have a Material Adverse Effect.

There have been no environmental investigations, studies, audits,
tests, reviews or other analyses conducted by or which are in the possession of
the Parent, the Borrower or any Subsidiary in relation to any property or
facility now or previously owned or leased by the Parent, the Borrower or any
Subsidiary which have not been made available to the Bank.

SECTION 8.14. Taxes. Each of the Parent and the Borrower and each
-----
Subsidiary has filed all tax returns (federal, state, and local) required to be
filed and have paid all taxes, assessments, and governmental charges and levies
thereon to be due, including interest and penalties.

SECTION 8.15. Debt. As of the date hereof, Schedule 8.15 sets forth
---- -------------
a complete and correct list of all credit agreements, indentures, purchase
agreements, guaranties, Capital Leases, and other investments, agreements, and
arrangements presently in effect providing for or relating to extensions of
credit (including agreements and arrangements for the issuance of letters of
credit or for acceptance financing) in respect of which the Parent, the Borrower
or any Subsidiary is in any manner directly or contingently obligated; and the
maximum principal or face amounts of the credit in question, which are
outstanding and which can be outstanding, are correctly stated, and all Liens of
any nature given or agreed to be given as security therefor are correctly
described or indicated in Schedule 10.1.
-------------

-47-
<PAGE>

SECTION 8.16. Senior Obligations, etc. The Borrower has the power and
-----------------------
authority to incur the Subordinated Debt provided for under the Indenture and
has duly authorized, executed and delivered the Indenture and each note issued
pursuant thereto. The Indenture constitutes the legal, valid and binding
obligation of the Borrower enforceable against the Borrower in accordance with
its terms. The subordination provisions of the Indenture will be enforceable
against the holders thereof by the Senior Debt (as defined in the Indenture).
All (i) Liabilities, including those to pay principal of and interest (including
post-petition interest) on the Revolving Loans and Letters of Credit (as such
term is defined in this Agreement and the Reimbursement Agreement) and fees and
expenses in connection therewith, constitute Senior Debt (as defined in the
Indenture) and all such Liabilities are entitled to the benefits of the
subordination created by the Indenture (ii) the subordination provisions of the
Indenture are enforceable by the Bank against the holders of Subordinated Debt
and (iii) payments of, or interest on, any Subordinated Debt made by Borrower
are subject to such subordination provisions. The Borrower acknowledges that
the Bank is entering into this Agreement, and is extending its Commitments in
reliance upon, the subordination provisions of the Indenture and this Section.

SECTION 8.17. Investment Company Act. Neither the Parent nor the
----------------------
Borrower is an "investment company," or a company "controlled" by an "investment
company," within the meaning of the Investment Company Act of 1940, as amended.

SECTION 8.18. Public Utility Holding Company Act. Neither the Parent
----------------------------------
nor the Borrower is a "holding company," or an "affiliate" of a "holding
company" or a "subsidiary company" of a "holding company," within the meaning of
the Public Utility Holding Company act of 1935, as amended.

ARTICLE IX

AFFIRMATIVE COVENANTS
---------------------

So long as the Bank has any Commitment hereunder or any of the
Liabilities remain unpaid or outstanding, the Parent and the Borrower will:

SECTION 9.1. Maintenance of Existence. Preserve and maintain, and
------------------------
cause each Subsidiary to preserve and maintain, its corporate existence and good
standing in the jurisdiction of its incorporation, and qualify and remain
qualified, and cause each Subsidiary to qualify and remain qualified, as a
foreign

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<PAGE>

corporation in each jurisdiction in which such qualification is required.

SECTION 9.2. Maintenance of Records. Keep, and cause each Subsidiary
----------------------
to keep, adequate records and books of account, in which complete entries will
be made in accordance with GAAP consistently applied, reflecting all financial
transactions of the Parent, the Borrower and each Subsidiary.

SECTION 9.3. Maintenance of Properties. Maintain, keep, and
-------------------------
preserve, and cause each Subsidiary to maintain, keep, and preserve, all of its
properties (tangible and intangible) necessary or useful in the proper conduct
of its business in good working order and condition, ordinary wear and tear
excepted.

SECTION 9.4. Conduct of Business. Continue, and cause each
-------------------
Subsidiary to continue, to engage in the line of business in which it is
currently engaged, and in no other line of business unless consented to in
writing by the Bank.

SECTION 9.5. Compliance With Laws. Comply, and cause each Subsidiary
--------------------
to comply, in all respects with all applicable laws, rules, regulations, and
orders, such compliance to include, without limitation, paying before the same
become delinquent all taxes, assessments, and governmental charges imposed upon
it or upon its property.

SECTION 9.6. Right of Inspection. At any reasonable time and from
-------------------
time to time, permit the Bank or any agent or representative thereof to examine
and make copies of and abstracts from the records and books of account of, and
visit the properties of, the Parent, the Borrower and any Subsidiary, and to
discuss the affairs, finances, and accounts of the Parent, the Borrower and any
Subsidiary with any of their respective officers, directors and employees and
the Parent's and the Borrower's independent accountants. If the Bank has a duty
or obligation under applicable laws, regulations or legal requirements to
disclose any report or findings made as a result of, or in connection with, any
such inspection, the Bank may make such a disclosure; provided, that the Bank
agrees to notify the Borrower of such disclosure. The Borrower also understands
and agrees that the Bank makes no representation or warranty to the Borrower or
any other party regarding the truth, accuracy of completeness of any such report
or findings that may be disclosed. The Borrower also understands that depending
on any inspection by the Bank and disclosed to the Borrower, the Borrower may
have a legal obligation to notify one or more environmental agencies of the
results, that such reporting requirements are site-specific, and are to be
evaluated by the Borrower without advice or assistance from the Bank.

-49-
<PAGE>

SECTION 9.7 Reporting Requirements. Furnish to the Bank:
----------------------

(1) Monthly Financial Statements. As soon as available and in any
----------------------------
event within thirty (30) days after the end of each month in each fiscal
year of the Borrower, consolidated and consolidating balance sheets of the
Borrower and its Subsidiaries as of the end of such month, consolidated and
consolidating statements of income and retained earnings of the Borrower
and its Subsidiaries for the period commencing at the end of the previous
fiscal year and ending with the end of such month, and consolidated and
consolidating cash flow statements of the Borrower and its Subsidiaries for
the portion of the fiscal year ended with the last day of such month, all
in reasonable detail and stating in comparative form the respective
consolidated and consolidating figures for the corresponding date and
period in the previous fiscal year and all prepared in accordance with GAAP
consistently applied and certified by the chief financial officer of the
Borrower (subject to year-end adjustments and absence of footnotes);

(2) Annual Financial Statements. (a) As soon as available and in
---------------------------
any event within ninety (90) days after the end of each fiscal year of the
Borrower, a consolidated and consolidating balance sheet of the Borrower
and its Subsidiaries as of the end of such fiscal year, consolidated and
consolidating statements of income and retained earnings of the Borrower
and its Subsidiaries for such fiscal year, and consolidated and
consolidating statements of cash flows of the Borrower and its Subsidiaries
for such fiscal year, all in reasonable detail and stating in comparative
form the respective consolidated figures for the corresponding date and
period in the prior fiscal year and all prepared in accordance with GAAP
consistently applied and as to the consolidated statements accompanied by
an opinion thereon acceptable to the Bank by Ernst & Young L.L.P. or other
independent accountants selected by the Borrower and acceptable to the
Bank, and (b) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of the Parent, a consolidated and
consolidating balance sheet of the Parent and its Subsidiaries as of the
end of such fiscal year, consolidated and consolidating statements of
income and retained earnings of the Parent and its Subsidiaries for such
fiscal year, and consolidated and consolidating statements of cash flows of
the Parent and its Subsidiaries for such fiscal year, all in

50
<PAGE>

reasonable detail and stating in comparative form the respective
consolidated figures for the corresponding date and period in the prior
fiscal year and all prepared in accordance with GAAP consistently applied
and as to the consolidated statements accompanied by an opinion thereon
acceptable to the Bank by Ernst & Young L.L.P. or other independent
accountants selected by the Borrower and acceptable to the Bank;

(3) Certificate of no Default. Together with the financial
-------------------------
statements furnished by the Borrower under the preceding clause (1) with
----------
respect to the calendar months of March, June, September and December, and
clause (2), a certificate of the chief financial officer of the Borrower
----------
(a) certifying that to the best of his knowledge no Default or Event of
Default has occurred and is continuing, or if a Default or Event of Default
has occurred and is continuing, a statement as to the nature thereof and
the action which is proposed to be taken with respect thereto, and (b) with
computations demonstrating compliance with the covenants contained in
Article XI;
----------

(4) Accountant's report. Simultaneously with the delivery of the
-------------------
annual financial statements referred to in Section 9.8(2), a certificate of
--------------
the independent public accountants who audited such statements to the
effect that, in making the examination necessary for the audit of such
statements, they have obtained no knowledge of any condition or event which
constitutes a Default or Event of Default, or if such accountants shall
have obtained knowledge of any such condition or event, specify in such
certificate each such condition or event of which they have knowledge and
the nature and status thereof;

(5) Business Plan. As soon as available, but in any event: (a)
-------------
within 45 days after the beginning of each fiscal year of the Borrower, a
copy of the plan and forecast (including a projected closing consolidated
and consolidating balance sheet, income statement and funds flow
statements) of the Borrower for such fiscal year;

(6) Notice of Litigation; Government Disputes. Promptly after the
-----------------------------------------
commencement thereof, notice of all Litigation and/or disputes with any
governmental authority affecting the Parent, the Borrower or any
Subsidiary, which, if determined adversely to such Person, could have a
Material Adverse Effect;

51
<PAGE>

(7) Notice of Defaults and Events of Default; Material Adverse
----------------------------------------------------------
Change. As soon as possible and in any event within two (2) Business Days
------
after any officer of the Parent or the Borrower becomes aware of the
occurrence of each Default or Event of Default or Material Adverse Change,
a written notice setting forth the details of such Default or Event of
Default or Material Adverse Change and the action which is proposed to be
taken by the Parent or the Borrower, as the case may be, with respect
thereto;

(8) ERISA reports. Promptly after the filing or receiving thereof,
-------------
copies of all reports, including annual reports, and notices which the
Parent, the Borrower or any Subsidiary files with or receives from the PBGC
or the U.S. Department of Labor under ERISA; and as soon as possible and in
any event within thirty (30) days after either the Parent, the Borrower or
any Subsidiary knows or has reason to know that any Reportable Event or
Prohibited Transaction has occurred with respect to any Plan or that the
PBGC or the Parent, the Borrower or any Subsidiary has instituted or will
institute proceedings under Title IV of ERISA to terminate any Plan, the
Parent and/or the Borrower, as the case may be, will deliver to the Bank a
certificate of the chief financial officer of the Parent and/or the
Borrower, as the case may be, setting forth details as to such Reportable
Event or Prohibited Transaction or Plan termination and the action the
Parent or the Borrower, as the case may be, proposes to take with respect
thereto;

(9) Account Aging. Within fifteen (15) days after the end of each
-------------
month, an aging of all Accounts and an aging of all accounts payable as of
the end of such month, in form and content acceptable to the Bank;

(10) Inventory. Within fifteen (15) days after the end of each month,
---------
an Inventory certification report as of the end of such month for all
Inventory locations, in form and content acceptable to the Bank;

(11) Borrowing Base Certificate. On the fifteenth day (15th) day and
--------------------------
on the thirtieth (30th) of each month (unless such day is not a Business
Day, in which case on the next immediately succeeding Business Day
thereafter), a certificate, substantially in the form of Exhibit D attached
---------
hereto, containing a computation of the Borrowing Base;

52
<PAGE>

(12) Proxy statements, etc. Promptly after the sending or filing
---------------------
thereof, (i) copies of all proxy statements, financial statements, and
reports which the Parent, the Borrower or any Subsidiary sends to its
stockholders, if any, and copies of all regular, periodic, and special
reports, and all registration statements which the Parent, the Borrower or
any Subsidiary files with the Securities and Exchange Commission (or any
governmental authority which may be substituted therefor) or with any
national securities exchange and (ii) copies of all notices and documents
sent to the holders of the Subordinated Debt and any holder of Debt for
borrowed money owing by the Borrower or any of its Subsidiaries (other than
routine notices sent in the ordinary course of business such as borrowing
requests, conversion notices and the like);

(13) Environmental Liabilities. Promptly upon learning thereof,
-------------------------
written notice (together with copies, if available) of all written claims,
complaints, notices or inquiries relating to the Borrower's or any
Subsidiary's (a) properties or facilities, or (b) compliance with
Environmental Laws, together with a description of the steps being taken by
the Borrower or such Subsidiary with respect thereto;

(14) General information. Such other information respecting the
-------------------
condition or operations, financial or otherwise, of the Parent, the
Borrower or any Subsidiary as the Bank may from time to time reasonably
request.

SECTION 9.8 Environmental Laws. Use and operate, and cause each
------------------
Subsidiary to use and operate, all of its facilities and properties in material
compliance with all Environmental Laws, keep all necessary permits, approvals,
certificates, licenses and other authorizations relating to environmental
matters in effect and remain in material compliance therewith, and handle all
hazardous substances in material compliance with all applicable Environmental
Laws, except to the extent the failure to comply with the foregoing would not
have a Material Adverse Effect; and provide such information and certifications
which the Bank may reasonably request from time to time to evidence compliance
with this Section.

SECTION 9.9 Maintenance of Bank Accounts. Maintain all bank
----------------------------
accounts of the Parent and the Borrower with the Bank which accounts shall be
subject to the customary fees of the Bank; provided, however, that the Borrower
-------- -------
may maintain in the ordinary course of business one or more payroll and other

53
<PAGE>

operating accounts with parties other than the Bank, provided, further, that the
-------- -------
aggregate deposit balances in all such accounts shall at no time exceed
$500,000.

SECTION 9.10 Inventory and Equipment Locations. Promptly notify the
---------------------------------
Bank if and when any of the Borrower's Inventory or Equipment is placed in
locations other than those identified in this Agreement.

SECTION 9.11 Places of Business. Promptly advise the Bank in
------------------
writing of the proposed opening of new places of business by the Borrower or any
Affiliate thereof, or the closing of any existing places of business of the
Borrower or any Affiliate thereof, of any changes in the name of Borrower or any
Affiliate thereof, or the use of any trade names by the Borrower or any
Affiliate thereof, or of any material change in the condition of the Collateral.

SECTION 9.12 Insurance. Keep the Collateral properly housed and
---------
insured for its full insurable value against loss or damage by fire, theft,
explosion, sprinklers, collision (in the case of motor vehicles) and such other
risks as are customarily insured against by persons engaged in business similar
to that of the Borrower, with such companies, in such amounts and under policies
in such form as shall be satisfactory to the Bank. Certificates of such policies
of insurance have been or will be delivered to the Bank within fifteen (15) days
after the date hereof, together with evidence of payment of all premiums
therefor, and shall contain an endorsement, in a form and substance acceptable
to the Bank, showing the Bank a loss payee and an additional insured. Such
endorsement or an independent instrument furnished to the Bank, shall provide
that the insurance companies will give the Bank at least thirty (30) days'
written notice before any such policy or policies of insurance shall be altered
or cancelled and that no act, whether willful or negligent, or default of the
Borrower or any other Person shall affect the right of the Bank to recover under
such policy or policies of insurance in case of loss or damage. After the
occurrence of an Event of Default, the Borrower hereby agrees to direct all
insurers under such policies of insurance to pay all proceeds payable thereunder
directly to the Bank. The Borrower irrevocably makes, constitutes and appoints
the Bank and any Person whom the Bank may from time to time designate (and all
officers, employees or agents designated by the Bank or such Person) as the
Borrower's true and lawful attorney (and agent-in-fact) for the purpose of
making, settling and adjusting claims under such policies of

54
<PAGE>

insurance, endorsing the name of the Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and for
making all determinations and decisions with respect to such policies of
insurance. In the event the Borrower at any time or times hereafter shall fail
to obtain or maintain any of the policies of insurance required herein or to pay
any premium in whole or in part relating thereto, then the Bank, without waiving
or releasing any obligations or Default by the Borrower hereunder, may at any
time or times thereafter (but shall be under no obligation to do so) obtain and
maintain such policies of insurance and pay such premiums and take any other
action with respect thereto which the Bank deems advisable. All sums so
disbursed by the Bank, including reasonable Attorneys' Fees, court costs,
expenses and other charges relating thereto, shall be payable on demand by the
Borrower to the Bank.

SECTION 9.13. Proceeds. Use all monies and other property obtained
--------
by the Borrower from the Bank pursuant to this Agreement solely for working
capital and general corporate purposes of the Borrower.

SECTION 9.14 Collateral Identification. At request of the Bank,
-------------------------
stamp on its records concerning the Collateral a notation, in form satisfactory
to the Bank, of the Lien of the Bank hereunder, and the Borrower will not
maintain duplicates or copies of such records at any address other than the
Borrower's principal place of business.

SECTION 9.15 Annual Clean-Up. For a period of not less than sixty
---------------
(60) consecutive days beginning September 30 of each fiscal year, reduce the
aggregate outstanding principal amount of Revolving Loans plus accrued interest
thereon to zero.

ARTICLE X

NEGATIVE COVENANTS
------------------

So long as the Bank shall have any Commitment hereunder or any of the
Liabilities remain unpaid or outstanding, neither the Parent nor the Borrower
will:

SECTION 10.1 Liens. Create, incur, assume, or suffer to exist, or
-----
permit any Subsidiary to create, incur, assume, or suffer to exist, any Lien
upon or with respect to any of its properties, now owned or hereafter acquired,
except Liens in favor of and granted to the Bank, or which arise by operation of
federal, state or local law and regulation with respect to sums not yet due, or
those Liens, security interest, mortgages, pledges and encumbrances listed on
Schedule 10.1 hereto or Liens arising in connection with Debt permitted pursuant
- -------------
to Section 7.2.4(5), and other Liens, which have been disclosed and
----------------

55
<PAGE>

consented to by the Bank in writing (collectively, "Permitted Liens").

SECTION 10.2 Debt. Create, incur, assume, or suffer to exist, or
----
permit any Subsidiary to create, incur, assume, or suffer to exist, any Debt,
except with respect to the Borrower:

(1) Debt under this Agreement, the Revolving Note and the Letters of
Credit;

(2) Debt described in Schedule 8.15, but no renewals, extensions, or
-------------
refinancings thereof;

(3) Accounts payable to trade creditors for goods or services which
are not aged more than sixty (60) days from billing date incurred in the
ordinary course of business and paid within the specified time, unless
contested in good faith and by appropriate proceedings;

(4) Debt under the Reimbursement Agreement, the IRB Letter of Credit
and the Bonds;

(5) Debt under Capital Leases; provided that the aggregate amount of
Capital Leases entered into during any one calendar year shall at no time
exceed $750,000;

(6) Subordinated Debt; provided, that the aggregate principal amount
--------
thereof shall at no time exceed $75,000,000;

(7) Other unsecured Debt of a type not otherwise permitted pursuant
to the preceding clauses (1) through (6) in an aggregate amount not to
----------- ---
exceed $250,000.

SECTION 10.3. Mergers, Etc. Merge or consolidate with, or sell,
------------
assign, lease, liquidate, dissolve or otherwise dispose of (whether in one
transaction or in a series of transactions) all or substantially all of its
assets (whether now owned or hereafter acquired) to any Person, or acquire all
or substantially all of the assets or the business of any Person, or permit any
Subsidiary to do so; provided that any Subsidiary may merge with and into the
Borrower.

SECTION 10.4. Leases. Create, incur, assume, or suffer to exist, or
------
permit any Subsidiary to create, incur, assume, or suffer to exist, any
obligation as lessee for the rental or hire of any real or personal property,
except leases between the Borrower and its Subsidiaries or between Subsidiaries
of the Borrower and, with respect to the Borrower and its

56
<PAGE>

Subsidiaries, leases with aggregate annual rents in an amount not to exceed
$2,000,000.

SECTION 10.5. Sale and Leaseback. Sell, transfer, or otherwise
------------------
dispose of, or permit any Subsidiary to sell, transfer, or otherwise dispose of,
any real or personal property to any Person and thereafter directly or
indirectly lease back the same or similar property.

SECTION 10.6 Restricted Payments, etc. Solely with respect to the
------------------------
Borrower or any Subsidiary,

(a) declare or pay any dividends; or purchase, redeem, retire, or
otherwise acquire for value any of its capital stock now or hereafter
outstanding; or make any distribution of assets to its stockholders as such
whether in cash, assets, or obligations of the Borrower; or allocate or
otherwise set apart any sum for the payment of any dividend or distribution
on, or for the purchase, redemption, or retirement of, any shares of its
capital stock; or make any other distribution by reduction of capital or
otherwise in respect of any shares of its capital stock; or permit any of
its Subsidiaries to purchase or otherwise acquire for value any stock of
the Borrower or any Subsidiary; provided, that (1) the Borrower may declare
--------
and deliver dividends and make distributions payable solely in its common
stock, (2) the Borrower may make cash distributions ("Tax Distributions")
to the Parent from time to time in amounts not exceeding the amount of
Federal, state and local income taxes actually owed by the Parent on a
consolidated basis with respect to the consolidated net income of the
Parent, (3) so long as no Default or Event of Default shall have occurred
and be continuing or will result therefrom, (i) the Borrower may pay other
dividends during any fiscal year provided that the aggregate amount of such
other dividends shall not exceed 50% of the Borrower's cumulative
consolidated net income measured from the Effective Date until the end of
the fiscal quarter for which the Borrower delivered financial statements to
the Bank in accordance with Section 9.7, (ii) the Borrower may pay other
-----------
dividends to the Parent of up to $250,000 per year to the Parent, the
proceeds of which shall be used by the Parent to pay its bona fide
operating expenses, and (iii) the Borrower may pay other dividends to the
Parent of up to $2,000,000 in aggregate, the proceeds of which shall be
used by the Parent, in accordance with Section 5.8 of the Parent's 1997
Stock Option Plan (effective February 4, 1997), to repurchase shares of its
stock held by certain of its employees, (4) any Subsidiary may make
distributions to the Borrower, and (5) the Borrower

57
<PAGE>

may pay other dividends to the Parent on the Effective Date in express
accordance with the Recapitalization Agreement.

(b) make (i) any payment of interest on any Subordinated Debt on any
day other than the stated, scheduled date (subject to any applicable grace
period) for such payment set forth in the Indenture, or which would violate
the subordination provisions of the Indenture, including, without
limitation, the provisions of Article 8 of the Indenture, or (ii make any
payment or voluntary or mandatory prepayment of principal of, or redeem,
purchase or defease, any Subordinated Debt. It being understood that this
clause (b) does not apply to payments on the Bonds.
----------

(c) if any payment of principal, interest or any other amount is
required to be paid or is paid on the same day with respect to any
Subordinated Debt, on the one hand, and with respect to this Agreement or
any other Loan Document, on the other hand, then all such amounts paid or
required to be paid with respect to this Agreement or such other Loan
Documents shall be paid in full in cash before any payments are made with
respect to the Subordinated Debt.

SECTION 10.7. Sale of Assets. Sell, lease, assign, transfer, or
--------------
otherwise dispose of (other than as a result of a Casualty Event for which any
resulting material loss is covered by insurance), or permit any Subsidiary to
sell, lease, assign, transfer, or otherwise dispose of (other than as a result
of a Casualty Event for which any resulting material loss is covered by
insurance), any of its now owned or hereafter acquired assets (including,
without limitation, shares of stock and indebtedness of Subsidiaries,
receivables, and leasehold interests), except with respect to the Borrower and
its Subsidiaries: (1) for Inventory disposed of in the ordinary course of
business; (2) the sale or other disposition of assets no longer used or useful
in the conduct of its business; (3) that any Subsidiary may sell, lease, assign,
or otherwise transfer its assets to the Borrower; and (4) the Borrower or any
Subsidiary may trade in or trade up, in its ordinary course of business, any of
its Equipment for similar Equipment of another Person.

SECTION 10.8. Investments. Make, or permit any Subsidiary to make,
-----------
any loan or advance to any Person (other than an Account), or purchase or
otherwise acquire, or permit any Subsidiary to purchase or otherwise acquire,
any capital stock, assets, obligations, or other securities of, make any capital
contribution to, or otherwise invest in or acquire any interest in any Person
except, with respect to the Borrower and its Subsidiaries: (1) direct
obligations of the United States or any agency thereof with maturities of one
year or less from the date

58
<PAGE>

of acquisition; (2) certificates of deposit with maturities of one year or less
from the date of acquisition issued by any commercial bank having capital and
surplus in excess of Five-Hundred Million Dollars ($500,000,000); (3) short term
asset management accounts with the Bank or any other short term investments with
the Bank or another financial institution acceptable to the Borrower; (4) for
stock, obligations, or securities received in settlement of debts (created in
the ordinary course of business) owing to the Borrower or any Subsidiary; (5)
loans and advances made by the Borrower to an employee; provided, that such
--------
loans and advances are (a) consistent with ordinary business practices and (b)
do not exceed an aggregate principal amount at any one time outstanding of
$25,000 with respect to such employee or of $100,000 with respect to all
employees of the Borrower.

SECTION 10.9. Guaranties, Etc. Assume, guarantee, endorse, or
---------------
otherwise be or become directly or contingently responsible or liable, or permit
any Subsidiary to assume, guarantee, endorse, or otherwise be or become directly
or contingently responsible or liable (including, but not limited to, an
agreement to purchase any obligation, stock, assets, goods, or services, or to
supply or advance any funds, assets, goods, or services, or to maintain or cause
such Person to maintain a minimum working capital or net worth, or otherwise to
assure the creditors of any Person against loss) for obligations of any Person,
except guaranties by endorsement of negotiable instruments for deposit or
collection or similar transactions in the ordinary course of business and the
Guaranty.

SECTION 10.10. Transaction With Affiliate. Except for the
--------------------------
transactions entered into in express accordance with the Recapitalization
Agreement on the Effective Date, enter into, directly or indirectly, or permit
any Subsidiary, directly or indirectly, to enter into any transaction with any
Affiliate, including, without limitation, the purchase, sale, lease or exchange
of property or the rendering of any service, or the making of any guarantee,
loan, advance or investment, except in the ordinary course of business of the
Borrower or any of its Subsidiaries and upon fair and reasonable terms no less
favorable to the Borrower or such Subsidiary than would be obtained in a
comparable arm's-length transaction with a Person not an Affiliate; provided, to
--------
the extent that any such transaction involves aggregate consideration in excess
of $1,000,000 then a majority of the disinterested directors of the Board of
Directors of the Borrower or the Subsidiary, as the case may, must determine, in
its good faith judgment evidenced by a resolution of such Board of Directors
filed with the Bank, that the terms of such transaction are at least as
favorable as the terms that could be obtained by the Borrower or such
Subsidiary, as the case

59
<PAGE>

may be, in a comparable transaction made on an arms-length basis between
unaffiliated parties; provided, further, that if the aggregate consideration
-------- -------
is in excess of $5 million the Borrower shall also obtain, prior to the
consummation of the transaction, the favorable opinion as to the fairness of the
transaction to the Borrower or such Subsidiary, from a financial point of view
from an independent financial advisor. For the purposes of this Section 10.10,
-------------
"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 such 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.

SECTION 10.11. Subsidiary, Etc. Create or otherwise acquire any
---------------
Subsidiary or acquire additional shares of the capital stock or other equity
interest of any existing Subsidiary; or sell or otherwise dispose of any shares
of capital stock of any Subsidiary or permit any Subsidiary to issue any
additional shares of its capital stock, except director's qualifying shares.

SECTION 10.12. Real Property. Purchase or otherwise acquire title to
-------------
any real property without the prior written consent of the Bank.

SECTION 10.13. Account Settlements. After the occurrence of an Event
-------------------
of Default and during the continuance thereof, permit or agree to any extension,
compromise or settlement or make any change or modification of any kind or
nature with respect to any Account, including any of the terms relating thereto.

SECTION 10.14. Modification of Certain Agreements. Consent to any
----------------------------------
amendment, supplement or other modification of any of the terms or provisions
contained in, or applicable to, the Indenture or the Organic Documents of the
Parent, the Borrower or any Subsidiary, except to the extent that such
amendment, supplement or other modification (a) with respect to any Organic
Document would not reasonably be expected to have a Material Adverse Effect, or
(b) with respect to the Indenture, would extend the date or reduce the amount of
any required repayment or redemption or would amend, supplement or modify any
term or provision not relating to rates of interest, amortization or
subordination in a manner not adverse to the Bank.

60
<PAGE>

SECTION 10.15. Assets of the Parent. Permit the Parent to have any
--------------------
assets other than its ownership of the stock of the Borrower.

ARTICLE XI

FINANCIAL COVENANTS
-------------------

So long as the Bank shall have any Commitment hereunder or any of the
Liabilities remain unpaid or outstanding, the Borrower will:

SECTION 11.1. Debt Service Coverage Ratio. Not permit, at the end of
---------------------------
any fiscal quarter, for the four consecutive fiscal quarter period then ended
(it being understood that with respect to any fiscal quarter ending prior to the
Effective Date the related components of this calculation shall be based on the
consolidated financials of the Parent), the ratio of (a) Consolidated EBITDA
minus Consolidated Capital Expenditures, to (b) Consolidated Fixed Charges to be
- -----
less than the minimum amount set forth below for the applicable fiscal year of
such fiscal quarter.

Fiscal Quarter Minimum Debt Service
Ending Coverage Ratio
-------------- --------------------
<S> <C>
1997 1.50:1.0
1998 2:00:1.0
1999 and thereafter 2.25:1.0
</TABLE>

SECTION 11.2. Net Worth. Not permit Consolidated Net Worth, at any
---------
time, to be less than the Minimum Consolidated Net Worth.

SECTION 11.3. Current Ratio. Not permit, at the end of any fiscal
-------------
quarter, its Consolidated Current Ratio to be less than 1.5:1. For purposes
hereof, "Consolidated Current Ratio" shall mean the ratio of (a) consolidated
current assets of the Borrower and its consolidated Subsidiaries to (b) the sum
of (i) consolidated current liabilities of the Borrower and its consolidated
Subsidiaries, plus (ii) without duplication, the amount of all then outstanding
----
Revolving Loans, plus (iii) without duplication, the aggregate undrawn amount of
----
any then outstanding commercial Letters of Credit, plus (iv) without
----
duplication, the aggregate unreimbursed amounts drawn under any commercial
Letters of Credit.

61
<PAGE>

ARTICLE XII

EVENTS OF DEFAULT
-----------------

SECTION 12.1. Events of Default.
-----------------

(1) The occurrence of any one or more of the following events shall
constitute a default ("Event of Default") by the Borrower under this Agreement:

(a) Non-Payment of Revolving Loans, Letters of Credit, etc. (i)
------------------------------------------------------
Default in the payment or prepayment when due of any principal on any
Revolving Loan; or (ii) default in the payment or prepayment when due of
any reimbursement obligation with respect to any LC Obligation and
continuance thereof for two (2) Business Days; or (iii) default in the
payment when due of any other amount owing by the Parent or the Borrower
pursuant to this Agreement or any other Loan Document and continuance
thereof for four (4) Business Days.

(b) Defaults of Other Debt. Default in the payment when due (subject
----------------------
to any applicable grace period), whether by acceleration or otherwise, of
any sums due in connection with Debt of the Parent or the Borrower or any
Subsidiary (other than Debt in respect of this Agreement), including
without limitation Subordinated Debt, in an aggregate principal amount in
excess of $250,000 or default in the performance or observance of any
obligation or condition with respect to any such Debt if the effect of such
default is to accelerate the maturity of any such Debt (including without
limitation such Subordinated Debt) or to permit the holder or holders
thereof, or any trustee or agent for such holders, to cause such Debt to
become due and payable prior to its expressed maturity.

(c) Bankruptcy, Insolvency, etc. The Parent, the Borrower or any
---------------------------
Subsidiary becomes insolvent or generally fails to pay, or admits in
writing its inability to pay, debts as they become due; or the Parent, the
Borrower or any Subsidiary applies for, consents to, or acquiesces in the
appointment of, a trustee, receiver or other custodian for such Person or
any property thereof, or makes a general assignment for the benefit of
creditors; or, in the absence of such application, consent or acquiescence,
a trustee, receiver or other custodian is appointed for the Parent, the
Borrower or any Subsidiary or for a substantial part of the property of any
such Person and

62
<PAGE>

is not discharged within 60 days; or any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under any bankruptcy or insolvency
law, or any dissolution or liquidation proceeding (except the voluntary
dissolution, not under any bankruptcy or insolvency law, of a Subsidiary),
is commenced in respect of the Parent, the Borrower or any Subsidiary and
if such case or proceeding is not commenced by such Person, it is consented
to or acquiesced in by such Person or remains for 60 days undismissed; or
the Parent, the Borrower or any Subsidiary takes any corporate action to
authorize, or in furtherance of, any of the foregoing.

(d) Defaults Under this Agreement. Failure by the Parent, the
-----------------------------
Borrower or any Subsidiary to comply with or perform (i) any of the
covenants or agreements applicable to it set forth in Sections 9.6 or 9.7,
------------ ---
or in Articles X (other than Section 10.1) or XI of this Agreement or (ii)
---------- ------------ --
any of the covenants or agreements applicable to it set forth in Section
-------
10.1 and continuance thereof for five (5) Business Days.
----

(e) Other Noncompliance with this Agreement or other Loan Documents.
---------------------------------------------------------------
Failure by the Parent, the Borrower or any Subsidiary to comply with or
perform any other provision of this Agreement or the other Loan Documents
applicable to it (other than those listed in Section 12.1(1)(d) or those
------------------
constituting an Event of Default under any of the other provisions of this

Article XII) and continuance of such failure for fifteen (15) Business Days
-----------
following notice thereof from the Bank.

(f) Representations and Warranties. Any representation or warranty
------------------------------
made by the Parent, the Borrower or any Subsidiary herein or in any of the
other Loan Documents is false or misleading in any material respect as of
the date hereof or as of the date hereafter certified, or any schedule,
certificate, financial statement, report, notice, or other writing
furnished by the Parent, the Borrower or any Subsidiary to the Bank is
false or misleading in any material respect on the date as of which the
facts therein set forth are stated or certified.

(g) Pension Plans and Welfare Plans. With respect to any Plan as to
-------------------------------
which the Parent, the Borrower or any Subsidiary may have any liability,
there shall exist a deficiency in the Plan assets

63
<PAGE>

available to satisfy the benefits guaranteeable under ERISA with respect to
such Plan and steps are undertaken to terminate such Plan or such Plan is
terminated or such Person withdraws from or institutes steps to withdraw
from such Plan or any material Reportable Event with respect to such
Pension Plan shall occur. With respect to any welfare Plan as to which the
Parent or the Borrower may have any liability, there shall occur any event
which could result in the incurrence by such Person of any increase in the
vested or contingent liability of the Borrower with respect to any post-
retirement welfare Plan benefit.

(h) Adverse Judgment. One or more final judgments or decrees shall
----------------
be entered against the Parent, the Borrower or any Subsidiary involving, in
the aggregate, a liability (not covered by collectible insurance) of
$250,000 or more and all such judgments or decrees shall not have been
vacated, satisfied, discharged or stayed or bonded pending appeal within
thirty (30) consecutive days from the entry thereof.

(i) Loan Documents. Any of the Loan Documents shall fail to remain
--------------
in full force and effect; or any action shall be taken by the Parent, the
Borrower or any Subsidiary to discontinue any of the Loan Documents or to
assert the invalidity of any thereof.

(j) Change in Control. The occurrence of a Change in Control.
-----------------

(k) Collateral Matters. (i) This Agreement, the Trademark Agreement
------------------
or the Pledge Agreement shall at any time after its execution and delivery
and for any reason cease: (A) to create a valid security interest (subject
only to Permitted Liens) in and to the property purported to be subject to
this Agreement, the Trademark Agreement or the Pledge Agreement, as the
case may be, or (B) to be in full force and effect or shall be declared
null and void, or the validity or enforceability thereof shall be contested
by the Parent, the Borrower or any Subsidiary, or any such Person (to the
extent such Person is a party to such agreement) shall deny it has any
further liability or obligation under or shall fail to perform any of its
material obligations under this Agreement, Trademark Agreement, or the
Pledge Agreement, as the case may be (subject to any applicable grace
periods set forth therein), or (ii) the Bank's Lien granted under this
Agreement, the Trademark Agreement, the

64
<PAGE>

Pledge Agreement or any Other Agreements shall cease to be a first-priority
Lien subject only to Permitted Liens.

(l) Guaranty. The Guaranty shall, at any time after its execution
--------
and delivery and for any reason cease to be in full force and effect or
shall be declared null and void, or the validity or enforceability thereof
shall be contested by the Parent, the Borrower or any Subsidiary or the
Parent shall deny it has any further liability or obligation under or shall
fail to perform its material obligations under such Guaranty (subject to
any applicable grace periods set forth therein).

(2) If any Event of Default described in Section 12.1(1)(c) shall
------------------
occur and be continuing, the Commitments (if they have not theretofore
terminated) shall immediately terminate and all Liabilities shall become
immediately due and payable, all without notice of any kind; and, in the case of
any other Event of Default, if such Event of Default has occurred and is
continuing, the Bank may declare the Commitments (if they have not theretofore
terminated) to be terminated and all Liabilities to be due and payable,
whereupon the Commitments (if they have not theretofore terminated) shall
immediately terminate and all Liabilities shall become immediately due and
payable, all without presentment, demand, protest or notice of any kind. The
Bank shall promptly advise the Borrower (and the Borrower shall promptly
thereafter advise the Parent) of any such declaration, but failure to do so
shall not impair the effect of such declaration. Notwithstanding the foregoing,
the effect as an Event of Default of any event described in this Article XII may
-----------
be waived by the Bank.

(3) In the event of the occurrence of any Event of Default and during
its continuance, the Bank may exercise any one or more or all of the following
remedies, all of which are cumulative and non-exclusive:

(a) Any remedy contained in this Agreement or in any of the other
Loan Documents or Other Agreements or any Supplemental Documentation;

(b) Any rights and remedies available to the Bank under the Uniform
Commercial Code as enacted in the State of Illinois as of the date of this
Agreement, and any other applicable law;

(c) Without notice, demand or legal process of any kind, the Bank may
take possession of any or all of the Collateral (in addition to Collateral
which it might already have in its possession), wherever it

65
<PAGE>

might be found, and for that purpose may pursue the same wherever it may be
found, and may enter into any of the Parent's or the Borrower's or any
Subsidiary's premises where any of the Collateral may be or is supposed to
be, and search for, take possession of, remove, keep and store any of the
Collateral until the same shall be sold or otherwise disposed of, and the
Bank shall have the right to store the same in any of the Parent's, the
Borrower's or any Subsidiary's premises without costs to the Bank;

(d) At the Bank's request, the Parent and the Borrower will, at the
Parent's and the Borrower's expense, assemble the Collateral and make it
available to the Bank at a place or places to be designated by the Bank
which is reasonably convenient to the Bank and the Borrower; and

(e) The Bank at its option, and pursuant to notification given to the
Parent and/or the Borrower as provided for below, may sell any Collateral
actually or constructively in its possession at public or private sale and
apply the proceeds thereof as provided below.

(4) Any notification of intended disposition of any of the Collateral
required by law shall be deemed reasonably and properly given if given at least
five (5) calendar days before such disposition.

(5) Any proceeds of any disposition by the Bank of any of the
Collateral may be applied by the Bank to the payment of expenses in connection
with the taking possession of, storing, preparing for sale, and disposition of
Collateral, including Attorneys' Fees and legal expenses, and any balance of
such proceeds may be applied by the Bank toward the payment of such of the
Liabilities, and in such order of application, as the Bank may from time to time
elect.

ARTICLE XII

MISCELLANEOUS
-------------

SECTION 13.1. Assignments and Participations. Nothing herein
------------------------------
contained shall affect the Bank's right to sell or grant assignments, or
participations to one or more banks or other financial institutions of, in or to
all or any part of the obligations owing to the Bank, the Commitment, the
Revolving Note and the Letters of Credit, and any assignee shall be deemed a
party hereto for all purposes of this Agreement and the Loan

66
<PAGE>

Documents. The Parent and the Borrower hereby each consents to the disclosure of
any information obtained by the Bank in connection herewith to any bank or
financial institution to which the Bank now or hereafter sells, or proposes to
sell, any such assignment or participation interest.

SECTION 13.2. Amendments, Etc. No amendment, modification,
---------------
termination, or waiver of any provision of any Loan Document to which the Parent
or the Borrower is a party, nor consent to any departure by the Parent or the
Borrower from any Loan Document to which it is a party, shall in any event be
effective unless the same shall be in writing and signed by the Bank, and then
such waiver or consent shall be effective only in the specific instance and for
the specific purpose for which given.

SECTION 13.3 Notices, Etc. All notices and other communications
------------
provided for under this Agreement and under the other Loan Documents or Other
Agreements to which the Parent or the Borrower is a party shall be in writing
(including telegraphic, telex or facsimile communication) and mailed or
telecommunicated or delivered, if to the Parent, at the Parent's address at 167
Kelley Drive, Front Royal, Virginia 22630, facsimile number (540) 622-2008,
Attn: William Leary, Chief Financial Officer, if to the Borrower, at the
Borrower's address at 167 Kelley Drive, Front Royal, Virginia 22630, facsimile
number (540) 622-2008, Attn: William Leary, Chief Financial Officer, and if to
the Bank, at its address at 231 South LaSalle Street, Chicago, Illinois 60697,
facsimile number (312) 828-1974, Attn: Richard DiDonato; or, as to each party,
at such other address as shall be designated by such party in a written notice
to the other party complying as to delivery with the terms of this Section 13.3.
------------
All such notices and communications shall, when mailed or telecommunicated, be
effective when deposited in the mails, transmitted by telex and the appropriate
answerback received, transmitted by facsimile or delivered to the telegraph
company, respectively, addressed as aforesaid, except that notices to the Bank
pursuant to the provisions of Article II and III shall not be effective until
---------- ---
received by the Bank.

SECTION 13.4. No Waiver; Remedies. No failure on the part of the
-------------------
Bank to exercise, and no delay in exercising, any right, power, or remedy under
any Loan Documents shall operate as a waiver thereof; nor shall any single or
partial exercise of any right under any Loan Documents preclude any other or
further exercise thereof or the exercise of any other right. The remedies
provided in the Loan Documents are cumulative and not exclusive of any remedies
provided by law.

67
<PAGE>

SECTION 13.5. Successors and Assigns. This Agreement shall be
----------------------
binding upon and inure to the benefit of the Parent, the Borrower and the Bank
and their respective successors and assigns, except that neither the Parent nor
the Borrower may assign or transfer any of its rights under any Loan Document to
which it is a party without the prior written consent of the Bank.

SECTION 13.6. Costs, Expenses, and Taxes. The Borrower agrees to
--------------------------
pay on demand all reasonable costs and expenses in connection with the
preparation, negotiation, execution, delivery, filing, recording, and
administration of any of the Loan Documents, including, without limitation, any
local counsel who may be retained by said counsel, with respect thereto and with
respect to advising the Bank as to its rights and responsibilities under any of
the Loan Documents, and all costs and expenses, if any, in connection with the
enforcement of any of the Loan Documents. In addition, the Borrower shall pay
any and all stamp and other taxes and fees payable or determined to be payable
in connection with the execution, delivery, filing, and recording of any of the
Loan Documents and the other documents to be delivered under any such Loan
Documents, and agrees to save the Bank harmless from and against any and all
liabilities with respect to or resulting from any delay in paying or omission to
pay such taxes and fees.

SECTION 13.7. Right of Setoff. Upon the occurrence and during the
---------------
continuance of any Event of Default, the Bank is hereby authorized at any time
and from time to time, without notice to the Parent or the Borrower (any such
notice being expressly waived by the Parent and Borrower), to setoff and apply
any and all deposits (general or special, time or demand, provisional or final)
at any time held and other indebtedness at any time owing by the Bank to or for
the credit or the account of the Parent or the Borrower against any and all of
the respective obligations of the Parent or the Borrower now or hereafter
existing under this Agreement, the Revolving Note, any other Loan Document or
Other Agreement, irrespective of whether or not the Bank shall have made any
demand under this Agreement, the Revolving Note, such other Loan Document or
such Other Agreement and although such obligations may be unmatured. The Bank
agrees promptly to notify the Parent or the Borrower, as the case may be, after
any such setoff and application, provided that the failure to give such notice
shall not affect the validity of such setoff and application. The rights of the
Bank under this Section 13.7 are in addition to other rights and remedies
------------
(including, without limitation, other rights of setoff) which the Bank may have.

68
<PAGE>

SECTION 13.8. Governing Law. This Agreement, the Revolving Note and
-------------
the Letters of Credit shall be governed by, and construed in accordance with,
the laws of the State of Illinois.

SECTION 13.9. Indemnity. The Borrower agrees to indemnify the Bank
---------
and hold the Bank harmless from and against any and all liabilities (including,
without limitation, any environmental liabilities), losses, damages, costs and
expenses of any kind (including, without limitation, the reasonable fees and
disbursements of counsel for the Bank) in connection with any investigative,
administrative or judicial proceedings whether or not the Bank shall be
designated a party thereto, which may be incurred by the Bank, relating to or
arising out of this Agreement or any other Loan Document or any actual or
proposed use of the proceeds of the Revolving Loans or LC Obligations hereunder;
provided that the Bank shall not have the right to be indemnified hereunder for
its own gross negligence or willful misconduct as determined by a court of
competent jurisdiction. All obligations of the Borrower provided for in this
Section 13.9 shall survive termination of this Agreement.
- ------------

SECTION 13.10. Severability of Provisions. Any provision of any Loan
--------------------------
Document which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of such Loan
Document or affecting the validity or enforceability of such provision in any
other jurisdiction.

SECTION 13.11. Headings. Article and Section headings in the Loan
--------
Documents are included in such Loan Documents for the convenience of reference
only and shall not constitute a part of the applicable Loan Documents for any
other purpose.

SECTION 13.12. Submission to Jurisdiction; Waiver of Venue; Service
----------------------------------------------------
of Process. The Parent and the Borrower each, on behalf of itself and each
- ----------
Subsidiary (1) hereby irrevocably submits to the jurisdiction of any Illinois
State or Federal court sitting in Chicago, Illinois over any action or
proceeding arising out of or relating to this Agreement or the Loan Documents,
and the Parent and the Borrower each hereby irrevocably agrees that all claims
in respect of such action or proceeding may be heard and determined in such
Illinois State or Federal court and (2) agrees not to institute any legal action
or proceeding against the Bank or the directors, officers, employees, agents or
property of any thereof, arising out of or relating to this Agreement, in any
court other than as hereinabove specified in this Section 13.11. The Parent and
-------------
the Borrower each, on behalf of itself and each Subsidiary, hereby

69
<PAGE>

irrevocably waives, to the fullest extent permitted by law, any objection it may
now or hereafter have to the laying of venue in any action or proceeding
(whether brought by the Parent, the Borrower, any Subsidiary, the Bank or
otherwise) in any court hereinabove specified in this Section 13.11 as well as
-------------
any right it may now or hereafter have, to remove any such action or proceeding,
once commenced, to another court on the grounds of forum non conveniens or
----- --- ----------
otherwise. The Parent and the Borrower each, on behalf of itself and each
Subsidiary, agrees that a final judgment in any such action or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law.

SECTION 13.13. WAIVER OF JURY TRIAL. THE PARENT, THE BORROWER AND
--------------------
THE BANK HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT TO A
TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM CONCERNING ANY RIGHTS
UNDER THIS AGREEMENT, ANY LOAN DOCUMENT OR UNDER ANY OTHER DOCUMENT OR AGREEMENT
DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH OR
THEREWITH, OR ARISING FROM ANY BANKING RELATIONSHIP EXISTING IN CONNECTION WITH
THIS AGREEMENT, AND AGREES THAT ANY SUCH ACTION, PROCEEDING OR COUNTERCLAIM
SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY; THIS PROVISION IS A
MATERIAL INDUCEMENT FOR THE BANK ENTERING INTO THIS AGREEMENT.

SECTION 13.14. Reaffirmation and Restatement. This Agreement
-----------------------------
constitutes an amendment and restatement of the Existing Loan and Security
Agreement and the Debt evidenced by the Existing Loan and Security Agreement is
continuing Debt, and nothing herein shall be deemed to constitute a payment,
settlement or novation of the Debt evidenced by the Existing Loan and Security
Agreement, or to release or otherwise adversely affect any Lien, mortgage or
security interest securing such Debt or any rights the Bank against any
guarantor, surety or other party primarily or secondarily liable for such Debt.

70
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their respective officers thereunto duly authorized, as of the
date first above written.

PEN-TAB INDUSTRIES, INC., a
Delaware corporation

By:_______________________________
Name:
Title:

BANK OF AMERICA ILLINOIS

By:_______________________________
Name:
Title:

Domestic Lending Office

231 South LaSalle Street
Chicago, IL 60697
Attn: Renee Deluzen

Offshore Lending Office:

231 South LaSalle Street
Chicago, IL 60697
Attn: Renee Deluzen
<PAGE>

ACCEPTANCE AND ACKNOWLEDGMENT
-----------------------------

PEN-TAB HOLDINGS, INC. (formerly known as Pen-Tab Industries, Inc.), a
Virginia Corporation hereby acknowledges and agrees to make such deliveries as
are required by it and comply with the covenants and other provisions applicable
to it contained in this Agreement.

PEN-TAB HOLDINGS, INC. (formerly
known as Pen-Tab Industries, Inc.),
a Virginia Corporation

By:________________________________________
Name:
Title:
<PAGE>

SCHEDULE 6.10

INVENTORY LOCATIONS

Pen-Tab Industries, Inc.
2011 West Hastings Street
Chicago, IL 60608

Pen-Tab Industries of California, Inc.
911 Bixby Drive
City of Industry, CA 91745

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, VA 22630
<PAGE>

SCHEDULE 7.2

LITIGATION

None
<PAGE>

SCHEDULE 8.12

REAL PROPERTY

Leased Owner
- ------ -----

911 Bixby Drive 911 Bixby Drive Co.
City of Industry, CA 91745 c/o Crown Associates Realty Inc.
977 Wilshire Blvd, Suite 711
Beverly Hills, CA 90212
Ronald Bloom (213) 272-7777

2011 West Hastings Street Hawthorne Realty Group
Chicago, IL 60608 2 North LaSalle Street
Suite 400
Chicago, IL 60602
Joe Beale (312) 346-9500

<PAGE>

EXHIBIT E
---------

Form of Notice of Borrowing
---------------------------

Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697

Attention: L. Richard DiDonato

Ladies and Gentlemen:

This Notice of Borrowing is delivered to you pursuant to Sections
--------
2.3(a) of the Second Amended and Restated Loan and Security Agreement, dated as
- ------
of February 4, 1997 (as amended or modified, the "Credit Agreement"), among Pen-
Tab Industries, Inc., a Delaware corporation (the "Borrower"), Pen-Tab Holdings,
Inc. (f/k/a Pen-Tab Industries, Inc.), a Virginia corporation (the "Parent"),
and Bank of America Illinois (the "Bank"). Unless otherwise defined herein,
capitalized terms used herein have the meanings provided in the Credit
Agreement.

The Borrower hereby requests that a Revolving Loan be made in the
aggregate principal amount of $_________ on _________, ________ as a [Base Rate
Loan] [Offshore Rate Loan having an Interest Period of _______ months].

The Borrower hereby certifies and warrants that on the date the
Revolving Loan requested hereby is made, after giving effect to the making of
such Revolving Loan:

(a) No Default or Event of Default has occurred and is continuing or
will result from the borrowing of such Revolving Loan.

(b) The representations and warranties of the Borrower and the Parent
contained in the Loan Documents (including without limitation, Article VIII
------------
of the Credit Agreement) are true and correct with the same effect as
though made on the date of the making of the Revolving Loan requested
hereby, except to the extent such representation and warranty expressly
speaks to an earlier date.

-1-
<PAGE>

respect to any Litigation so disclosed on Schedule 7.2 of the Credit
------------
Agreement.

(d) No Material Adverse Change has occurred since the date of the
most recent financial statements delivered or required to be delivered
pursuant to the terms of the Credit Agreement.

The Borrower agrees that if prior to the time of the Revolving Loan
requested hereby any matter certified to herein by it will not be true and
correct at such time as if then made, it will immediately so notify the Bank.
Except to the extent, if any, that prior to the time of the Revolving Loan
requested hereby the Bank shall receive written notice to the contrary from the
Borrower, each matter certified to herein shall be deemed once again to be
certified as true and correct at the date of such Revolving Loan as if then
made.

Please make the proceeds of the Revolving Loan available in accordance
with the instructions previously provided to you or as set forth on Annex I
-------
attached hereto.

The Borrower has caused this Notice of Borrowing to be executed and
delivered, and the certification and warranties contained herein to be made, by
an Authorized Representative this ____ day of _____________, _______.

PEN-TAB INDUSTRIES, INC., a
Delaware corporation

By:___________________________________
Name:
Title:

-2-
<PAGE>

ANNEX I

Instructions
------------

-3-
<PAGE>

EXHIBIT F
---------

Form of Notice of Conversion/Continuation
-----------------------------------------

Bank of America Illinois
231 South LaSalle Street
Chicago, Illinois 60697

Attention: L. Richard DiDonato

Ladies and Gentlemen:

This Notice of Conversion/Continuation is delivered to you pursuant to
Section 2.4(b) Second Amended and Restated Loan and Security Agreement, dated as
- --------------
of February 4, 1997 (as amended or modified, the "Credit Agreement"), among Pen-
Tab Industries, Inc., a Delaware corporation (the "Borrower"), Pen-Tab Holdings,
Inc. (f/k/a Pen-Tab Industries, Inc.), a Virginia corporation (the "Parent"),
and Bank of America Illinois (the "Bank"). Unless otherwise defined herein,
capitalized terms used herein have the meanings provided in the Credit
Agreement.

The Borrower hereby requests that on ________________, __________
,
(1) $ __________ of the presently outstanding
principal amount of the Revolving Loans originally made
on _________________, ________,

(2) and all presently being maintained as [Base
Rate Loans] [Offshore Rate Loans],

(3) be [converted into] [continued as],

(4) [Base Rate Loans] [Offshore Rate Loans having an
Interest Period of months].

The Borrower hereby certifies and warrants that on the date the
conversion or continuation herein requested is made, after giving effect to the
making of such conversion or continuation:

(a) No Default or Event of Default has occurred and is continuing or
will result from the conversion or continuation requested herein.

(b) The representations and warranties of the Borrower and the Parent
contained in the Loan Documents (including without limitation, Article VIII
------------
of the Credit Agreement) are true

-1-
<PAGE>

and correct with the same effect as though made on the date of the making
of the conversion or continuation requested hereby, except to the extent
such representation and warranty expressly speaks to an earlier date.

(c) No Material Litigation exists except as disclosed on Schedule 7.2
------------
of the Credit Agreement, and since the Effective Date of the Credit
Agreement no Material Litigation Development has occurred with respect to
any Litigation so disclosed on Schedule 7.2 of the Credit Agreement.
------------

(d) No Material Adverse Change has occurred since the date of the most
recent financial statements delivered or required to be delivered pursuant
to the terms of the Credit Agreement.

Except to the extent, if any, that prior to the time of the
continuation or conversion requested hereby the Bank shall receive written
notice to the contrary from the Borrower, each matter certified to herein shall
be deemed to be certified at the date of such continuation or conversion as if
then made.

The Borrower has caused this Notice of Conversion/Continuation to be
executed and delivered, and the certification and warranties contained herein to
be made, by an Authorized Representative this ___ day of _________, ______.

PEN-TAB INDUSTRIES, INC., a
Delaware corporation

By:_______________________________
Name:
Title:

-2-

<PAGE>

EXHIBIT A

FORM OF AMENDED AND RESTATED REVOLVING NOTE

$35,000,000 Chicago, Illinois
February __, 1997

FOR VALUE RECEIVED, the undersigned promises to pay to the order of
Bank of America Illinois (the "BANK") at its principal office located at 231
South LaSalle Street, Chicago, Illinois, the principal amount of THIRTY-FIVE
MILLION AND NO/100 DOLLARS ($35,000,000.00) or, if less, the aggregate unpaid
principal amount of all Revolving Loans (as defined in the "Loan Agreement" as
described below) outstanding, as duly shown in the records of the Bank or, at
the Bank's option, on attached Schedule 1 (and any continuation thereof), on the
----------
Termination Date.

The undersigned also promises to pay interest on the unpaid principal
amount hereof from time to time outstanding from the date hereof until maturity
(whether by acceleration or otherwise) and, after maturity, until paid, at the
rates per annum and on the dates specified in the Loan Agreement.

Payments of both principal and interest are to be made in lawful money
of the United States of America in immediately available funds.

This Amended and Restated Revolving Note is the Revolving Note
described in, and is subject to the terms and provisions of, the Second Amended
and Restated Loan and Security Agreement, dated as of February __, 1997 (as the
same may at any time be amended, modified or supplemented from time to time, the
"LOAN AGREEMENT"), among the undersigned, Pen-Tab Holdings, Inc. (formerly known
as Pen-Tab Industries, Inc.) (the "PARENT") and the Bank. Certain capitalized
terms not otherwise defined herein have the meanings ascribed to them in the
Loan Agreement.

Reference is hereby made to the Loan Agreement for a statement of the
prepayment rights and obligations of the undersigned and for a statement of the
terms and conditions under which the due date of this Amended and Restated
Revolving Note may be accelerated. Upon the occurrence of any Event of Default
as specified in the Loan Agreement, the principal balance hereof and the
interest accrued hereon may be declared to be forthwith due and payable, and any
indebtedness of the Bank or other holder hereof to the undersigned may be
appropriated and applied hereon.

In addition to and not in limitation of the foregoing and the
provisions of the Loan Agreement, the undersigned further agrees, subject only
to any limitation imposed by applicable law, to pay all expenses, including
reasonable attorneys' fees and legal expenses, incurred by the holder of this
Amended and Restated Revolving Note in endeavoring to collect any amounts
payable hereunder which are not paid when due, whether by acceleration or
otherwise.
<PAGE>

All parties hereto, whether as makers, endorsers, or otherwise,
severally waive presentment for payment, demand, protest and notice of dishonor.

This Amended and Restated Revolving Note constitutes a renewal and
restatement of, and a replacement and substitute for, the Revolving Note dated
March 24, 1995 of the undersigned (as assignee of the Parent pursuant to the
Assignment and Assumption Agreement), payable to the order of the Bank in the
original principal amount of Fifty-Five Million and No/100 Dollars
($55,000,000.00) (the "EXISTING NOTE"). The indebtedness evidenced by the
Existing Note is continuing indebtedness, and nothing herein shall be deemed to
constitute a payment, settlement or novation of the Existing Note, or to release
or otherwise adversely affect any lien, mortgage, or security interest securing
such indebtedness or any rights of the Bank against any guarantor, surety or
other party primarily or secondarily liable for such indebtedness.

* * * *

-2-
<PAGE>

THIS AMENDED AND RESTATED REVOLVING NOTE SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

PEN-TAB INDUSTRIES, INC., a Delaware
corporation

By:______________________________________
Name:____________________________________
Its:_____________________________________

-3-
<PAGE>

SCHEDULE 1

Attached to the Amended and Restated Revolving Note dated February __, 1997 of
PEN-TAB INDUSTRIES, INC., a Delaware corporation, payable to the order of BANK
OF AMERICA ILLINOIS.

Interest
Amount of Rate Per Amount of Notation
Revolving Loan Annum Repayment Made By
- -------------- -------- --------- --------

-4-

<PAGE>

AMENDED AND RESTATED TRADEMARK AGREEMENT

THIS AMENDED AND RESTATED TRADEMARK AGREEMENT (this "Agreement"),
dated as of February __, 1997, among PEN-TAB INDUSTRIES, INC., a Delaware
corporation ("Pen-Tab"), PEN-TAB HOLDINGS, INC. (formerly known as Pen-Tab
Industries, Inc.), a Virginia corporation (the "Parent"; together with Pen-Tab,
the "Grantors" and individually a "Grantor"), and BANK OF AMERICA ILLINOIS (the
"Bank"), having its main banking house at 231 South LaSalle Street, Chicago,
Illinois 60697.

W I T N E S S E T H :
- - - - - - - - - -

WHEREAS, the Grantors are party to a certain Assignment and Assumption
Agreement, dated as of the date hereof (the "Assignment and Assumption
Agreement") and consented to by the Bank, whereby Pen-Tab assumed all of the
Liabilities (as such term is defined in the Existing Loan and Security Agreement
referred to below) and all of the LC Obligations (as such term is defined in the
Existing Reimbursement Agreement referred to below) from the Parent under the
Existing Loan and Security Agreement and the Existing Reimbursement Agreement;

WHEREAS, Pen-Tab (as assignee of the Parent pursuant to the Assignment
and Assumption Agreement) and the Bank are parties to that certain Amended and
Restated Loan and Security Agreement, dated as of March 24, 1995 (as amended and
modified prior to the date hereof, the "Existing Loan and Security Agreement"),
whereby the Bank made certain revolving loans to and issued certain letters of
credit for the account of Pen-Tab (as assignee of the Parent pursuant to the
Assignment and Assumption Agreement);

WHEREAS, Pen-Tab (as assignee of the Pledgor pursuant to the
Assignment and Assumption Agreement) and the Bank are parties to that certain
Reimbursement Agreement, dated as of April 1, 1995 (as amended and modified
prior to the date hereof, the "Existing Reimbursement Agreement"), whereby the
Bank issued an irrevocable letter of credit for the account of Pen-Tab;

WHEREAS, Pen-Tab (as assignee of the Parent pursuant to the Assignment
and Assumption Agreement) and the Bank are parties to that certain Trademark
Assignment Agreement, dated as of March 24, 1995 (as amended and modified prior
to the date hereof, the "Existing Trademark Agreement"), whereby Pen-Tab (as
assignee of the Parent pursuant to the Assignment and Assumption Agreement)
granted the Bank a security interest in its Collateral (as such term is defined
in the Existing Trademark Agreement);
<PAGE>

WHEREAS, the Grantors have entered into a Second Amended and Restated
Loan and Security Agreement, dated as of the date hereof (together with all
amendments and other modifications, if any, from time to time made thereto, the
"Loan Agreement"; capitalized terms not otherwise defined herein are used herein
as defined in the Loan Agreement), with the Bank amending and restating the
Existing Loan Agreement;

WHEREAS, the Grantors have entered into an Amended and Restated
Reimbursement Agreement, dated as of the date hereof (together with all
amendments and other modifications, if any, from time to time made thereto, the
"Reimbursement Agreement"), with the Bank amending and restating the Existing
Reimbursement Agreement; and

WHEREAS, as a condition precedent to the making of the Revolving Loans
and the issuance of the Letters of Credit under the Loan Agreement and the
continuance of the Letter of Credit under the Reimbursement Agreement, the
Grantors are required to execute and deliver this Agreement, in amendment and
restatement of the Existing Trademark Agreement, and to grant to the Bank a
continuing security interest in all of the Collateral (as defined below) to
secure all the Liabilities and LC Obligations (as defined in the Reimbursement
Agreement; together with the Liabilities, collectively, the "Secured
Liabilities").

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, and in order to induce the Bank to
make Revolving Loans to and issue Letters of Credit pursuant to the Loan
Agreement, and to continue the Letter of Credit under the Reimbursement
Agreement, the Grantors agree, for the benefit of the Bank, as follows:

SECTION 1. Definitions. Unless otherwise defined herein or the
-----------
context otherwise requires, terms used in this Agreement, including its preamble
and recitals, have the meanings provided in the Loan Agreement.

SECTION 2. Grant of Security Interest. For good and valuable
--------------------------
consideration, the receipt and sufficiency of which are hereby acknowledged, to
secure all of the Secured Liabilities, the Grantors do hereby pledge and grant
to the Bank a security interest in and to the following property (the
"Collateral"), whether now or hereafter existing or acquired;

(a) all right, title and interest in and to all of the Grantors'
registered and unregistered trademarks, service marks, trade names,
designs, logos, indicia, and/or other source and/or business
identifiers and the goodwill of the business relating to any and all
of the foregoing,

-2-
<PAGE>

all of Grantors' rights in such properties owned by others and any
registrations or applications therefor, which, in the case of
applications or registrations, are now or hereafter issued by or filed
with the United States Patent and Trademark Office, with any similar
office or agency of any state, territory or possession of the United
States or any similar office or agency of any other countries or, if
not so filed, are otherwise used in the United States, any state,
territory or possession thereof or any other country, including,
without limitation, the marks, names, logos, indicia, trademark
registrations and trademark applications listed on Schedule I attached
----------
hereto and made a part hereof (the "Trademark Collateral"); and

(b) all General Intangibles (as defined in the Loan Agreement)
that are related to the Trademark Collateral.

SECTION 3. Security Agreement. This Agreement has been executed and
------------------
delivered by the Grantors for the purpose of recording the security interest of
the Bank in the Collateral with the United States Patent and Trademark Office.
The security interest granted hereby has been granted as a supplement to, and
not in limitation of, the security interest granted to the Bank under the Loan
Agreement and Reimbursement Agreement. The Loan Agreement and the Reimbursement
Agreement (and all rights and remedies of the Bank thereunder) shall remain in
full force and effect in accordance with its terms.

SECTION 4. Release of Security Interest. Upon payment in full of all
----------------------------
the Secured Liabilities and the termination of all Commitments (as such term is
defined in the Loan Agreement and the Reimbursement Agreement), the Bank shall,
at the Grantors' expense, execute and deliver to the Grantors all instruments
and other documents as may be necessary or proper to release the lien on and
security interest in the Collateral which has been granted hereunder.

SECTION 5. Acknowledgment. The Grantors do hereby further
--------------
acknowledge and affirm that the rights and remedies of the Bank with respect to
the security interest in the Collateral granted hereby are more fully set forth
in the Loan Agreement and Reimbursement Agreement, the terms and provisions of
which (including the remedies provided for therein) are incorporated by
reference herein as if fully set forth herein.

SECTION 6. Loan Document, etc. This Agreement is a Loan Document
------------------
executed pursuant to the Loan Agreement and

-3-
<PAGE>

Reimbursement Agreement and shall (unless otherwise expressly indicated herein)
be construed, administered and applied in accordance with the terms and
provisions of the Loan Agreement and Reimbursement Agreement.

SECTION 7. Counterparts. This Agreement may be executed by the
------------
parties hereto in several counterparts, each of which shall be deemed to be an
original and all of which shall constitute together but one and the same
agreement.

SECTION 8. Reaffirmation and Restatement. This Agreement constitutes
-----------------------------
an amendment and restatement of the Existing Trademark Agreement and the Debt
evidenced and/or secured by the Existing Loan and Security Agreement is
continuing Debt, and nothing herein shall be deemed to constitute a payment,
settlement or novation of the Debt evidenced by or referred to under the
Existing Trademark Agreement, or to release or otherwise adversely affect any
Lien, mortgage or security interest securing such Debt or any rights the Bank
against any guarantor, surety or other party primarily or secondarily liable for
such Debt.

[Signature Page Follows]

-4-
<PAGE>

IN WITNESS WHEREOF, the Grantors have caused this Agreement to be duly
executed and delivered as of the day and year first above written.

PEN-TAB INDUSTRIES, INC., a Delaware corporation

By:_______________________________
Name:_____________________________
Title:____________________________

PEN-TAB HOLDINGS, INC. (FORMERLY KNOWN AS
PEN-TAB INDUSTRIES, INC.)

By:_______________________________
Name:_____________________________
Title:____________________________

<PAGE>

PLEDGE AGREEMENT
----------------

THIS PLEDGE AGREEMENT (this "Pledge Agreement"), dated as of February
__, 1997 is made by PEN-TAB HOLDINGS, INC. (FORMERLY KNOWN AS PEN-TAB
INDUSTRIES, INC.), a Virginia corporation (the Pledgor"), in favor of BANK OF
AMERICA ILLINOIS (the "Bank").

W I T N E S S E T H:
- - - - - - - - - -

WHEREAS, PEN-TAB INDUSTRIES, INC., a Delaware corporation (the
"Borrower"), has entered into that certain Second Amended and Restated Loan and
Security Agreement, dated as of even date herewith (said Second Amended and
Restated Loan and Security Agreement, as amended, supplemented, modified,
restated, refinanced, refunded or renewed from time to time, the "Credit
Agreement"; capitalized terms not otherwise defined herein are used herein as
defined in the Credit Agreement) with the Bank, pursuant to which the Bank has
agreed to make Revolving Loans and issue Letters of Credit on behalf of
Borrower, subject to the terms and conditions of the Credit Agreement;

WHEREAS, the Borrower is party to that certain Reimbursement Agreement
dated as of even date herewith between the Borrower and the Bank (said
Reimbursement Agreement, as amended, supplemented, modified, restated,
refinanced, refunded or renewed from time to time, the "Reimbursement
Agreement"), pursuant to which the Bank has issued an irrevocable letter of
credit for the account of Borrower, subject to the terms and conditions of the
Reimbursement Agreement;

WHEREAS, as a condition precedent to the making of the Revolving Loans
and the issuance of the Letters of Credit by the Bank under the Credit Agreement
and the continuance of the irrevocable letter of credit under the Reimbursement
Agreement, the Pledgor is required to execute and deliver this Pledge Agreement;

WHEREAS, the Pledgor will derive significant direct and indirect
benefits from the making of the Revolving Loans and the issuance and
continuation of the Letters of Credit by the Bank; and

WHEREAS, the Pledgor has duly authorized the execution, delivery and
performance of this Pledge Agreement.

NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, and in order to induce the Bank to
make Revolving Loans to the
<PAGE>

Borrower pursuant to the Credit Agreement and the Bank to issue and/or continue
Letters of Credit pursuant to the Credit Agreement and the Reimbursement
Agreement, the Pledgor agrees, for the benefit of the Bank, as follows:

ARTICLE I

DEFINITIONS

Section 1.1 Certain Terms. The following terms when used in this
-------------
Pledge Agreement, including its preamble and recitals, shall have the following
meanings (such definitions to be equally applicable to the singular and plural
forms thereof):

"Bank" is defined in the Preamble.
--------

"Borrower" is defined in the first Recital.
-------------

"Collateral" is defined in Section 2.1.
-----------

"Credit Agreement" is defined in the first Recital.
-------------

"Credit Documents" is defined in Section 2.2.
-----------

"Distributions" means all stock dividends, liquidating dividends,
shares of stock resulting from (or in connection with the exercise of) stock
splits, reclassifications, warrants, options, non-cash dividends, and other
distributions (whether similar or dissimilar to the foregoing) on or with
respect to any Pledged Securities or other shares of capital stock constituting
Collateral, but shall not include Dividends.

"Dividends" means cash dividends and cash distributions with respect
to any Pledged Securities made out of capital surplus.

"Event of Default" means an "Event of Default" under the Credit
Agreement or the Reimbursement Agreement.

"Pledge Agreement" is defined in the Preamble.
--------

"Pledged Securities" means all shares of capital stock, or other
equity interest of the Borrower, and all of the certificates and instruments
representing such shares of capital stock or other equity interest.

"Pledgor" is defined in the Preamble.
--------

"Secured Obligations" is defined in Section 2.2.
-----------

-2-
<PAGE>

"U.C.C." means the Uniform Commercial Code as in effect in the State
of Illinois, as the same may be amended from time to time.

SECTION 1.2 Credit Agreement Definitions. Unless otherwise defined
----------------------------
herein or the context otherwise requires, terms used in this Pledge Agreement,
including its preamble and recitals, have the meanings provided in the Credit
Agreement.

SECTION 1.3 U.C.C. Definitions. Unless otherwise defined herein or
------------------
the context otherwise requires, terms for which meanings are provided in the
U.C.C. are used in this Pledge Agreement, including its preamble and recitals,
with such meanings.

ARTICLE II

PLEDGE

SECTION 2.1 Grant of Security Interest. The Pledgor hereby pledges,
--------------------------
hypothecates, assigns, charges, mortgages, delivers, and transfers to the Bank,
and hereby grants to the Bank, a continuing security interest in, all of the
following property (the "Collateral"):

(a) all Pledged Securities identified in Attachment 1 hereto;

(b) all other Pledged Securities issued from time to time;

(c) all Dividends, Distributions, interest, and other payments and
rights with respect to any Pledged Securities to which the Pledgor is
entitled or entitled to receive a security interest; and

(d) all proceeds of any of the foregoing.

SECTION 2.2 Security for Obligations. This Pledge Agreement secures
------------------------
the payment in full of all obligations of every nature of the Borrower and the
Parent now or hereafter existing under the Credit Agreement, the Revolving Note,
the Reimbursement Agreement, the Guaranty and the other Loan Documents and LC
Documents (as such term is defined in the Reimbursement Agreement) (such
documents collectively, the "Credit Documents") whether for principal, interest,
costs, fees, expenses, or otherwise (all such obligations of the Borrower being
the "Secured Obligations").

-3-
<PAGE>

SECTION 2.3 Delivery of Pledged Securities; Registration of Pledge,
-------------------------------------------------------
Transfer, etc. All certificates or instruments representing or evidencing any
- -------------
Collateral, including all Pledged Securities, shall be delivered to and held by
or on behalf of the Bank pursuant hereto, shall be in suitable form for transfer
by delivery, and shall be accompanied by all necessary instruments of transfer
or assignment, duly executed in blank. Prior to the delivery thereof to the
Bank, such certificates or instruments shall be held by the Pledgor separate and
apart from its other property and in express trust for the Bank. To the extent
the Pledgor has such rights, the Bank shall have the right, at any time, to
transfer to, or to register in the name of the Bank or any of its nominees, any
or all of such Pledged Securities, subject only to the revocable rights of the
Pledgor specified in clause (c) of Section 4.4. In addition, to the extent the
-----------
Pledgor has such rights, the Bank shall have the right at any time after a
Default shall have occurred and be continuing to exchange certificates or
instruments representing or evidencing any Pledged Securities for certificates
or instruments of smaller or larger denominations.

SECTION 2.4 Dividends. In the event that any Dividend to which the
---------
Bank is entitled or entitled to receive a security interest is to be paid on any
Pledged Securities at a time when no Event of Default has occurred and is
continuing, and the proceeds of such Dividend have not previously been required
to be applied to any of the Secured Obligations, such proceeds may be paid
directly to the Pledgor.

SECTION 2.5 Continuing Security Interest. This Pledge Agreement
----------------------------
shall create a continuing security interest in the Collateral and shall

(a) remain in full force and effect until payment in full of all
Secured Obligations and the termination of all contractual obligations of
the Bank under any Credit Document to extend credit of any nature to
Borrower,

(b) be binding upon the Pledgor and its successors, transferees and
assigns, and

Without limiting the foregoing clause (c), pursuant to the terms of the Credit
Documents, the Bank may assign, or otherwise transfer (in whole or in part) the
Secured Obligations to any other Person or entity, and such other Person or
entity shall thereupon become vested with all the benefits in respect thereof

-4-
<PAGE>

granted to the Bank under any Credit Document (including this Pledge Agreement)
or otherwise. Upon the payment in full of the Secured Obligations and the
termination of all contractual obligations of the Bank under any Credit Document
to extend credit of any nature to Borrower, the security interest granted herein
shall terminate and all rights to the Collateral shall revert to the Pledgor.
Upon any such termination, the Bank will, at the Pledgor's sole expense, deliver
to the Pledgor, without any representations or warranties of any kind
whatsoever, all certificates and instruments representing or evidencing all
Pledged Securities of the Pledgor, together with all other Collateral held by
the Bank hereunder, and execute and deliver to the Pledgor, at the Pledgor's
sole expense, such documents as the Pledgor shall reasonably request to evidence
such termination.

ARTICLE III

REPRESENTATIONS AND WARRANTIES

The Pledgor represents and warrants unto the Bank, as at the date of
each pledge and delivery hereunder (including each pledge of Pledged Securities)
by the Pledgor to the Bank of any Collateral, as follows:

SECTION 3.1 Ownership, No Liens, etc. The Pledgor is the legal and
------------------------
beneficial owner of, and has good and marketable title to (and has full right
and authority to pledge and assign) all the Collateral pledged by it under this
Pledge Agreement, free and clear of all liens, security interests, options, or
other charges or encumbrances.

SECTION 3.2 As to Pledged Securities. In the case of any Pledged
------------------------
Securities constituting such Collateral, all of such Pledged Securities are duly
authorized and validly issued. The Pledged Securities represent 100% of the
issued and outstanding stock of the Borrower.

SECTION 3.3 Authorization, Approval, etc. Except as may have been
----------------------------
obtained, no authorization, approval, or other action by, and no notice to or
filing with, any governmental authority, regulatory body or any other Person is
required either

(a) for the pledge by Pledgor of any Collateral pursuant to this
Pledge Agreement or for the execution, delivery, and performance of this
Pledge Agreement by the Pledgor, or

(b) for the exercise by the Bank of the voting or other rights
provided for in this Pledge Agreement, or,

-5-
<PAGE>

except with respect to any Pledged Securities, as may be required in
connection with a disposition of such Pledged Securities by laws affecting
the offering and sale of securities generally, the remedies in respect of
the Collateral pursuant to this Pledge Agreement.

ARTICLE IV

COVENANTS

SECTION 4.1 Protect Collateral; Further Assurances, etc. The Pledgor
-------------------------------------------
will not sell, assign, transfer, pledge, or encumber in any other manner the
Collateral (except in favor of the Bank hereunder). The Pledgor will warrant
and take reasonable action to defend the right and title herein granted unto the
Bank in and to the Collateral (and all right, title, and interest represented by
the Collateral) against the claims and demands of all Persons whomsoever. The
Pledgor agrees that at any time, and from time to time, at the expense of the
Pledgor, the Pledgor will promptly execute and deliver all further instruments,
and take all further action, that may be necessary or desirable, or that the
Bank may reasonably request, in order to perfect and protect any security
interest granted or purported to be granted hereby or to enable the Bank to
exercise and enforce its rights and remedies hereunder with respect to any
Collateral.

SECTION 4.2 Stock Powers, etc. The Pledgor agrees that all Pledged
-----------------
Securities (and all other shares of capital stock constituting Collateral)
delivered by the Pledgor pursuant to this Pledge Agreement will be accompanied
by duly executed undated blank stock powers, or other equivalent instruments of
transfer acceptable to the Bank. The Pledgor will, from time to time upon the
request of the Bank, promptly deliver to the Bank such stock powers,
instruments, and similar documents, satisfactory in form and substance to the
Bank, with respect to the Collateral as the Bank may reasonably request and
will, from time to time upon the request of the Bank after the occurrence of any
Event of Default and during the continuance thereof to the extent of any right
to do such, promptly transfer any Pledged Securities into the name of any
nominee designated by the Bank.

SECTION 4.3 Continuous Pledge. Subject to Section 2.4, the Pledgor
----------------- -----------
will, at all times, keep pledged to the Bank pursuant hereto all Pledged
Securities and all other shares of capital stock constituting Collateral, all
Dividends and Distributions with respect thereto to which the Pledgor is
entitled, or entitled to receive a security interest in and all other Collateral
and other securities, instruments, proceeds, and

-6-
<PAGE>

rights from time to time received by or distributable to the Pledgor in respect
of any Collateral.

SECTION 4.4 Voting Rights; Dividends, etc. The Pledgor agrees to
-----------------------------
deliver (properly endorsed where required hereby or requested by the Bank) to
the Bank:

(a) after an Event of Default shall have occurred and be continuing,
promptly upon receipt thereof by the Pledgor and without any request
therefor by the Bank, all Dividends and Distributions (to which the Pledgor
is entitled or entitled to receive a security interest therein) and all
interest, all other cash payments, and all proceeds of the Collateral; and

(b) after an Event of Default shall have occurred and be continuing,
promptly upon request of the Bank, such proxies and other documents as may
be necessary to allow the Bank to exercise any voting power to which the
Pledgor is entitled with respect to any share of capital stock (including
Pledged Securities) constituting Collateral;

provided, however, that unless an Event of Default shall have occurred and be
- -------- -------
continuing, the Pledgor shall be entitled:

(c) to exercise, in its reasonable judgment, but in a manner which
would not have a material adverse effect on the value of the Pledged
Securities, and in a manner not inconsistent with the terms of the Credit
Documents (including this Pledge Agreement) the voting power and all other
incidental rights of ownership with respect to any Pledged Securities or
other shares of capital stock constituting Collateral (subject to the
Pledgor's obligation to deliver to the Bank such Pledged Securities and
other shares in pledge hereunder); and

(d) to the receipt of all Dividends in accordance with Section 2.4.
-----------

All Dividends, Distributions, interest, cash payments, and proceeds which may at
any time and from time to time be held by the Pledgor but which the Pledgor is
then obligated to deliver to the Bank, shall, until delivery to the Bank, be
held by the Pledgor separate and apart from its other property in trust for the
Bank. The Bank agrees that unless an Event of Default shall have occurred and
be continuing, the Bank shall, upon the written request of the Pledgor, promptly
deliver such proxies and other documents, if any, as shall be reasonably
requested by the

-7-
<PAGE>

Pledgor which are necessary to allow the Pledgor to exercise any voting power to
which the Pledgor is entitled with respect to any share of capital stock
(including Pledged Securities) constituting Collateral; provided, however, that
-------- -------
no vote shall be cast, or consent, waiver, or ratification given, or action
taken by the Pledgor that would impair any Collateral or be inconsistent with or
violate any provision of the Credit Documents (including this Pledge Agreement).

ARTICLE V

REMEDIES

SECTION 5.1 Certain Remedies. If any Event of Default shall have
----------------
occurred and be continuing:

(a) The Bank may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein or otherwise available to
it, all the rights and remedies of a secured party on default under the
U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and
also may sell the Collateral or any part thereof after reasonable notice to
the Pledgor in one or more parcels at public or private sale or broker's
board, at any of the Bank's offices or elsewhere, for cash, on credit or
for future delivery, and upon such other terms as the Bank may deem
commercially reasonable. The Pledgor agrees that the Bank shall be
entitled to bid for or purchase any or all of the Collateral at any such
sale. The Pledgor agrees that at least ten days' notice to the Pledgor of
the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. The Bank
shall not be obligated to make any sale of Collateral regardless of notice
of sale having been given. The Bank may adjourn any public or private sale
from time to time by announcement at the time and place fixed therefor, and
such sale may, without further notice, be made at the time and place to
which it was so adjourned.

(b) The Bank may (to the extent the Pledgor could do so or has done
so)

(i) transfer all or any part of the Collateral
into the name of the Bank or its nominee, with or without
disclosing that such Collateral is subject to the lien
and security interest hereunder,

-8-
<PAGE>

(ii) notify the parties obligated on any of the
Collateral to make payment to the Bank of any amount
due or to become due thereunder,

(iii) enforce collection of any of the Collateral
by suit or otherwise, and surrender, release or
exchange all or any part thereof, or compromise or
extend or renew for any period (whether or not longer
than the original period) any obligations of any nature
of any party with respect thereto,

(iv) endorse any checks, drafts, or other
writings in the Pledgor's name to allow collection of
the Collateral,

(v) take control of any proceeds of the
Collateral, and

(vi) execute (in the name, place and stead of
the Pledgor) endorsements, assignments, stock powers
and other instruments of conveyance or transfer with
respect to all or any of the Collateral.

SECTION 5.2 Application of Proceeds. Except as expressly provided
-----------------------
elsewhere in this Agreement, all proceeds received by the Bank in respect of any
sale of, collection from or other realization upon all or any part of the
Collateral may, in the discretion of the Bank, be held by the Bank as Collateral
for, and/or then, or at any other time thereafter applied, in full or in part by
the Bank against the Secured Obligations.

SECTION 5.3 Indemnity and Expenses. The Pledgor hereby indemnifies
----------------------
and holds harmless the Bank from and against any and all claims, losses, and
liabilities growing out of or resulting from this Pledge Agreement (including
enforcement of this Pledge Agreement), except claims, losses, or liabilities
resulting from the Bank's gross negligence or willful misconduct. Upon demand,
the Pledgor will pay to the Bank the amount of any and all reasonable expenses,
including the reasonable fees and disbursements of its counsel and of any
experts and agents, which the Bank may incur in connection with:

(a) the administration of this Pledge Agreement;

(b) the custody, preservation, use, or operation of,
or the sale of, collection from, or other realization upon,
any of the Collateral;

-9-
<PAGE>

(d) the failure by the Pledgor to perform or observe
any of the provisions hereof.

SECTION 5.4 Rights Exercisable. Notwithstanding anything else to the
------------------
contrary herein, the Bank's rights hereunder are limited to whatever rights the
Pledgor have with respect to the Collateral.

ARTICLE VI

MISCELLANEOUS PROVISIONS

SECTION 6.1 Credit Documents. This Pledge Agreement is a Credit
----------------
Document executed pursuant to the Credit Agreement and the Reimbursement
Agreement and shall (unless otherwise expressly indicated herein) be construed,
administered and applied in accordance with the terms and provisions of the
Credit Agreement and the Reimbursement Agreement, including Article XIII of the
------------
Credit Agreement and Article IX of the Reimbursement Agreement.
----------

SECTION 6.2 Amendments, etc. No amendment to or waiver of any
---------------
provision of this Pledge Agreement nor consent to any departure by the Pledgor
herefrom shall in any event be effective unless the same shall be in writing and
signed by the Bank, and then such waiver or consent shall be effective only in
the specific instance and for the specific purpose for which it is given.

SECTION 6.3 Obligations Not Affected. The obligations of the Pledgor
------------------------
under this Pledge Agreement shall remain in full force and effect without regard
to, and shall not be impaired or affected by:

(a) any amendment or modification or addition or
supplement to any Credit Document any instrument delivered
in connection therewith, or any assignment or transfer
thereof;

(b) any exercise, non-exercise, or waiver by the Bank of
any right, remedy, power, or privilege under or in respect
of, or any release of any guaranty or collateral provided
pursuant to, this Pledge Agreement or any other Credit
Document;

-10-
<PAGE>

(c) any waiver, consent, extension, indulgence, or
other action or inaction in respect of this Pledge Agreement
or any other Credit Document or any assignment or transfer
of any thereof; or

(d) any bankruptcy, insolvency, reorganization,
arrangement, readjustment, composition, liquidation, or the
like, of the Pledgor or any other Person, whether or not the
Pledgor shall have notice or knowledge of any of the
foregoing.

SECTION 6.4 Protection of Collateral. The Bank may from time to
------------------------
time, at its option, perform any act which the Pledgor agrees hereunder to
perform and which the Pledgor shall fail to perform after being requested in
writing so to perform (it being understood that no such request need be given
after the occurrence and during the continuance of an Event of Default) and the
Bank may from time to time take any other action which the Bank reasonably deems
necessary for the maintenance, preservation or protection of any of the
Collateral or of its security interest therein.

SECTION 6.5 Notices, Etc. All notices and other communications
-------------
provided for under this Pledge Agreement shall be in writing (including
telegraphic, telex or facsimile communication) and mailed or telecommunicated or
delivered at the address of such party set forth at the address set forth on the
signature page of this Pledge Agreement; or, as to each party, at such other
address as shall be designated by such party in a written notice to the other
party complying as to delivery with the terms of this Section 6.5. All such
-----------
notices and communications shall, when mailed or telecommunicated, be effective
upon actual receipt, or one (1) Business Day after transmitted by telex and the
appropriate answerback received, transmitted by facsimile or delivered to the
telegraph company, respectively, addressed as aforesaid.

SECTION 6.6 Section Captions. Section captions used in this Pledge
----------------
Agreement are for convenience of reference only, and shall not affect the
construction of this Pledge Agreement.

SECTION 6.7 Severability. Wherever possible each provision of this
------------
Pledge Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Pledge Agreement shall
be prohibited by or invalid under such law, such provision shall be ineffective
to the extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Pledge
Agreement.

-11-
<PAGE>

Section 6.8 LAW. THIS PLEDGE AGREEMENT SHALL BE CONSTRUED IN
---
ACCORDANCE WITH AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS
WITHOUT GIVING EFFECT TO ITS PRINCIPLES OF CHOICE OF LAW.

SECTION 6.9 Submission to Jurisdiction. Each of the parties to this
--------------------------
Pledge Agreement hereby irrevocably agree that any legal action or proceeding
pertaining to this Pledge Agreement may be brought in the courts of the State of
Illinois or Federal Court sitting in Chicago, Illinois. Each of the parties to
this Pledge Agreement hereby irrevocably agree that service of process in such
action or proceeding may be made either by mailing, by registered or certified
mail, postage prepaid, a copy of the summons or complaint, or other legal
process in such action or proceeding to such party at the address specified
pursuant to Section 6.5. Service of process in any such action or proceeding,
-----------
effected as aforesaid, shall be effective upon receipt by party or such agent
and shall be deemed personal service upon such party and shall be legal and
binding upon such party for all purposes, notwithstanding any failure by such
party's agent to forward copies of such process to such party. Each of the
parties to this Pledge Agreement hereby waives, to the fullest extent permitted
by law, any objection it may now or hereafter have to the laying of venue in any
such action or proceeding in any such court as well as any right it may now or
hereafter have to remove any such action or proceeding, once commenced, to
another court on the grounds of forum non conveniens or otherwise.

-12-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the day and year first above written.

PEN-TAB HOLDINGS, INC. (FORMERLY KNOWN
AS PEN-TAB INDUSTRIES, INC.), a Virginia
corporation

By:_____________________________________
Name:
Title:

167 Kelley Drive
Front Royal, VA 22630

Telephone: (540) 622-2000
Facsimile: (540) 622-2008

BANK OF AMERICA ILLINOIS

By:_____________________________________
Name:
Title:

231 South LaSalle Street
Chicago, Illinois 60697
Attn: L. Richard DiDonato

Telephone: (312) 828-1995
Facsimile: (312) 828-1974

-13-
<PAGE>

ATTACHMENT 1
to
Pledge Agreement

Pledged Securities
- ------------------

Certificate #1
100 shares of Pen-Tab Industries, Inc. issued to Pen-Tab
Holdings, Inc.

-14-

<PAGE>

INDENTURE OF TRUST

among

THE FAIRFAX COUNTY ECONOMIC DEVELOPMENT AUTHORITY
(The "Issuer")

and

THE FIRST NATIONAL BANK OF MARYLAND,
as Trustee

Dated as of April 1, 1996

THIS INSTRUMENT ALSO CONSTITUTES
A SECURITY AGREEMENT UNDER THE
UNIFORM COMMERCIAL CODE
OF VIRGINIA
<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I Definitions and Rules of Construction........................................... 2

Section 101. Definitions........................................................ 2
Section 102. Rules of Construction............................................. 11

ARTICLE II Establishment of Trust......................................................... 11

Section 201. Grant............................................................ 11

ARTICLE III Authorization, Execution, Authentication, Registration and Delivery of Bonds
and Adjustment of Rate......................................................... 12

Section 301. Authorization of Bonds........................................... 12
Section 302. Issuance of Bonds; Interest...................................... 12
Section 303. Payment of Principal, Premium and Interest....................... 14
Section 304. Optional Tender.................................................. 14
Section 305. Mandatory Tender................................................. 16
Section 306. Execution and Authentication; Limited Liability.................. 17
Section 307. Bond Registrar................................................... 18
Section 308. Registration and Exchange of Bonds; Persons Treated as Owners.... 18
Section 309. Mutilated, Lost, Stolen or Destroyed Bonds....................... 19
Section 310. Cancellation of Bonds............................................ 19
Section 311. Temporary Bonds.................................................. 19
Section 312. Form of Bonds.................................................... 19
Section 313. Book Entry System................................................ 19

ARTICLE IV Redemption of Bonds; Optional and Mandatory Tender............................. 21

Section 401. Redemption Dates and Prices...................................... 21
Section 402. Notice of Redemption............................................. 22
Section 403. Partial Redemption of Bonds...................................... 23
Section 404. Selection of Bonds for Redemption................................ 23
Section 405. Effect of Notice of Redemption................................... 24
Section 406. Purchase of Bonds................................................ 24
Section 407. Remarketing of Bonds............................................. 25
Section 408. Delivery of Bonds................................................ 26
Section 409. Drawings on Letter of Credit..................................... 27
Section 410. Delivery of Proceeds of Sale..................................... 27
Section 411. No Remarketing after Default or Defeasance....................... 27

ARTICLE V General Covenants and Provisions............................................... 28

Section 501. Payment of Bonds................................................. 28
Section 502. Covenants and Representations of Issuer.......................... 28
Section 503. Further Assurances............................................... 28
</TABLE>

i
<PAGE>

<TABLE>
<S> <C>
Section 504. Inspection of Books Relating to the Project...................... 29
Section 505. Rights under Agreement........................................... 29
Section 506. Prohibited Activities............................................ 29
Section 507. Reports by Trustee............................................... 29
Section 508. Notice of Bankruptcy............................................. 29

ARTICLE VI Bond Proceeds.................................................................. 29

Section 601. Deposits into and Payments from Defeasance Fund.................. 29

ARTICLE VII Bond Fund and Rebate Fund...................................................... 30

Section 701. Creation of Bond Fund............................................ 30
Section 702. Payments into the Bond Fund...................................... 31
Section 703. Use of Moneys in the Bond Fund and Certain Other Moneys.......... 31
Section 704. Trustee Authorized to Draw on Letter of Credit................... 32
Section 705. Non-Presentment of Bonds......................................... 32
Section 706. Trustee's and Issuer's Fees, Costs and Expenses.................. 32
Section 707. Moneys to be Held in Trust....................................... 33
Section 708. Repayment to Borrower............................................ 33
Section 709. Letter of Credit................................................. 33
Section 710. Deposits Into and Payments from Rebate Fund and Other
Agreements....................................................... 35

ARTICLE VIII Investments.................................................................... 36

Section 801. Investment of Funds.............................................. 36
Section 802. Investments through Trustee's Bond Department.................... 40
Section 803. Arbitrage Covenant............................................... 40

ARTICLE IX Discharge of Indenture......................................................... 40

Section 901. Discharge of Indenture........................................... 40

ARTICLE X Default Provisions and Remedies of Trustee and Bondholders..................... 42

Section 1001. Events of Default............................................... 42
Section 1002. Acceleration.................................................... 42
Section 1003. Other Remedies; Rights of Bondholders........................... 42
Section 1004. Right of Bondholders To Direct Proceedings...................... 43
Section 1005. Application of Moneys........................................... 43
Section 1006. Remedies Vested in Trustee...................................... 45
Section 1007. Limitations on Suits............................................ 45
Section 1008. Unconditional Right to Receive Principal and Interest........... 46
Section 1009. Termination of Proceedings...................................... 46
</TABLE>

ii
<PAGE>

<TABLE>
<S> <C>
Section 1010. Waivers of Events of Default.................................... 46

ARTICLE XI The Trustee; Remarketing Agent; Tender Agent................................... 47

Section 1101. Acceptance of Trusts and Obligations............................ 47
Section 1102. Fees, Charges and Expenses of Trustee........................... 49
Section 1103. Notice Required of Trustee...................................... 50
Section 1104. Intervention by Trustee......................................... 50
Section 1105. Merger or Consolidation of Trustee.............................. 50
Section 1106. Resignation by Trustee.......................................... 51
Section 1107. Removal of Trustee.............................................. 51
Section 1108. Appointment of Successor Trustee; Temporary Trustee............. 51
Section 1109. Concerning Any Successor Trustee................................ 51
Section 1110. Trustee Protected in Relying on Resolutions..................... 52
Section 1111. Notification to Rating Agency................................... 52
Section 1112. Duties of Remarketing Agent..................................... 52
Section 1113. Eligibility of Remarketing Agent; Replacement................... 52
Section 1114. Compensation of Remarketing Agent............................... 53
Section 1115. Tender Agent.................................................... 53

ARTICLE XII Supplemental Indentures........................................................ 54

Section 1201. Supplemental Indentures Not Requiring Consent of Bondholders.... 54
Section 1202. Supplemental Indentures Requiring Consent....................... 55
Section 1203. Opinion of Counsel Required..................................... 56

ARTICLE XIII Amendment of Agreement or Remarketing Agreement................................ 56

Section 1301. Amendments Not Requiring Consent of Bondholders................. 56
Section 1302. Amendments Requiring Consent.................................... 57
Section 1303. Limitation on Amendments........................................ 57
Section 1304. Amendment by Unanimous Consent.................................. 58
Section 1305. Opinion of Counsel Required..................................... 58

ARTICLE XIV Miscellaneous.................................................................. 58

Section 1401. Borrower Bonds.................................................. 58
Section 1402. Consents of Bondholders......................................... 58
Section 1403. Limitation of Rights............................................ 58
Section 1404. Limitation of Liability of Directors, Officers, Etc., of
Issuer and the Trustee.......................................... 59
Section 1405. Notices......................................................... 59
Section 1406. Successors and Assigns.......................................... 60
Section 1407. Severability.................................................... 60
Section 1408. Applicable Law.................................................. 60
Section 1409. Counterparts.................................................... 60
Section 1410. Issuer's Reliance upon Certificates............................. 60
</TABLE>

iii
<PAGE>

Exhibit A Form of Bond
Exhibit B Letter of Representations

iv
<PAGE>

THIS INDENTURE OF TRUST is made as of the 1st day of April, 1996, by and
among THE FAIRFAX COUNTY ECONOMIC DEVELOPMENT AUTHORITY, a political subdivision
of the Commonwealth of Virginia (the "Issuer"), and THE FIRST NATIONAL BANK OF
MARYLAND, having its principal corporate trust office in Baltimore, Maryland, or
its successors in trust (the "Trustee").

RECITALS
--------

By virtue of Chapter 643 of the Virginia Acts of Assembly of 1964, as
amended (the "Act"), the General Assembly of Virginia has authorized the
creation of the Issuer and the Issuer has been duly organized pursuant to the
Act. The Issuer has been vested with all powers necessary or convenient to
carry out and effectuate the purposes and provisions of the Act, including the
powers to issue its revenue bonds for the purpose of protecting and promoting
the safety, health, welfare, convenience and prosperity of the inhabitants of
the Commonwealth; the Issuer is further authorized to acquire, own, lease and
dispose of properties and to that end the Issuer is further authorized to lease
or sell to others any or all of its facilities, to issue its bonds for the
purpose of carrying out any of its powers, to mortgage and pledge any or all of
its assets, whether then owned or thereafter acquired, as security for the
payment of the principal of, premium, if any, and interest on any such bonds and
any agreements made in connection therewith, and to pledge the revenues and
receipts from the leasing or sale of such facilities, or from any other source,
to the payment of such bonds and to refund bonds issued for such purposes; and

In order to further the purposes of the Act, the Issuer proposes to issue
its Variable Rate Demand Revenue Bonds (Forman Development Associates Project)
Series 1996, in the aggregate principal amount of $2,665,000 (the "Bonds") and
to apply the proceeds thereof, upon the terms and conditions of this Indenture
and a Loan Agreement dated as of the date hereof (the "Agreement") between the
Issuer and Forman Development Associates Limited Partnership, a Virginia limited
partnership (the "Borrower"), to refund bonds issued to finance the costs of
acquiring, constructing, equipping and furnishing an administrative office and
warehouse facility containing approximately 72,000 square feet located on 4.75
acres in Springbelt Center, Fairfax County, Virginia (the "Project").

The Issuer intends to assign to the Trustee, as security for the Bonds, the
Issuer's rights under the Agreement (except for certain of the Issuer's rights
with respect to notice, indemnification and payment of fees, if any, and
expenses). The Bonds shall be issued in registered form without coupons. The
Bonds and Trustee's certificate of authentication with respect thereto are to be
in substantially the form set forth in Exhibit A hereto, with such variations,
---------
omissions and insertions as are permitted or required by this Indenture.

All things necessary to make the Bonds valid, binding and legal limited
obligations of the Issuer, when authenticated by the Trustee and issued as
provided in this Indenture, and to constitute this Indenture as a valid and
binding agreement securing the payment of the principal and redemption price of,
and interest on, and the purchase price of, the Bonds
<PAGE>

issued and to be issued hereunder have been done and performed. Subject to the
terms hereof, the execution and delivery of this Indenture and the execution and
issuance of the Bonds have, in all respects, been duly authorized.

The Issuer hereby covenants and agrees with the Trustee and with the
registered owners, from time to time, of the Bonds, as follows:

ARTICLE I

Definitions and Rules of Construction
-------------------------------------

Section 101. Definitions. For all purposes of the Bond Documents, the
----------- -----------
following words and terms shall have the meanings herein set forth, unless the
context expressly provides or otherwise requires. In addition to, and not as a
limitation upon, the preceding sentence, words and terms used herein which are
defined in the body of any of the Bond Documents shall have the same meaning
when used herein as therein, unless the context in which any such term is used
herein clearly requires that a different meaning be ascribed to such term.

"Act" shall mean Chapter 643 of the Virginia Acts of Assembly of 1964, as
amended, as now in effect or hereafter from time to time amended.

"Act of Bankruptcy" shall mean the filing of a case in bankruptcy (or the
commencement of a bankruptcy or similar proceeding) by or against the Borrower
or the Issuer, as debtor, under any applicable bankruptcy, reorganization,
insolvency or other similar law now or hereafter in effect.

"Adjustment Date" shall mean each Wednesday during which any of the Bonds
are Outstanding.

"Agreement" or "Loan Agreement" shall mean the Loan Agreement, dated as of
April 1, 1996, including any amendments thereto, between the Issuer and the
Borrower.

"Alternate Credit Facility" shall have the meaning set forth in Section
709(b) of this Indenture.

"Authorized Denominations" shall mean $100,000 or any integral multiple of
$5,000 in excess thereof.

"Authorized Representative of the Borrower" shall mean initially Barry P.
Forman, Howard D. Forman or Matthew D. Forman, and thereafter, the person or
persons as may be designated by the Borrower by certificate filed with the
Trustee and the Issuer, authorized to act on behalf of the Borrower under the
Bond Documents.

2
<PAGE>

"Available Moneys" shall mean

(a) If the Letter of Credit is then in effect:

(i) proceeds from the remarketing of any Bonds pursuant to this
Indenture to any person other than the Issuer, the Borrower or any "insider" (as
defined in the Bankruptcy Code) of the Issuer or the Borrower; or

(ii) moneys received from any draw on the Letter of Credit; or

(iii) any other moneys or securities if there is delivered to
the Trustee an Opinion of Counsel experienced in bankruptcy matters and, for so
long as S&P rates the Bonds, reasonably acceptable to S&P (which may assume that
no Bondholder is an "insider" as defined in the Bankruptcy Code) to the effect
that the use of such moneys or securities to pay the principal or purchase price
of, premium, if any, or interest on the Bonds would not be avoidable as
preferential payments under Section 547 of the Bankruptcy Code recoverable under
Section 550 of the Bankruptcy Code should the Issuer or the Borrower become a
debtor in a proceeding commenced thereunder; or

(iv) earnings derived from the investment of any of the
foregoing; or

(b) if the Letter of Credit is not in effect, any moneys used to pay
principal of, premium, if any, purchase price of or interest on the Bonds.

"Bankruptcy Code" shall mean the United States Bankruptcy Reform Act of
1978, as amended, or any substitute or replacement legislation.

"Bond Documents" shall mean this Indenture, the Remarketing Agreement and
the Loan Agreement.

"Beneficial Owner" shall mean the Person in whose name a Bond is recorded
as beneficial owner of such Bond by the Securities Depository or a Participant
or an Indirect Participant on the records of such Securities Depository,
Participant or Indirect Participant, as the case may be, or such Person's
subrogee.

"Bond" or "Bonds" shall mean the Variable Rate Demand Revenue Bonds (Forman
Development Associates Project) Series 1996, of the Issuer in the original
aggregate principal amount of $2,665,000.

"Bond Counsel" shall mean an attorney or firm of attorneys nationally
recognized on the subject of municipal bonds.

3
<PAGE>

"Bond Counsel Approval" shall mean an opinion of Bond Counsel to the effect
that the actions or change described therein will not adversely affect the
exemption from Federal income taxation of interest on the Bonds.

"Bond Fund" shall mean the fund created under Section 701 of this
Indenture.

"Bondholder," "Holder," "holder" or any similar term, when used with
reference to a Bond, shall mean the registered owner of such Bond.

"Bond Proceeds" shall mean all receipts from the sale of the Bonds,
including earnings thereon.

"Bond Registrar" shall mean the Trustee or its designee, in its capacity as
registrar for the beneficial Owners of the Bonds held in book-entry form.

"Book Entry System" shall mean a book entry system established and operated
for the recordation of Beneficial Owners of the Bonds pursuant to Section 313
hereof.

"Borrower" shall mean Forman Development Associates Limited Partnership, a
Virginia limited partnership.

"Business Day" shall mean any day other than (i) Saturday or Sunday, (ii) a
day on which commercial banks located in Baltimore, or, if the Letter of Credit
is in effect, in the city in which the principal office of the Letter of Credit
Issuer is located, or the city in which the principal office of the Trustee is
located, are required or authorized by law or executive order to close or remain
closed or (iii) a day on which The New York Stock Exchange is closed.

"Closing" or "Closing Date" shall mean April 24, 1996.

"Code" shall mean the Internal Revenue Code of 1986, as amended, including
applicable regulations, whether temporary or permanent, revenue procedures and
revenue rulings thereunder.

"Commonwealth" shall mean the Commonwealth of Virginia.

"DTC" shall mean The Depository Trust Company, New York, New York, or its
nominee, or its successors and assigns, or any other depository performing
similar functions under this Indenture.

"Deed of Trust" shall mean the Deed of Trust dated as of April 1, 1996,
from the Borrower to E. Stephen White, trustee, including any amendments or
supplements thereto.

4
<PAGE>

"Determination of Taxability" shall mean: (i) the date on which the
Borrower determines that interest payable on the Bonds is includable in the
gross income for Federal income tax purposes of the registered owners thereof
(other than a "substantial user" of the Project or a "related person" as such
terms are used in Section 147(a) of the Code), if such determination is
supported by a written opinion of Bond Counsel to such effect, satisfactory to
the Trustee; (ii) the date on which, in the opinion of Bond Counsel, a change in
law or regulation becomes effective or on which the Internal Revenue Service has
issued any private ruling, technical advice or any other written communication,
specifically to the effect that interest payable on the Bonds is includable in
the gross income of the registered owners thereof (other than a "substantial
user" or "related person", as defined above) for federal income tax purposes;
(iii) the date on which the Borrower shall receive notice from the Trustee in
writing that the Trustee has been advised by the registered owner of any Bond
that the Internal Revenue Service has issued a 90-day letter which asserts that
the interest payable on such Bond is includable in the gross income for Federal
income tax purposes of such owner (other than a "substantial user", or "related
person" as defined above); or (iv) the date on which the Trustee receives notice
that the Borrower or the Issuer has taken any action inconsistent with, or has
failed to act consistently with, the tax-exempt status of the Bonds (unless the
Trustee receives an opinion of Bond Counsel, satisfactory to it, and
substantially to the effect that, notwithstanding such action or failure to act,
the interest on the Bonds continues to qualify as exempt from Federal income
taxation). For purposes of this definition only, the provisions of the Code as
in effect on the date of the issuance of the Bonds relating to the alternative
minimum tax and inclusion of interest on the Bonds in the calculation of
adjusted net book income for purposes of the alternative minimum tax on
corporations shall not be deemed to make interest on the Bonds includable in the
gross income of any holder.

"Governmental Charges" shall mean taxes, fees, assessments, levies, utility
charges and other governmental charges of any kind whatsoever which are
assessed, levied or imposed against the Project or incurred in the operation,
maintenance, use and occupancy of the Project.

"Indenture" shall mean this Indenture of Trust, dated as of April 1, 1996,
among the Issuer and the Trustee, including any amendments or supplements
thereto.

"Indirect Participant" shall mean a broker-dealer, bank or other financial
institution for which the Securities Depository holds Bonds as a securities
depository through a Participant.

"Interest Payment Date" or "interest payment date" shall mean (i) the first
Business Day of each calendar month, (ii) any date on which the Bonds are
subject to mandatory tender under this Indenture, and (iii) the final maturity
date of the Bonds.

"Interest Period" shall mean a seven day period commencing on Wednesday of
a given week and ending on Tuesday of the following week, except that (i) the
first Interest

5
<PAGE>

Period shall commence on the first Business Day of a calendar month and end on
the first Tuesday thereafter. Upon the initial issuance of the Bonds, the Bonds
shall be in an Interest Period commencing on the date of initial issuance and
delivery of the Bonds and ending on Tuesday of the following week.

"Issue Date" shall mean the date of issuance of the Bonds, which is the
Closing Date.

"Issuer" shall mean the Fairfax County Economic Development Authority, a
political subdivision of the Commonwealth of Virginia, and its successors or
assigns.

"Land" shall mean that parcel of land located in Fairfax County, Virginia,
as more particularly described in Exhibit A attached to the Deed of Trust, less
---------
such real estate as may be taken by the exercise of the power of eminent domain
or lost because of failure of title or released from the lien of the Deed of
Trust pursuant to the terms thereof.

"Letter of Credit" shall mean any irrevocable letter of credit issued in
accordance with Section 4.4 of the Agreement and any Alternate Credit Facility
issued in accordance with Section 709(b) hereof.

"Letter of Credit Account" shall mean the Letter of Credit Account in the
Bond Fund established by Section 701 hereof.

"Letter of Credit Agreement" shall mean, while the Bonds are Outstanding
during the Letter of Credit Period, an agreement between the Letter of Credit
Issuer and the Borrower, whereby the Letter of Credit Issuer agrees to issue a
Letter of Credit in favor of the Trustee to secure the Bonds, including
amendments and supplements thereto, and any Letter of Credit Agreement entered
into with the issuer or provider of an Alternate Credit Facility, as amended.

"Letter of Credit Issuer" shall mean the issuer of the Letter of Credit,
which may be a commercial bank (whether domestic or foreign), a savings and loan
association, an insurance company or other entity acceptable to the Remarketing
Agent or, if there be no Remarketing Agent, such an entity with long-term debt
or obligations rated within one of the three highest rating categories by any
Rating Agency. Unless otherwise provided, any reference to Letter of Credit
Issuer shall refer only to the Letter of Credit Issuer which at the time of any
determination shall have an outstanding Letter of Credit.

"Letter of Credit Period" shall mean any time that Bonds Outstanding are
secured by a Letter of Credit issued in favor of the Trustee by a Letter of
Credit Issuer.

"LIBOR" shall mean the average (rounded upward, if necessary, to the next
higher 1/16 of 1%) of the respective rate per annum at which deposits in U.S.
dollars are offered to the Letter of Credit Issuer in the London Interbank
Eurodollar market at approximately 11:00 A.M. (London time) two (2) business
days before the first day of such applicable Interest

6
<PAGE>

Period in an amount approximately equal to the principal amount of the Bonds to
which such Interest Period is to apply and for a period of time comparable to
such Interest Period.

"Mandatory Tender Date" shall mean and refer to each of the dates described
in Section 305 of this Indenture on which date the Bondholders are required to
tender their Bonds for purchase and the Issuer is required, in the absence of a
Non-Tender Notice (hereinafter defined), to cause such Bonds to be purchased,
but solely from Available Moneys.

"Mandatory Tender Notice" shall mean the notice required to be given
pursuant to Section 305(b) of this Indenture.

"Maturity Date" shall mean November 30, 2007, or such earlier date on which
the Bonds, in accordance with their terms, become due and payable or are
required to be redeemed in whole and not in part.

"Maximum Rate" shall mean 10% per annum for so long as the Letter of Credit
is in effect.

"Moody's" shall mean Moody's Investors Service, Inc. and its successors.

"Municipality" shall mean Fairfax County, Virginia, a political subdivision
of the Commonwealth.

"Net Proceeds" shall mean the proceeds from any insurance recovery or
condemnation award, after payment of attorneys' fees, fees and expenses of the
Trustee and all other expenses incurred in the collection of such proceeds.

"Opinion of Counsel" shall mean a written opinion of any attorney or firm
of attorneys, acceptable to the Trustee, who may be counsel for the Issuer, the
Trustee or the Borrower.

"Optional Tender Date" shall mean and refer to each of the dates described
in Section 304(a) hereof, on which dates the Bondholders, having first delivered
notice in accordance with Section 304(a), shall be entitled to require the
Issuer to cause their Bonds to be purchased, but solely from Available Moneys.

"Outstanding", when used in reference to the Bonds, shall mean as of a
particular date, all Bonds authenticated and delivered under this Indenture
except:

(a) any Bond canceled or required to be canceled by the Trustee at or
before such date;

7
<PAGE>

(b) any Bond for the payment of which cash equal to the principal
amount thereof with interest to date of maturity, shall have theretofore been
deposited with the Trustee before maturity;

(c) any Bonds for the redemption of which cash or noncallable direct
obligations of, or obligations the payment of the principal of and interest on
which is unconditionally guaranteed by, the United States of America, which at
their maturity will provide funds equal to the redemption price of such Bonds
with interest to the redemption date, shall have theretofore been deposited with
the Trustee and for which notice of redemption shall have been given in
accordance with this Indenture;

(d) any Bond in lieu of, or in substitution for which, another Bond
shall have been authenticated and delivered pursuant to this Indenture;

(e) any Bond deemed paid under the provisions of Section 901 of this
Indenture, except that any such Bond shall be considered Outstanding until the
maturity or redemption date thereof only for the purposes of actually being
paid; and

(f) any Bond not deemed Outstanding pursuant to, but only to the
extent provided for in, Sections 304 and 305 hereof.

"Participant" shall mean a broker-dealer, bank or other financial
institution for which the Securities Depository holds Bonds as a securities
depository.

"Payment of the Bonds" shall mean payment in full of the principal or
redemption price of, premium, if any, and interest on, and purchase price of the
Bonds and any other amounts payable under the terms of this Indenture.

"Payments Account" shall mean the Payments Account of the Bond Fund
established by Section 701 hereof.

"Person" shall mean natural persons, firms, partnerships, associations,
corporations, trusts and public bodies.

"Pledged Bonds" shall mean Bonds purchased with moneys drawn under the
Letter of Credit and held as provided in the Letter of Credit Agreement or
related pledge agreement during the period that such Bonds are so held.

"Pledged Bonds Custodian" shall mean (a) The First National Bank of
Maryland, as Trustee, as agent for the Letter of Credit Issuer under the Pledged
Bonds Custody Agreement, or any successor custodian of the Pledged Bonds acting
as the Letter of Credit Issuer's agent and (b) any other person who, pursuant to
a Pledged Bonds Custody Agreement with a Letter

8
<PAGE>

of Credit Issuer and as agent for such Letter of Credit Issuer, acts as
custodian of the Pledged Bonds.

"Project" shall mean the acquiring, constructing, equipping and furnishing
of a warehouse and administrative offices facility of approximately 72,000
square feet located on 4.75 acres in Springbelt Center, Fairfax County,
Virginia, the costs of which will be refunded with proceeds of the Bonds.

"Purchase Date" shall mean the date on which the Bonds are tendered for
purchase pursuant to Section 304 hereof (relating to optional tenders).

"Rated Period" shall mean any time that Bonds Outstanding are currently
rated by a Rating Agency.

"Rating Agency" shall mean Moody's, if the Bonds shall at the time be rated
by Moody's, and S&P, if the Bonds shall at the time be rated by S&P.

"Rebate Fund" shall mean the Rebate Fund established by Section 710 hereof.

"Rebate Earnings Account" shall mean the account in the Rebate Fund
established by Section 710 hereof.

"Rebate Payment Account" shall mean the account in the Rebate Fund
established by Section 710 hereof.

"Record Date" shall mean the Business Day preceding the Interest Payment
Date.

"Refunded Bonds" shall mean the Fairfax County Economic Development
Authority Industrial Development Revenue Note (Forman Distributing Facility)
dated November 30, 1982 in the original principal amount of $3,500,000.

"Registered Owner" or "Owner" shall mean the person or persons in whose
name or names a Bond shall be registered on the books of the Issuer maintained
by the Bond Registrar for that purpose in accordance with the terms of this
Indenture.

"Remarketing Agent" shall mean The First National Bank of Maryland, or its
successors or assigns permitted to act as such under the Remarketing Agreement.

"Remarketing Agreement" shall mean the Placement Agency and Remarketing
Agreement, dated as of April 1, 1996, by and among the Issuer, the Remarketing
Agent and the Borrower, and any amendments or supplements thereto.

"Resolution" shall mean the resolution adopted by the Issuer on April 16,
1996, approving the issuance of the Bonds and the financing contemplated by the
Bond Documents.

9
<PAGE>

"Revenues" shall mean (i) the revenues and receipts, if any, derived by the
Issuer from the sale of the Bonds and all amounts realized by the Issuer or the
Trustee from or paid pursuant to the Agreement (except payments to the Issuer
and others under Sections 8.3 and 8.4 of the Agreement and payments pursuant to
Section 8.1 of the Agreement) or pursuant to the terms of, or moneys provided
by, the Letter of Credit, (ii) any proceeds of Bonds originally deposited with
the Trustee for the payment of accrued interest on the Bonds, (iii) investments
and investment income in respect of any moneys held by the Trustee, and (iv)
moneys held by the Trustee in the Eligible Moneys Account of the Bond Fund.

"S&P" shall mean Standard and Poor's Ratings Group, a division of McGraw
Hill, and its successors.

"Securities Depository" shall mean The Depository Trust Company and any
substitute for or successor to such Securities Depository that shall maintain a
Book Entry System with respect to the Bonds.

"Securities Depository Nominee" shall mean the Securities Depository or the
nominee of such Securities Depository in whose name there shall be registered on
the registration books the Bonds to be delivered to such Securities Depository
during the continuation with such Securities Depository of participation in its
Book Entry System.

"Tender Agent" shall mean at any time the Bonds are not held in a Book
Entry System, the Trustee, or such other entity as may be designated, as set
forth in Section 1115 of this Indenture.

"Tender Date" shall mean any Mandatory Tender Date or Optional Tender Date.

"Termination Date" shall mean (a) the first Business Day of the calendar
month in which the expiration date of the Letter of Credit then in effect
occurs, provided that, if there is delivered to the Trustee an Alternate Credit
Facility prior to the day that is 5 days before the date upon which the Trustee
is required to give a Mandatory Tender Notice with respect to such Termination
Date in accordance with Section 305(b) of this Indenture, the Termination Date
shall be determined with reference to the expiration date of such Alternate
Credit Facility, or (b) the effective date of any Alternate Credit Facility that
replaces any Letter of Credit then in effect.

"Trustee" shall mean The First National Bank of Maryland, Baltimore,
Maryland, or its successors serving as such under this Indenture.

"UCC" shall mean the Uniform Commercial Code of the Commonwealth, as
amended.

"Undelivered Bonds" shall mean the Bonds defined as such in Sections 304
and 305 of this Indenture.

10
<PAGE>

"Variable Rate" shall mean the rate of interest on the Bonds determined as
provided in Section 302(c)(i) hereof.

Section 102. Rules of Construction. The following rules shall apply to
----------- ---------------------
the construction of this Indenture unless the context otherwise requires:

(a) Singular words shall connote the plural number as well as the singular
and vice versa.

(b) Words importing the redemption or calling for redemption of Bonds
shall not be deemed to refer to or connote the payment of Bonds at their stated
maturity.

(c) All references herein to particular Articles or Sections are
references to Articles or Sections of this Indenture unless otherwise indicated.

(d) The headings herein are solely for convenience of reference and shall
not constitute a part of this Indenture nor shall they affect its meaning,
construction or effect.

(e) The masculine, feminine and neuter genders are used solely for
convenience of reference and not as terms of limitation. Accordingly, words of
masculine, feminine and neuter genders shall be deemed and construed to include
correlative words of masculine, feminine and neuter genders.

(f) This Indenture shall be construed for the benefit of the Borrower as
well as for the parties hereto to the extent not inconsistent with the rights of
the Trustee and the Bond holders.

ARTICLE II

Establishment of Trust
----------------------

Section 201. Grant. In order to provide for the payment of the
----------- -----
principal or redemption price of, and interest on, and the purchase price of,
the Bonds and for the payment of the funds which may be advanced by the Trustee
pursuant to this Indenture, and to secure the performance of all of the
obligations of the Issuer under the Bonds and this Indenture, the Issuer has
caused the Borrower to deliver the Letter of Credit to the Trustee and hereby
pledges, assigns and grants to, and creates in favor of, the Trustee a lien on
and a security interest in the following:

(a) All rights of the Issuer under the Agreement, but excluding rights
to notice and the payments to be made directly to the Issuer and others pursuant
to Sections 8.1, 8.3 and 8.4 of the Agreement.

(b) The Revenues.

11
<PAGE>

(c) The funds and accounts, including moneys and investments, held by
the Trustee pursuant to the terms of this Indenture, other than funds paid
pursuant to Sections 304 and 305 and the Rebate Fund.

(d) All rights of the Issuer under the Remarketing Agreement, but
excluding the Issuer's rights to indemnification thereunder.

(e) All other property of any kind mortgaged, pledged or hypothecated
at any time as and for additional security hereunder by the Issuer or by anyone
on its behalf or with its written consent in favor of the Trustee, which is
hereby authorized to receive all such property at any time and to hold and apply
it subject to the terms of this Indenture.

The property described above is to be held by the Trustee in trust for the
equal and proportionate benefit and security of the Bondholders from time to
time of the Bonds issued under and secured by this Indenture, without privilege,
priority or distinction as to the lien or otherwise of any of the Bonds over any
of the others, on the terms and conditions set forth in this Indenture. Upon
Payment of the Bonds, if during the Letter of Credit Period, the Letter of
Credit Issuer shall be subrogated, as provided for in Section 901, to the rights
of the Bondholders to the extent amounts have been drawn under the Letter of
Credit.

ARTICLE III

Authorization, Execution, Authentication,
Registration and Delivery of Bonds and Adjustment of Rate
---------------------------------------------------------

Section 301. Authorization of Bonds. There are hereby authorized to be
----------- ----------------------
issued variable rate demand revenue bonds of the Issuer in the aggregate
principal amount of $2,665,000.

Section 302. Issuance of Bonds; Interest. (a) General Terms. The Bonds
----------- --------------------------- -------------
shall be issuable only as fully registered Bonds in Authorized Denominations.
Unless the Issuer shall otherwise direct, the Bonds shall be numbered from R-1
upward.

(b) Date; Maturity. The Bonds shall be dated as of the date of their
--------------
authentication, and shall mature, subject to prior redemption, on November 30,
2007.

(c) Calculation. Interest on Bonds shall be calculated on the basis
-----------
of a year of 365 or 366 days, as appropriate, for actual days elapsed. If any
Bonds are tendered to the Remarketing Agent pursuant to Section 304 or 305
hereof but the Bonds are not immediately remarketed, such Bonds will continue to
bear interest at the rate applicable to the Interest Period during which the
Bonds were tendered until a period of sixty (60) days has elapsed, at which time
the interest rate will adjust to LIBOR plus one hundred fifty (150) basis
points. If the Bonds cannot be remarketed due a downgrade in the rating of the
Letter of Credit Issuer, then the interest rate shall be deemed not to have been
set by the

12
<PAGE>

Remarketing Agent pursuant to Section 302(c)(i) below. Notwithstanding the
foregoing, the interest rate borne by the Bonds during such time as the Bonds
are in default and cannot be remarketed shall be equal to LIBOR plus three
hundred fifty (350) basis points commencing on the date of such default.

(i) Interest Rate. The Remarketing Agent shall determine the
-------------
interest rate on the Bonds to be effective for each Interest Period on the
Business Day preceding the first day of such Interest Period. Such rate shall be
equal to the interest rate per annum which, in the professional judgment of the
Remarketing Agent having due regard for prevailing market conditions, would be
the minimum interest rate necessary to cause a sale of the Bonds on the first
day of such Interest Period at a price equal to 100% of the principal amount
thereof plus accrued interest, but in no event to exceed the Maximum Rate. If
for any reason the Remarketing Agent does not set an interest rate or a court
holds that the interest rate set for any period is invalid or unenforceable, the
interest rate for such Interest Period shall be determined by the Trustee as
that rate per annum equal to 85% of the per annum bond equivalent yield
applicable to 13-week United States Treasury securities, as published by the
Federal Reserve Bank of New York on the most recent date prior to the applicable
Interest Period as provided in this subsection.

(ii) Notice of Interest Rate. The Remarketing Agent shall provide
-----------------------
the Tender Agent, if any, the Borrower and the Trustee with telephonic notice
(confirmed in writing) of the Interest Rate, by 12:00 noon, Baltimore time, on
the date any such rates are determined.

(iii) Initial Rate. The Bonds shall initially bear interest at the
------------
interest rate determined by the Remarketing Agent on or prior to the date of
initial issuance and delivery of the Bonds.

(iv) Conclusive Determination. The determination of the interest
------------------------
rate on the Bonds as provided in this Section 302(c) shall be conclusive and
binding.

(d) Payment of Interest. Interest on the Bonds shall be payable on
-------------------
each Interest Payment Date. Interest paid on each Interest Payment Date shall
be for the period from and including the 26th day of the second month preceding
such Interest Payment Date (or, with respect to the first Interest Payment Date,
the date on which interest begins to accrue at the Variable Rate) through and
including the 25th day of the month immediately preceding such Interest Payment
Date.

Section 303. Payment of Principal, Premium and Interest. The principal
----------- ------------------------------------------
of, premium, if any, and interest on the Bonds shall be payable in lawful money
of the United States of America at the principal corporate trust office of the
Trustee; provided, however, that the payment of interest alone shall be made to
the Registered Owner thereof (a) by check or draft mailed on the applicable
Interest Payment Date to the Registered Owner as of the close of business on the
applicable Record Date, at his address as it appears on the

13
<PAGE>

registration books of the Issuer maintained by the Trustee or at such other
address as is furnished in writing by the Registered Owner to the Trustee, or
(B) as to any Registered Owner of $1,000,000 or more in aggregate principal
amount of Bonds who so elects, by wire transfer to such wire transfer address in
the continental United States as such Registered Owner shall have furnished to
the Trustee in writing on or prior to the respective Record Date.

If and to the extent that there shall be a default in the payment of the
interest due on such Interest Payment Date, such defaulted interest shall be
paid to the Registered Owners who were Registered Owners at the close of
business as of the fifth Business Day immediately preceding the date of payment
of such defaulted interest.

Payment of principal shall be made to or upon the order of the Registered
Owner only upon presentation and surrender of each Bond, as the same becomes
due, at the principal corporate trust office of the Trustee.

Section 304. Optional Tender. (a) Optional Tender. Each owner of any
----------- --------------- ---------------
Bond may demand that its Bond be purchased by the Tender Agent, in whole (or in
part in an Authorized Denomination), on any Business Day at a purchase price
equal to the principal amount thereof plus accrued interest, if any, to the
Purchase Date as provided below. To effect such a purchase, the Bondholder must
(i) deliver to the Tender Agent at its principal office a written irrevocable
notice, which will be effective upon receipt, which states the name and address
of the registered owner, the principal amount of such Bond (and the portion
thereof to be tendered, if less than the full principal amount is to be
tendered) and the Bond number, and states the date on which such Bond shall be
purchased, which date shall be a Business Day at least seven days following the
date of delivery of such notice to the Tender Agent, and (ii) deliver to the
Tender Agent at its principal office by 10:30 a.m., Baltimore time on the
Purchase Date (A) the Bonds being tendered, and (B) an instrument of transfer in
form satisfactory to the Tender Agent, executed in blank by the owner thereof
with the signature of a member of a signature guarantee program approved by the
Securities Transfer Association (currently MSP, STAMP and SEMP).

If the Bonds are held in a Book Entry System, the right to optionally
tender Bonds may be exercised by a Beneficial Owner. Such right shall be
exercised by delivery by the Beneficial Owner to the Remarketing Agent of the
notice described in the preceding paragraph stating that such Beneficial Owner
will cause its beneficial interest (or portion thereof in an Authorized
Denomination) to be tendered, the amount of such interest to be tendered, the
date on which such interest will be tendered (which date shall be a Business Day
at least seven days after delivery of such notice to the Remarketing Agent) and
the identity of the Participant through which the Beneficial Owner maintains its
interest. Upon delivery of such notice, the Beneficial Owner must make
arrangements to have its beneficial ownership interest in the Bonds being
tendered transferred to the Remarketing Agent at or prior to 10:00 a.m.,
Baltimore time, on the Purchase Date.

14
<PAGE>

(b) Undelivered Bonds. The delivery of an optional tender notice
-----------------
described in (a) above by an Owner of a Bond is irrevocable and binding on such
owner and cannot be withdrawn. If the Bonds are not then in a Book-Entry
System, any Bond, the owner of which has delivered such notice, which is not
tendered on or before the Purchase Date shall, if Available Moneys sufficient
and available for the purchase of such Bonds have been deposited with the Tender
Agent on the Purchase Date, be deemed to have been tendered for purchase on the
Purchase Date and shall be an Undelivered Bond for purposes of this Indenture.
Owners of Undelivered Bonds shall have no rights or benefits under this
Indenture with respect to such Bonds other than to receive the purchase price
for such Bonds upon surrender of such Bonds to the Tender Agent.

(c) Payment of Purchase Price. The purchase price for Bonds
-------------------------
optionally tendered pursuant to this Section 304 shall be payable on the
Purchase Date by check mailed on the Purchase Date to the Bondholder tendering
such Bond or, at the option of any Bondholder demanding purchase of Bonds in an
aggregate principal amount of $1,000,000 or more, in Federal or other
immediately available funds by either (i) wire transfer to such Bondholder to
the bank account number on file with the Tender Agent, (ii) credit to an account
maintained by such Bondholder with the Tender Agent, or (iii) Federal funds
check to be picked up at the principal office of the Tender Agent. If the Bonds
are then held in a Book Entry System, payment of the purchase price shall be
made by the Trustee or the Remarketing Agent in accordance with the rules and
procedures of the Securities Depository.

(d) Tender Agent and Remarketing Agent Not Agent of Issuer. In
------------------------------------------------------
connection with any action required of the Tender Agent or the Remarketing Agent
pursuant to this Section 304, the Tender Agent and the Remarketing Agent are not
and shall not be construed to be acting as an agent of the Issuer but are acting
on behalf of the selling Bondholder.

(e) Effect of Purchase of Bonds. No purchase of Bonds pursuant to
---------------------------
this Section 304 or advance of use of any funds to effectuate any such purchase
shall be deemed to be a payment or redemption of the Bonds or a prepayment of
the amounts due under the Agreement or of any portion thereof and such purchase
will not operate to extinguish or discharge the indebtedness evidenced by such
Bonds or the amounts due under the Agreement.

(f) Pledged Bonds. Notwithstanding the foregoing, Pledged Bonds may
-------------
not be optionally tendered as provided in this Section 304.

Section 305. Mandatory Tender. (a) In General. All Bonds are subject to
----------- ---------------- ----------
mandatory tender in whole by the Owners of the Bonds to the Tender Agent at its
principal office on each date described below (each a "Mandatory Tender Date")
at a purchase price equal to 100% of the principal amount thereof, plus, if the
Mandatory Tender Date is not an Interest Payment Date, accrued interest to the
Mandatory Tender Date, on the fifth Business Day prior to the expiration or
termination of the Letter of Credit if (1) the Trustee has not

15
<PAGE>

received written notice of the extension of the Letter of Credit at least twenty
(20) days prior to the expiration or termination date and the Letter of Credit
is not being replaced with an Alternate Credit Facility on or prior to such
expiration or termination date or (2) the Letter of Credit is being replaced
with an Alternate Credit Facility on or prior to such expiration or termination
date, but the Trustee has not received written confirmation of a Maintenance of
Rating, as defined in Section 709(b) hereof, by the dates described therein.

(b) Notice of Mandatory Tender. At least forty-five (45) days before
--------------------------
each Mandatory Tender Date, the Trustee shall mail notice of such Mandatory
Tender Date to the Remarketing Agent. No later than 20 days prior to any
Mandatory Tender Date, the Trustee shall mail notice to all Owners of Bonds
subject to mandatory tender on such date stating that (1) due to the occurrence
of one of the events described above (which event shall be specified), such
Owner's Bonds will be subject to mandatory tender to the Tender Agent at its
principal office on the Mandatory Tender Date at the purchase price described
above, and (2) interest with respect to Bonds which are not tendered on the
Mandatory Tender Date will cease to accrue provided Available Moneys for such
purchase are on deposit with the Tender Agent on the Mandatory Tender Date. No
failure on the part of the Trustee to give such notice shall affect the
requirement that Bonds be tendered on the Mandatory Tender Date. A copy of such
notice shall be mailed by the Trustee to the Remarketing Agent, together with
written notice as to the aggregate principal amount of the Bonds subject to
mandatory tender on such date.

(c) Undelivered Bonds. If the Bonds are not then held in a Book Entry
-----------------
System, any Bond subject to mandatory tender which is not tendered on or before
the Mandatory Tender Date shall, if Available Moneys sufficient and available
for the purchase of such Bonds have been deposited with the Tender Agent on the
Mandatory Tender Date, be deemed to have been tendered for purchase on the
Mandatory Tender Date and shall be an Undelivered Bond for purposes of this
Indenture. Owners of Undelivered Bonds shall have no rights or benefits under
this Indenture with respect to such Bonds other than to receive the purchase
price for such Bonds upon surrender of such Bonds to the Tender Agent.

(d) Payment of Purchase Price. The purchase price for Bonds
-------------------------
mandatorily tendered pursuant to this Section 305 shall be payable on the
Mandatory Tender Date by check mailed on the Mandatory Tender Date to the
Bondholder tendering such Bond or, at the option of any Owner of Bonds in an
aggregate principal amount of $1,000,000 or more (exercised by a request in
writing delivered to the Trustee), in Federal or other immediately available
funds by either (i) wire transfer to such Bondholder to the bank account number
on file with the Tender Agent, (ii) credit to an account maintained by such
Bondholder with the Tender Agent, or (iii) Federal funds check to be picked up
at a principal office of the Tender Agent. If the Bonds are then held in a Book
Entry System, payment of the purchase price shall be made by the Trustee or the
Remarketing Agent in accordance with the rules and procedures of the Securities
Depository.

16
<PAGE>

(e) Tender Agent Not Agent of Issuer. In connection with any action
--------------------------------
required of the Tender Agent pursuant to this Section 305, the Tender Agent is
not and shall not be construed to be acting as an agent of the Issuer but is
acting on behalf of the selling Bondholder.

(f) Effect of Purchase of Bonds. No purchase of Bonds pursuant to
---------------------------
this Section 305 or advance or use of any funds to effectuate any such purchase
shall be deemed to be a payment or redemption of the Bonds or a prepayment of
the amounts due under the Agreement or of any portion thereof and such purchase
will not operate to extinguish or discharge the indebtedness evidenced by such
Bonds or the amounts due under the Agreement.

(g) Pledged Bonds. Notwithstanding the foregoing, Pledged Bonds are
-------------
not subject to mandatory tender as provided in this Section 305.

(h) Book Entry System. If the Bonds are then held in the Book Entry
-----------------
System, it shall not be necessary that Bonds be physically tendered to a Tender
Agent on the Mandatory Tender Date. Transfers of Beneficial Owner interests
shall be effected by the Securities Depository in accordance with its rules and
procedures and notices otherwise to be given by the Tender Agent shall be given
by the Trustee.

Section 306. Execution and Authentication; Limited Liability. The Bonds
----------- -----------------------------------------------
will be signed on behalf of the Issuer with the manual or facsimile signature of
its Chairman or Vice Chairman and attested by the manual or facsimile signature
of its Secretary or Assistant Secretary, and the seal of the Issuer will be
impressed or imprinted on the Bonds by facsimile or otherwise. If an officer of
the Issuer whose signature is on a Bond no longer holds that office at the time
Trustee or the Tender Agent authenticates the Bond, the Bond shall nevertheless
be valid. Also, if a person signing a Bond is the proper officer on the actual
date of execution, the Bond shall be valid even if that person is not the proper
officer on the nominal date of action.

A Bond shall not be valid for any purpose under this Indenture until the
Trustee or the Tender Agent manually signs the certificate of authentication on
the Bond. Such signature shall be conclusive evidence that the Bond has been
authenticated under this Indenture.

The Trustee may appoint an authenticating agent acceptable to the Borrower
to authenticate Bonds. An authenticating agent may authenticate Bonds whenever
the Trustee may do so. Each reference in this Indenture to authentication by
the Trustee includes authentication by such authenticating agent.

The Bonds and the premium, if any, and interest thereon do not constitute
an indebtedness or an obligation, general or moral, or a pledge of the faith and
credit of the Issuer, the Commonwealth or any political subdivision thereof,
including the Municipality,

17
<PAGE>

within the purview of any constitutional or statutory limitation or provision,
and shall never constitute nor give rise to a charge against the general credit
or taxing powers, if any, of the Issuer, the Commonwealth or any political
subdivision thereof, including the Municipality, but shall be a special, limited
obligation of the Issuer, payable solely from the revenues and income derived by
the Borrower under the Agreement and payments under the Letter of Credit.

Section 307. Bond Registrar. Bonds may be presented at the principal
----------- --------------
corporate trust office of the Trustee for registration, transfer and exchange,
and Bonds may be presented at the office for payment. While Bonds are not in a
Book Entry System, Bonds demanded to be purchased by their holders under this
Indenture must be delivered to the Tender Agent as specified herein. The
Trustee shall keep a register of Bonds and of their transfer and exchange.

Section 308. Registration and Exchange of Bonds; Persons Treated as
----------- ------------------------------------------------------
Owners. Bonds may be transferred only on the register maintained by the
- ------
Trustee. Upon surrender for transfer of any Bond to the Trustee, duly endorsed
for transfer or accompanied by an assignment duly executed by the holder or the
holder's attorney duly authorized in writing, the Trustee will authenticate a
new Bond or Bonds in an equal total principal amount and registered in the name
of the transferee.

Bonds may be exchanged for an equal total principal amount of Bonds of
different Authorized Denominations. The Trustee will authenticate and deliver
Bonds that the Bondholder making the exchange is entitled to receive, bearing
numbers not then outstanding.

The Trustee will not be required to transfer or exchange any Bond during
the period beginning 15 days before the mailing of notice calling the Bond or
any portion of the Bond for redemption and ending on the redemption date.

The holder of a Bond shall be the absolute owner of the Bond for all
purposes, and payment of principal, interest or purchase price shall be made
only to or upon the written order of the holder or the holder's legal
representative.

The Trustee will require the payment by a Bondholder requesting exchange or
transfer of any tax or other governmental charge required to be paid in respect
of the exchange or transfer but will not impose any other charge.

Section 309. Mutilated, Lost, Stolen or Destroyed Bonds. If any Bond is
----------- ------------------------------------------
mutilated, lost, stolen or destroyed, the Trustee will authenticate a new Bond
of the same denomination if any mutilated Bond shall first be surrendered to the
Trustee, and if, in the case of any lost, stolen or destroyed Bond, there shall
first be furnished to the Issuer, the Trustee, the Letter of Credit Issuer, the
Remarketing Agent and the Borrower evidence of such loss, theft or destruction,
together with an indemnity satisfactory to them. If the Bond has matured,

18
<PAGE>

instead of issuing a duplicate Bond, the Trustee may with the consent of the
Borrower pay the Bond without requiring surrender of the Bond and make such
requirements as the Trustee deems fit for its protection, including a lost
instrument bond. The Issuer, the Borrower and the Trustee may charge their
reasonable fees and expenses in this connection.

Section 310. Cancellation of Bonds. Whenever a Bond is delivered to the
----------- ---------------------
Trustee for cancellation (upon payment, redemption or otherwise), or for
transfer, exchange or replacement pursuant to Section 308 or 309, the Trustee
will promptly cancel the Bond and deliver the canceled Bond or a certificate of
destruction as appropriate to the Borrower at its request. Upon cancellation of
any tendered Bond by the Tender Agent, the Tender Agent shall forward the
canceled Bond to the Trustee.

Section 311. Temporary Bonds. Until definitive Bonds are ready for
----------- ---------------
delivery, the Issuer may execute and the Trustee or the Tender Agent will
authenticate temporary Bonds substantially in the form of the definitive Bonds,
with appropriate variations. The Issuer will, without unreasonable delay,
prepare and the Trustee or the Tender Agent will authenticate definitive Bonds
in exchange for the temporary Bonds. Such exchange shall be made by the Trustee
or the Tender Agent without charge.

Exchanges and transfers shall be made without charge to the Bondholders;
provided that in each case the Trustee shall require the payment by the
Bondholder requesting exchange or transfer of any tax or other governmental
charge required to be paid with respect thereto.

Section 312. Form of Bonds. The Bonds issued under this Indenture shall
----------- -------------
be substantially in the form attached hereto as Exhibit A, with such appropriate
---------
variations, omissions and insertions as are permitted or required by this
Indenture.

Section 313. Book Entry System. The Bonds shall be issued pursuant to a
----------- -----------------
Book Entry System administered by the Securities Depository with no physical
distribution of Bond certificates to be made except as provided in this Section
313. Any provision of this Indenture or the Bonds requiring physical delivery
of the Bonds shall, with respect to any Bonds held under the Book Entry System,
be deemed to be satisfied by a notation on the bond registration books
maintained by the Trustee that such Bonds are subject to the Book Entry System.

So long as a Book Entry System is being used, one Bond registered in the
name of the Securities Depository Nominee will be issued and required to be
deposited with the Securities Depository and held in its custody. The Book
Entry System will be maintained by the Securities Depository and the
Participants and Indirect Participants and will evidence beneficial ownership of
the Bonds in authorized denominations, with transfers of ownership effected on
the records of the Securities Depository, the Participants and the Indirect
Participants pursuant to rules and procedures established by the Securities
Depository, the Participants and the Indirect Participants. The principal of
and any premium on each Bond

19
<PAGE>

shall be payable to the Securities Depository Nominee or any other person
appearing on the registration books as the registered Holder of such Bond or his
registered assigns or legal representative at the principal office of the
Trustee. So long as the Book Entry System is in effect, the Securities
Depository will be recognized as the holder of the Bonds for all purposes.
Transfers of principal, interest and any premium payments or notices to
Participants and Indirect Participants will be the responsibility of the
Securities Depository, and transfers of principal, interest and any premium
payments or notices to Beneficial Owners will be the responsibility of the
Participants and the Indirect Participants. No other party will be responsible
or liable for such transfers of payments or notices or for the maintaining,
supervising or reviewing such records maintained by the Securities Depository,
the Participants or the Indirect Participants. While the Securities Depository
Nominee or the Securities Depository, as the case may be, is the registered
owner of the Bonds, notwithstanding any other provisions set forth herein,
payments of principal of, redemption premium, if any, and interest on the Bonds
shall be made to the Securities Depository Nominee or the Securities Depository,
as the case may be, by wire transfer in immediately available funds to the
account of said Holder as may be specified in the bond registration books
maintained by the Trustee or by such other method of payment as the Trustee may
determined to be necessary or advisable with the concurrence of the Securities
Depository.

In the event that (i) the Securities Depository determines not to continue
to administer a Book Entry System for the Bonds, or (ii) the Borrower, with the
consent of the Remarketing Agent, determines to discontinue use of a Book Entry
System, the Book Entry System will be discontinued if the Borrower fails to
replace or removes the then-acting Securities Depository, in which case the
Trustee will deliver replacement Bonds in the form of fully registered
certificates in Authorized Denominations in exchange for the Outstanding Bonds
as required by the Trustee and the Beneficial Owners.

The Securities Depository may be removed at any time at the election of the
Borrower, with the consent of the Remarketing Agent, and a new Securities
Depository may thereupon be appointed by the Borrower, with the consent of the
Remarketing Agent.

The Issuer and the Trustee shall enter into the Letter of Representations
set forth in Exhibit B hereto with the Securities Depository and the provisions
---------
of such Letter of Representations shall be incorporated herein by reference as
if fully set forth herein. In the event of any conflict between the Letter of
Representations and the provisions of this Indenture, the Letter of
Representations shall control.

ARTICLE IV

Redemption of Bonds; Optional and Mandatory Tender
--------------------------------------------------

Section 401. Redemption Dates and Prices. The Bonds shall be subject to
----------- ---------------------------
redemption prior to maturity in the amounts, at the times and in the manner
provided in this Article IV.

20
<PAGE>

(a) Optional Redemption.
-------------------

Bonds may be redeemed at the option of the Borrower in whole on
any date or in part on any Interest Payment Date. Such redemptions shall be at a
redemption price of 100% of the principal amount thereof, without premium, plus
accrued interest to the redemption date. Any such redemption shall occur upon
receipt by the Trustee at least 30 days prior to the redemption date of a
written notice from the Authorized Representative of the Borrower directing such
redemption.

(b) Extraordinary Optional Redemption. The Bonds may be redeemed in
---------------------------------
whole at the option of the Borrower at a redemption price of 100% of the
principal amount thereof plus accrued interest to the redemption date at any
time during any Interest Period after the occurrence of either of the following:

(i) All or substantially all of the Project is damaged,
destroyed, condemned or taken by eminent domain.

(ii) The operation of the Project is enjoined or prevented
or is otherwise prohibited by, or conflicts with, any order, decree, rule or
regulations of any court or Federal, state or local regulatory body,
administrative agency or other governmental body.

Such redemption shall occur upon receipt by the Trustee of a written notice
from the Authorized Representative of the Borrower specifying the event which
has occurred and directing such redemption, which notice shall be given at least
20 days prior to the redemption date.

(c) Mandatory Redemption on Determination of Taxability. The Bonds
---------------------------------------------------
will be redeemed in whole (or in part as provided below) at a redemption price
of 100% of the principal amount of Bonds redeemed plus accrued interest to the
redemption date on any day within 180 days after the occurrence of a
Determination of Taxability. Fewer than all the Bonds may be redeemed if
redemption of fewer than all would result in the interest payable on the Bonds
remaining outstanding being not includable in the gross income for Federal
income tax purposes of any owner other than a "substantial user" or "related
person." If fewer than all Bonds are redeemed, the Trustee will select the
Bonds to be redeemed by lot as provided in this Indenture or by such other
method acceptable to the Trustee as may be specified in an opinion of Bond
Counsel.

(d) Mandatory Sinking Fund Redemption. The Bonds are subject to
---------------------------------
mandatory sinking fund redemption commencing April 1, 1997 and on each April 1
thereafter and the November 1 prior to maturity in the principal amounts set
forth below.

All such redemptions shall be at a redemption price of 100% of the
principal amount thereof, without premium, plus accrued interest to the
redemption date.

21
<PAGE>

<TABLE>
<CAPTION>
APRIL 1 AMOUNT APRIL 1 AMOUNT
<S> <C> <C> <C>
1997 $115,000 2003 $220,000
1998 $125,000 2004 $315,000
1999 $190,000 2005 $315,000
2000 $190,000 2006 $315,000
2001 $190,000 2007 $315,000
2002 $190,000 NOVEMBER 1, $185,000
2007
</TABLE>

Section 402. Notice of Redemption. (a) Official Notice of Redemption.
----------- -------------------- -----------------------------
At least 15 days before each redemption date, the Trustee will mail notice of
redemption by first class mail to each registered owner of Bonds at the
registered owner's registered address. The notice shall identify the Bonds to
be redeemed and will state (1) the redemption date, (2) the redemption price,
(3) that the Bonds called for redemption must be surrendered to collect the
redemption price, (4) the address at which the Bonds must be surrendered, (5)
that interest on the Bonds called for redemption ceases to accrue on the
redemption date, provided moneys available and sufficient to pay the redemption
price are on deposit with the Trustee on such date, (6) the CUSIP numbers of all
Bonds being redeemed, (7) the dated date of the Bonds, (8) the rate of interest
borne by each Bond being redeemed, (9) the maturity date of each Bond being
redeemed, and (10) any other descriptive information needed to identify
accurately the Bonds being redeemed.

Failure to give any required notice of redemption as to any particular
Bonds will not affect the validity of the call for redemption of any Bonds in
respect of which no such failure has occurred. Any notice mailed as provided in
this Indenture will be conclusively presumed to have been given whether or not
actually received by any holder.

(b) Notice of Redemption to Depositories and National Information
-------------------------------------------------------------
Services. In addition to the redemption notice required above, if there is more
- --------
than one registered owner of all the Bonds, further notice shall be given by the
Trustee as set out below. No defect in such notice nor any failure to give all
or any portion of such notice shall in any manner defeat the effectiveness of a
call for redemption if notice is given as prescribed in paragraph (a) above.

(1) Each such notice of redemption shall contain the information
required in paragraph (a) above for an official notice of redemption.

(2) Each such notice of redemption shall be sent at least 15
days before the redemption date by registered or certified mail or overnight
delivery service to all registered securities depositories then in the business
of holding substantial amounts of

22
<PAGE>

obligations similar to the Bonds and to one or more national information
services that disseminate notices of redemption of obligations such as the
Bonds.

(c) Upon the payment of the redemption price of the Bonds being
redeemed, each check or other transfer of funds issued for such purposes shall
bear the CUSIP number identifying, by issue and maturity, the Bonds being
redeemed with the proceeds of such check of other transfer.

(d) Any notice of redemption at the direction of the Borrower may
state that the redemption is conditioned on receipt of moneys for such
redemption by the Trustee prior to the redemption date; if such moneys are not
received, the redemption of Bonds for which notice was given shall not be made.

Section 403. Partial Redemption of Bonds. (a) All partial redemptions
----------- ---------------------------
of Bonds shall be in Authorized Denominations. In case a Bond is of a
denomination larger than the minimum Authorized Denomination, all or a portion
of such Bond (equal to such minimum Authorized Denomination or any integral
multiple thereof) may be redeemed but such Bond shall be redeemed only in a
principal amount equal to such minimum Authorized Denomination or any integral
multiple thereof and such redemption shall result in the unredeemed portion of
each Bond equaling or exceeding the minimum Authorized Denomination.

(b) Upon surrender of any Bond for redemption in part only, the Issuer
shall execute and the Trustee shall authenticate and deliver to the owner
thereof, at the expense of the Borrower, a new Bond or Bonds of Authorized
Denomination or denominations in aggregate principal amount equal to the
unredeemed portion of the Bond surrendered.

Section 404. Selection of Bonds for Redemption. If fewer than all of
----------- ---------------------------------
the Bonds are called for redemption, the Trustee shall select the Bonds or
portions thereof to be redeemed, from the Bonds Outstanding not previously
called for redemption, in such manner as in the Trustee's sole discretion it
shall deem appropriate and fair; provided that Pledged Bonds, if any, shall be
selected for redemption prior to any other Bond. The Trustee shall promptly
notify the Issuer and the Borrower in writing of the Bonds or portions thereof
selected for redemption.

If a Bond selected for redemption shall have been purchased pursuant to
Section 304 hereof and delivered pursuant to Section 304 hereof on or after the
fifteenth day next preceding notice by mail of any proposed redemption of Bonds,
then the Bond so delivered pursuant to Section 304 hereof shall be deemed to be
the Bond so purchased and selected for redemption.

If the owner of any such Bond of a denomination greater than the minimum
Authorized Denomination shall fail to present such Bond to the Trustee for
payment and

23
<PAGE>

exchange as aforesaid, such Bond shall, nevertheless, become due and payable on
the date fixed for redemption to the extent of the unit or units of principal
amount called for redemption (and to that extent only).

Section 405. Effect of Notice of Redemption. When notice of redemption
----------- ------------------------------
is given, Bonds called for redemption become due and payable on the redemption
date at the applicable redemption price. In such case, when Available Moneys
are deposited with the Trustee sufficient for redemption, interest on the Bonds
to be redeemed shall cease to accrue as of the date of redemption.

Section 406. Purchase of Bonds. (a) On each date that Bonds are to be
----------- -----------------
purchased pursuant to Section 304 or Section 305 hereof, if the Bonds are not
then in a Book Entry System, the Tender Agent, and if the Bonds are then in a
Book Entry System, the Remarketing Agent (in the case of funds described in (i)
below) or the Trustee (in the case of funds described in (ii) and (iii) below)
shall purchase, or cause to be purchased, but only from the funds listed below,
such Bonds from the owners thereof at a purchase price equal to the principal
amount thereof plus, if the Purchase Date or Mandatory Tender Date is not an
Interest Payment Date, accrued interest to the Purchase Date or Mandatory Tender
Date. Funds for the payment of such purchase price shall be derived from the
following sources in the order of priority indicated:

(i) proceeds of the sale of such Bonds by the Remarketing Agent
pursuant to Section 407 hereof to the extent such funds are available by 9:30
A.M., Baltimore time, on the Purchase Date or Mandatory Tender Date, as the case
may be;

(ii) proceeds of a drawing by the Trustee under the Letter of
Credit; and

(iii) any moneys furnished by the Borrower pursuant to
Section 4.1(b) of the Agreement.

(b) If the Bonds are not then held in a Book Entry System, the Tender
Agent shall hold all Bonds delivered to it pursuant to Section 304 or Section
305 hereof in trust for the benefit of the respective Bondholders which shall
have so delivered such Bonds, until moneys representing the purchase price of
such Bonds shall have been delivered to or for the account of or to the order of
such Bondholders. Subject to the provisions of Section 409 hereof, the Tender
Agent (if the Bonds are not in a Book Entry System) or the Remarketing Agent or
the Trustee (if the Bonds are in a Book Entry System) shall hold all moneys
delivered to it hereunder for the purchase of Bonds in trust for the benefit of
the person or entity which shall have so delivered such moneys, and not
commingle such funds with its general funds, until the Bonds purchased with such
moneys shall have been delivered to or for the account of such property or
entity.

24
<PAGE>

Section 407. Remarketing of Bonds. (a) The Remarketing Agent shall
----------- --------------------
offer for sale and use its best efforts to sell Bonds tendered pursuant to
Section 304 hereof on the Purchase Date at the purchase price therefor. The
Remarketing Agent, for its own account and not as an agent of the Borrower, the
Issuer or the Trustee, may purchase any Bonds remarketed by it hereunder.

(b) Promptly but in no event later than the close of business on the
Business Day on which the Remarketing Agent or the Tender Agent (as the case may
be) receives notice from any Bondholder of its demand to have its Bonds
purchased pursuant to Section 304 hereof, the Remarketing Agent or the Tender
Agent (as the case may) shall give telecopied or telephonic notice, promptly
confirmed by a written notice, to the Remarketing Agent (if applicable), the
Trustee and the Letter of Credit Issuer specifying the principal amount of Bonds
which such Bondholder has demanded to have purchased and shall promptly deliver
a copy of such written notice from the Bondholder to each of such parties.

(c) Except as provided in subsection (d) of this Section 407, any Bond
delivered for purchase pursuant to Section 304 of this Indenture from the date
notice of a mandatory tender or redemption is given hereunder with respect to
such Bond through the date of mandatory tender or redemption shall not be
remarketed. The Trustee shall notify the Remarketing Agent of the Bonds not to
be remarketed pursuant to this Section 407(c).

(d) Upon any mandatory tender of Bonds in accordance with Section 305
hereof, the Remarketing Agent shall, unless otherwise directed by the Borrower,
offer for sale and use its best efforts to sell Bonds subject to purchase
pursuant to Section 305 hereof at the purchase price to be paid for such Bond
hereunder.

(e) The Remarketing Agent shall offer for sale and use its best
efforts to sell Pledged Bonds at the best available price, unless otherwise
directed by the Letter of Credit Issuer.

(f) The Remarketing Agent shall not knowingly sell any Bonds to the
Borrower, any general partner of the Borrower, any "insider" of the Borrower
(within the meaning of the Bankruptcy Code), or the Issuer pursuant to this
Indenture unless, prior to such sale, the Trustee shall have received an opinion
of Counsel experienced in bankruptcy matters acceptable to any Rating Agencies
then rating the Bonds to the effect that such purchase would not result in a
preferential payment pursuant to the provisions of Section 547 of the Bankruptcy
Code.

(g) The Remarketing Agent shall notify the Trustee if no Book Entry
System is in effect, or the Tender Agent, if any, as to the remarketing of any
Bond as soon as possible after such remarketing. Each notice shall include the
name, address and taxpayer identification number of the purchaser and the
principal amount of the remarketed Bond.

25
<PAGE>

(h) The Remarketing Agent shall notify the Trustee, the Letter of
Credit Issuer and the Tender Agent, if any, by 10:30 A.M., Baltimore time, on
the Business Day preceding each Purchase Date or Mandatory Tender Date of the
amount of proceeds from remarketing the Bonds on deposit with the Remarketing
Agent through that time.

Section 408. Delivery of Bonds. (a)(i) Bonds sold by the Remarketing
----------- -----------------
Agent pursuant to Section 407 hereof shall be delivered by the Tender Agent at
the principal office of the Tender Agent by 11:00 A.M., Baltimore time, against
prior payment therefor in immediately available funds as provided in Section 410
hereof in an amount equal to the purchase price therefor. If the Book Entry
System is in effect, the new Beneficial Owner's interest shall be reflected in
accordance with the rules and procedures of the Securities Depository.

(ii) Bonds purchased with moneys described in clause (ii) of
Section 406(a) hereof shall be held in accordance with Section 408(b) hereof.

(iii) Bonds purchased with moneys described in clause (iii) of
Section 406(a) hereof, shall at the direction of the Borrower either be (A) held
by the Tender Agent for the account of the Borrower or (B) canceled by the
Tender Agent; provided, however, that any Bonds so purchased after the selection
-------- -------
thereof by the Trustee for redemption shall be canceled. If a Book Entry System
is in effect, the beneficial ownership interest of the Borrower in the Bonds
shall be reflected in accordance with the rules and procedures of the Securities
Depository.

(b) If while the Bonds are not held in a Book Entry System, any Bond
is purchased with moneys drawn under the Letter of Credit, that Bond shall be
registered as instructed by the Letter of Credit Issuer and shall only be
released by the party holding such Pledged Bonds upon receipt by it of written
notice from the Letter of Credit Issuer that the Letter of Credit has been
reinstated to an amount equal to the principal amount of all Bonds to be
Outstanding upon such release (other than any remaining Pledged Bonds) plus the
applicable number of days' interest at the Maximum Rate. If while Bonds are
held in a Book Entry System, and any Bond is purchased with moneys drawn under
the Letter of Credit, the Letter of Credit Issuer shall be designated as the
Beneficial Owner of the Bond and the Trustee shall reflect on its records that
such beneficial ownership interest is pledged to the Letter of Credit Issuer.
Such pledge and beneficial ownership interest shall be released upon receipt by
the Trustee of the notice from the Letter of Credit Issuer described in the
second sentence of this Section 408(b).

Section 409. Drawings on Letter of Credit. If the Trustee has not
----------- ----------------------------
received notice of the amount of remarketing proceeds on deposit with the
Remarketing Agent pursuant to Section 407(h) hereof sufficient to purchase all
Bonds tendered or required to be tendered prior to 10:30 A.M., Baltimore time,
on the Business Day preceding any Purchase Date or Mandatory Tender Date, as the
case may be, then the Trustee shall draw on the Letter of Credit in accordance
with its terms to the end that immediately available funds will be

26
<PAGE>

provided on such date from such draw to pay the purchase price of Bonds for
which proceeds of remarketing were not available as described above. If the
Bonds are not in a Book Entry System, the Trustee shall deliver the moneys drawn
under the Letter of Credit to the Tender Agent on such Purchase Date or
Mandatory Tender Date, as the case may be, and the Tender Agent shall deliver
the purchase price of the Bonds against delivery of the Bonds to the selling
Bondholder.

Section 410. Delivery of Proceeds of Sale. The proceeds of the sale by
----------- ----------------------------
the Remarketing Agent pursuant to Section 407(a) or Section 407(d) hereof of
Bonds delivered to the Tender Agent shall be turned over by the Remarketing
Agent to the Tender Agent by 9:30 A.M., Baltimore time, on the Purchase Date or
Mandatory Tender Date, as the case may be, at the Principal Office of the Tender
Agent (or if the Bonds are in a Book Entry System, to the Securities Depository)
against delivery of the remarketed Bonds to the Remarketing Agent and such
proceeds shall be paid by the Tender Agent to the selling Bondholder (unless
such proceeds have been paid directly to the Securities Depository by the
Remarketing Agent as provided above). The Remarketing Agent shall no later than
9:30 A.M., Baltimore time, notify the Trustee of the delivery of proceeds of
sale to the Tender Agent (or the Securities Depository). The proceeds of the
sale by the Remarketing Agent of any Pledged Bond shall be paid to the Letter of
Credit Issuer.

Section 411. No Remarketing after Default or Defeasance. Anything in
----------- ------------------------------------------
this Indenture to the contrary notwithstanding, there shall be no remarketing of
Bonds demanded to be purchased pursuant to Section 304 hereof if there shall
have occurred and be continuing an Event of Default or after defeasance of Bonds
pursuant to Section 901 of this Indenture.

ARTICLE V

General Covenants and Provisions
--------------------------------

Section 501. Payment of Bonds. The Issuer shall promptly pay the
----------- ----------------
principal or purchase price of (whether at maturity, by acceleration or call for
redemption or otherwise), premium, if any, and interest on the Bonds on the
dates and in the manner provided in this Indenture and in the Bonds; provided,
however, that such obligations are not general obligations of the Issuer but are
limited obligations of the Issuer and are payable solely from the Revenues,
which revenues have been pledged and assigned to the Trustee to secure payment
thereof. THE BONDS AND THE REDEMPTION PRICE THEREOF, AND INTEREST THEREON AND
THE PURCHASE PRICE THEREOF SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR A PLEDGE
OF THE FAITH AND CREDIT OF THE COMMONWEALTH OR ANY POLITICAL SUBDIVISION
THEREOF, INCLUDING THE MUNICIPALITY. NEITHER THE COMMONWEALTH OF VIRGINIA NOR
ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE ISSUER, SHALL BE OBLIGATED TO
PAY THE PRINCIPAL OR REDEMPTION PRICE OF, OR INTEREST ON, OR THE PURCHASE PRICE
OF, THE BONDS OR OTHER COSTS INCIDENT THERETO, EXCEPT FROM THE REVENUES AND
MONEYS

27
<PAGE>

PLEDGED THEREFOR, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE
COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE ISSUER AND THE
MUNICIPALITY, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OR REDEMPTION PRICE OF,
OR INTEREST ON, OR THE PURCHASE PRICE OF, THE BONDS OR OTHER COSTS INCIDENT
THERETO.

Section 502. Covenants and Representations of Issuer. The Issuer shall
----------- ---------------------------------------
faithfully observe and perform all covenants, conditions and agreements on its
part contained in this Indenture, in every Bond executed, authenticated and
delivered hereunder and in all proceedings of its Board of Directors pertaining
thereto; provided, however, that the liability of the Issuer under any such
covenant, condition or agreement for any breach or default by the Issuer shall
be limited solely to, and satisfied solely from, the sources of payment
described in Section 501. The Issuer represents that it is duly authorized
under the constitution and laws of the Commonwealth, including particularly and
without limitation the Act, to issue the Bonds, to execute this Indenture, to
execute and assign the Agreement, and to pledge the revenues, receipts and
funds, including the Revenues, in the manner and to the extent set forth in this
Indenture. The Issuer further represents that all action on its part necessary
for the issuance of the Bonds and the execution and delivery of this Indenture
has been duly and effectively taken and that the Bonds are valid and enforceable
limited obligations of the Issuer.

Section 503. Further Assurances. Subject to the provisions of Section
----------- ------------------
501, the Issuer (a) shall do, execute, acknowledge and deliver, or cause to be
done, executed, acknowledged and delivered, such indentures supplemental to this
Indenture and such further acts, instruments and transfers as the Trustee may
reasonably require for the better assuring, transferring, conveying, pledging
and assigning to the Trustee of all the rights assigned by this Indenture and
the revenues and receipts pledged by this Indenture, including the Revenues, to
the payment of the principal or redemption price of, premium, if any, and
interest on, and the purchase price of, the Bonds and (b) shall fully cooperate
with the Trustee and the Bondholders in protecting the rights and security of
the Bondholders.

Section 504. Inspection of Books Relating to the Project. All books and
----------- -------------------------------------------
documents in the Issuer's possession or held on behalf of the Issuer relating to
the Project and the Revenues derived by the Issuer from the Project shall at all
reasonable times be open to inspection by such agents as may be designated by
the Trustee or the holders of 25% or more in aggregate principal amount of Bonds
then outstanding.

Section 505. Rights under Agreement. The Trustee in its own name or in
----------- ----------------------
the name of the Issuer may enforce all rights of the Issuer and all obligations
of the Borrower under the Agreement for and on behalf of the Bondholders,
whether or not the Issuer is in default under this Indenture.

28
<PAGE>

Section 506. Prohibited Activities. The Issuer shall not engage in any
----------- ---------------------
activities or take any action which might result in the income of the Issuer
derived from the Project becoming taxable to it or any interest on the Bonds
becoming taxable to the recipients thereof under Federal or Virginia income tax
laws.

Section 507. Reports by Trustee. The Trustee shall make periodic
----------- ------------------
reports to the Borrower, the Letter of Credit Issuer and the Issuer of all
moneys received, invested and expended by it. The Trustee shall furnish to the
Borrower, the Remarketing Agent, the Letter of Credit Issuer or the Issuer upon
request (i) a statement of the amount of principal of Bonds Outstanding and
unpaid as of the date of such request and (ii) such information in the Trustee's
possession as may be necessary to make any other report required by the Act, or
any other law, now or hereafter in effect.

Section 508. Notice of Bankruptcy. The Issuer agrees promptly to notify
----------- --------------------
the Trustee, the Borrower, the Remarketing Agent and the Letter of Credit
Issuer, if any, of the occurrence of an Act of Bankruptcy with respect to it,
setting forth in detail the person involved, the date of the relevant event and
any other relevant information of which it has knowledge.

ARTICLE VI

Bond Proceeds
-------------

Section 601. Deposits into and Payments from Defeasance Fund. There is
----------- -----------------------------------------------
hereby created and established with the Trustee a Defeasance Fund, which shall
be used to redeem, defease and discharge the Refunded Bonds. Within the
Defeasance Fund there are hereby created and ordered established with the
Trustee two separate accounts to be designated the "Defeasance Payment Account"
and the "Defeasance Earnings Account", respectively.

(a) The Trustee shall authorize or approve the net proceeds from the
initial sale of the Bonds to be applied, or shall use such net proceeds itself
to redeem, defease and discharge the Refunded Bonds at the earliest possible
date pursuant to written instructions to be provided to the Title Company by the
trustee of the Refunded Bonds or Bond Counsel.

(b) The Trustee shall deposit into the Defeasance Earnings Account all
interest earned on, and profits received from the investment of, amounts on
deposit in the Defeasance Payment Account, if any.

(c) Funds on deposit in the Defeasance Fund, if any, may be invested
in investments set forth in subsection (d) and (g) of Section 801.

(d) Upon defeasance of the Refunded Bonds, any earnings in the
Defeasance Earnings Account and any sums remaining in the Defeasance Payment
Account, if any, shall be transferred to the Payments Account of the Bond Fund.

29
<PAGE>

ARTICLE VII

Bond Fund and Rebate Fund
-------------------------

Section 701. Creation of Bond Fund. There is hereby created and
----------- ---------------------
established with the Trustee a Bond Fund, which shall be used to pay the
principal of, premium, if any, and interest on the Bonds and for other purposes
described in this Article VII. There are hereby created by the Issuer and
ordered established with the Trustee within and as part of the Bond Fund two
separate and segregated accounts, to be designated "Payments Account", and
"Letter of Credit Account". The Payments Account shall be used generally to
hold moneys in the Bond Fund, other than proceeds of a draw on the Letter of
Credit which shall be held in the Letter of Credit Account and proceeds of a
remarketing of the Bonds.

All moneys deposited in the Bond Fund to pay principal of, premium and
interest on the Bonds shall be deposited in the Bond Fund and used for such
purpose or otherwise as provided herein.

At any time that no Letter of Credit is in effect, the Payments Account,
and the Letter of Credit Account will be merged, and the Bond Fund shall at such
time be a single account. At any time that no Letter of Credit is in effect, all
references herein to the Payments Account, and the Letter of Credit Account will
be deemed to be references to the Bond Fund as a whole.

The Bonds and all payments required of the Issuer hereunder are not general
obligations of the Issuer but are limited obligations as described in the form
of Bond. The payments provided in Section 4.1(a) of the Agreement are to be
remitted directly to the Trustee for the account of the Issuer and deposited in
the Bond Fund as provided in Section 702 hereof.

Section 702. Payments into the Bond Fund. There shall be deposited into
----------- ---------------------------
the various accounts of the Bond Fund from time to time the following:

(a) into the Payments Account, all payments by the Borrower pursuant
to Section 4.1(a) of the Agreement;

(b) into the Letter of Credit Account, all moneys drawn by the Trustee
under the Letter of Credit to pay principal of and interest on the Bonds
and proceeds of a remarketing of the Bonds; and

(c) into the Payments Account, all other moneys received by the
Trustee under and pursuant to the provisions of this Indenture or any of
the provisions of the Agreement, when accompanied by directions from the
person depositing such moneys that such moneys are to be paid into the Bond
Fund.

30
<PAGE>

The Issuer hereby covenants that so long as any of the Bonds issued
hereunder are outstanding it will cause to be deposited in the Bond Fund all
amounts from revenues derived under Section 4.1(a) of the Agreement (including,
without limitation, all draws on the Letter of Credit for such purpose) to meet
and pay promptly the principal of, premium, if any, and interest on the Bonds as
the same become due and payable.

Section 703. Use of Moneys in the Bond Fund and Certain Other Moneys.
----------- -------------------------------------------------------
Moneys in the Bond Fund shall be used solely for the payment of the principal
of, premium, if any, and interest on the Bonds whether upon final maturity,
redemption or acceleration, or to reimburse the Letter of Credit Issuer for
draws under the Letter of Credit and payment of all other obligations of the
Borrower due and payable under the Letter of Credit Agreement, from the
following source or sources, but only in the following order of priority:

(a) for payment of principal of, premium, if any, and interest on the
Bonds, first, from Available Moneys held in the Letter of Credit Account
and second from moneys in the Payments Account; and

(b) for reimbursement to the Letter of Credit Issuer upon presentation
to the Trustee of a written requisition as set forth in the immediately
succeeding clause (c) below, for all or a portion of the amount of any draw
under the Letter of Credit and payment of all other obligations of the
Borrower due and payable under the Letter of Credit Agreement from moneys
held in the Payments Account. Trustee shall not apply any funds in the
Letter of Credit Account to redeem Pledged Bonds.

(c) with respect to the sums payable to the Letter of Credit Issuer
pursuant to the immediately preceding clause (b), upon receipt by the
Trustee from the Letter of Credit Issuer of a written notice specifying the
outstanding amount of all obligations of the Borrower then due and payable
under the Letter of Credit Agreement, the Trustee shall promptly transfer
funds equal to such amount (or such lesser amount as shall then be held in
the Payments Account) to such account as the Letter of Credit Issuer may
specify in such written notice.

Section 704. Trustee Authorized to Draw on Letter of Credit. The Issuer
----------- ----------------------------------------------
hereby authorizes and directs the Trustee, and the Trustee hereby agrees, to
draw moneys under the Letter of Credit in accordance with terms and conditions
of the Letter of Credit and in the amounts available thereunder as shall be
necessary to make timely payment of the principal of and interest on the Bonds
(whether upon any interest payment date, principal payment date, upon
acceleration or upon maturity of the Bonds) in accordance with the provisions of
Sections 703 and 709(e) of this Indenture.

Section 705. Non-Presentment of Bonds. If any Bond is not presented for
----------- ------------------------
payment when the principal thereof becomes due (whether at maturity, by
acceleration or call for redemption or otherwise), all liability of the Issuer
to the registered owner of the Bond for the payment of such Bond shall be
completely discharged if funds (Available Moneys when

31
<PAGE>

required so to be by the terms of this Indenture) sufficient to pay such Bond
and interest due thereon to its maturity or redemption date shall be held by the
Trustee for the benefit of the registered owner thereof, and thereupon it shall
be the duty of the Trustee to hold such funds, without liability for interest
thereon, for the benefit of the registered owner of such Bond, who shall
thereafter be restricted exclusively to such funds for any claim under this
Indenture or on such Bond.

Any moneys which shall have been set aside by the Trustee for the payment
of the principal or redemption price of and interest on, the Bonds and which
shall remain unclaimed by the Registered Owner of any of the Bonds for a period
of five (5) years after the date on which such principal or redemption price of,
and interest on, the Bonds shall have become payable, shall, unless otherwise
required by law, be paid to the Borrower, and thereafter the registered owners
of such Bond shall look only to the Borrower as unsecured creditors for the
payment thereof and then only to the extent of the amount so received, without
any interest thereon, and the Issuer and the Trustee shall have no
responsibility with respect to such moneys.

Section 706. Trustee's and Issuer's Fees, Costs and Expenses. All fees
----------- -----------------------------------------------
and expenses, including reasonable counsel fees, of the Trustee and the Issuer
and reasonable costs and expenses of the Issuer directly related to the Bonds or
the Project, including the Issuer's fees, including but not limited to expenses,
to the extent not paid from Bond proceeds, are intended to be paid from payments
by the Borrower made under Section 8.4 of the Agreement.

Section 707. Moneys to be Held in Trust. All moneys required to be
----------- --------------------------
deposited with, or paid to, the Trustee for the account of any of the funds
created by this Indenture shall be held by the Trustee in trust, and except for
(i) moneys deposited with, or paid to, the Trustee for the redemption of Bonds,
notice of the redemption of which has been duly given, (ii) moneys on deposit
from time to time pursuant to Sections 304 and 305 of this Indenture and (iii)
moneys held in the Rebate Fund, shall, while held by the Trustee, constitute
part of the trust estate and be subject to the lien of, and security interests
created by, this Indenture.

Section 708. Repayment to Borrower. After Payment of the Bonds and the
----------- ---------------------
fees, charges and expenses of the Trustee and other amounts required to be paid
under this Indenture, and the fees, if any, charges and expenses of the Issuer
and any other amounts required to be paid by the Borrower under the Agreement,
all amounts remaining in any of the funds created by this Inden ture (other
than amounts in the Rebate Fund) shall be paid to the Borrower; provided,
however, that, if during the Letter of Credit Period, before making such payment
to the Borrower, the Trustee shall have given the Letter of Credit Issuer 30
days prior written notice that such amounts are available for payment to the
Borrower. Notwithstanding the foregoing, if the Trustee has received from the
Letter of Credit Issuer notice prior to the expiration of such 30 day period
that amounts are due to it from the Borrower under the terms of the Letter of
Credit Agreement, the Trustee shall pay to the Letter of Credit Issuer any
amounts which would otherwise be paid to the Borrower as

32
<PAGE>

provided above, up to the amount specified to be due in the notice from the
Letter of Credit Issuer, unless the Trustee has received notice from the
Borrower that it disputes the amounts which the Letter of Credit Issuer contends
are due to it from the Borrower, in which event the Trustee will deposit any
amount which would otherwise be paid to the Borrower into an escrow account
until the disposition thereof is agreed to by the Borrower and the Letter of
Credit Issuer or determined by a final non-appealable judicial decision.

Section 709. Letter of Credit.
----------- ----------------

(a) Requirements. The initial Letter of Credit will be an irrevocable
------------
letter of credit of a commercial bank dated as of the Closing Date providing for
direct payments to or upon the order of the Trustee of amounts up to (1) the
principal of the Bonds when due, at maturity or upon acceleration, redemption,
purchase pursuant to Sections 304 and 305 hereof or otherwise and (2) 60 days'
interest on the Bonds at the Maximum Rate.

Each Letter of Credit in effect after the initial Letter of Credit
must meet the requirements of the following paragraph (b) and be accompanied by
the opinions described in paragraph (c).

(b) Alternate Credit Facility. The Borrower may at any time
-------------------------
substitute an Alternate Credit Facility for an existing Letter of Credit,
subject to the limitations set forth in this Section 709(b) and any limitations
which may be set forth in the Letter of Credit Agreement. An Alternate Credit
Facility must be an irrevocable direct pay letter of credit issued by one or
more commercial banks, with terms in all respects material to the Bondholders
the same as in the initial Letter of Credit (except for the term and maximum
interest rate set forth in such Alternate Credit Facility or a change in number
of days of interest required to be covered as contemplated by Section
302(e)(iii)(6) hereof).

If an Alternate Credit Facility is furnished in order to avoid
mandatory tender pursuant to Section 305 hereof, the Borrower must furnish the
Trustee written confirmation (by the 30th day prior to the expiration or
termination of the current Letter of Credit) and further written confirmation
(on the date of delivery of the Alternate Credit Facility) from each Rating
Agency then having a rating in effect for the Bonds that the replacement of the
current Letter or Credit with the Alternate Credit Facility will not by itself
result in a withdrawal or reduction of the Rating Agency's current rating for
the Bonds (a "Maintenance of Rating"). Notwithstanding the foregoing, an
existing Letter of Credit may not under any circumstances be replaced prior to
its stated expiration date (as extended from time to time) or termination date
with an Alternate Credit Facility unless either (i) the Trustee is furnished
with evidence of a Maintenance of Rating by the date described above (so that
the Bonds will not be subject to mandatory tender as a result thereof) or (ii)
the substitution occurs on the first Business Day following the last day of such
Interest Period.

The Borrower shall promptly notify the Trustee, the Remarketing Agent
and the Letter of Credit Issuer of its intention to deliver an Alternate Credit
Facility. Upon

33
<PAGE>

receipt of such notice the Trustee will promptly mail a notice the anticipated
delivery of the Alternate Credit Facility to the Issuer, the Remarketing Agent
and each Bondholder at the holder's registered address.

(c) Opinions of Counsel. Any Alternate Credit Facility delivered to
-------------------
the Trustee after the initial Letter of Credit must be accompanied by (1) an
Opinion of Counsel stating that delivery of the Alternate Credit Facility is
authorized under this Indenture and complies with its terms, (2) an Opinion of
Counsel to the issuer or provider of such Alternate Credit Facility stating that
such Alternate Credit Facility is a legal, valid, binding and enforceable
obligation of such issuer or provider in accordance with its terms (subject only
to usual exceptions relating to bankruptcy and similar matters), (3) an Opinion
of Counsel to the Borrower in reasonably satisfactory form to the effect that,
based upon due and diligent investigation by such counsel, there is no
litigation pending or threatened against the Borrower and there are no
outstanding contractual obligations of the Borrower which would materially
adversely affect the ability of the Borrower to (i) enter into and perform its
obligations under any Letter of Credit Agreement entered into in connection
therewith or (ii) perform its obligations under this Agreement, and (4) an
opinion of Bond Counsel to the effect that the delivery of the Alternate Credit
Facility will not adversely affect the exclusion from gross income of interest
on the Bonds. All such Opinions shall be in form and substance reasonably
satisfactory to the Trustee.

(d) The Alternate Credit Facility (and accompanying opinions and
rating letters as required by (b) and (c) above) must be delivered to the
Trustee no later than twenty (20) days prior to the expiration or termination of
the Letter of Credit then in effect.

(e) Draws. As provided in Section 704, the Trustee will draw on the
-----
Letter of Credit, if one is in effect, to the extent necessary, to make timely
payment of principal and interest on the Bonds in accordance with this Indenture
and the Bonds. In drawing on the Letter of Credit, the Trustee will be acting
on behalf of the Bondholders by facilitating payment of their Bonds and not on
behalf of the Issuer or the Borrower and will not be subject to the control of
either. No draws shall be made to pay the principal of, premium, if any,
interest on or the purchase price of Pledged Bonds.

(f) Unless the Letter of Credit provides for such reduction without
action by the Trustee, on the Business Day next following any payment or
redemption of any principal amount of the Bonds, the Trustee shall notify the
Letter of Credit Issuer of the amount of any payment or redemption of any
principal amount of the Bonds, so that the Letter of Credit Issuer may reduce
the stated amount of the Letter of Credit by an amount equal to 100% of such
principal amount plus the interest for 60 days allocable thereto at the Maximum
Rate.

(g) Downgrade. If the rating of the Letter of Credit Issuer is
---------
downgraded and as a result the Remarketing Agent is unable to remarket the
Bonds, the Letter of Credit Issuer will be responsible for obtaining and bearing
all costs associated with (i) an Alternate

34
<PAGE>

Credit Facility meeting all requirements of Section 709(b) for a term equal to
or in excess of the remaining term of the Letter of Credit, or (ii) a confirming
letter of credit, which, together with the Letter of Credit, eliminates the
downgrade and enables the Remarketing Agent to remarket the Bonds, provided,
however, that the Borrower shall first acknowledge in writing its agreement to
accept an Alternate Credit Facility with a rating comparable to the Letter of
Credit Issuer's rating prior to the downgrade or a confirming letter of credit
before the Letter of Credit Issuer's obligations under this Section shall
commence.

Section 710. Deposits Into and Payments from Rebate Fund and Other
----------- -----------------------------------------------------
Agreements. There is hereby created and established with the Trustee a Rebate
- ----------
Fund. Certain capitalized terms used in this Section 710 shall have the
meanings ascribed to such terms in Section 8.1 of the Agreement, anything in
Section 101 hereof to the contrary notwithstanding. Within the Rebate Fund
there are hereby created and ordered established two separate accounts to be
designated the "Rebate Payment Account" and "Rebate Earnings Account,"
respectively.

(a) There immediately shall be deposited in the Rebate Payment Account
all amounts received from the Borrower pursuant to Section 8.1 of the Agreement.
The Trustee shall deposit into the Rebate Earnings Account all interest earned
on, and profits received from the investment of, amounts from time to time on
deposit in the Rebate Payment Account. Interest accrued on, and profits
realized from the investment of, the Rebate Earnings Account shall be retained
therein.

(b) The Trustee shall pay to the United States, in accordance with and
within the time specified in the Rebate Statements provided to the Trustee by
the Borrower pursuant to Section 8.1 of the Agreement, first from the Rebate
Earnings Account and then from the Rebate Payment Account, the Rebate Amount
due, according to such Rebate Statements. The Trustee shall have no obligation
to obtain the Rebate Statements on behalf of the Borrower, or to make payment to
the United States if no Rebate Statements are provided to it.

(c) The Trustee agrees to provide the Borrower monthly statements
setting forth the earnings on the investment of all funds held by the Trustee
under the terms of this Indenture and the funds on deposit in the Rebate Fund
within ten (10) days from the end of each month. The Trustee shall retain
records of all such statements for a period of six years following Payment of
the Bonds.

(d) Funds on deposit in the Rebate Fund may be separately invested and
reinvested by the Trustee at the request of, and as directed by the Borrower, in
investments set forth in, subsections (b), (c) and (g) of Section 801. The
Trustee shall sell and reduce to cash a sufficient amount of investments in the
Rebate Fund whenever the cash balance in the Rebate Fund is insufficient to pay
the Rebate Amount in accordance with Section 710(b). The Trustee may rely
conclusively on any Rebate Statement delivered to the Trustee, unless the
Trustee has actual knowledge of any error in any such Rebate Statement from
written notice thereof.

35
<PAGE>

(e) The Trustee for itself and on behalf of the Bondholders hereby
waives, and forever releases and disclaims, any and all statutory and consensual
lien rights or security inter ests, including but not limited to any and all
rights of offset, which it or they at any time may have or be entitled to in or
in respect of moneys or investments at any time held in the Rebate Fund.

ARTICLE VIII

Investments
-----------

Section 801. Investment of Funds. The Trustee shall separately invest
----------- -------------------
and reinvest any moneys held in the Bond Fund in:

(a) Bonds, notes and other evidences of indebtedness of the
Commonwealth or any political subdivision thereof and securities unconditionally
guaranteed as to payment of principal and interest by the Commonwealth, and, if
during the Rated Period, which currently carry at least the fourth highest
rating by Moody's or S&P, or both if rated by both;

(b) In the event there are funds from any letter of credit draw, they
can only be invested, under this subparagraph, to wit: bonds, treasury notes
and other obligations of the United States of America;

(c) Bonds, debentures, notes or other evidence of indebtedness issued
by any of the following agencies or any other like governmental or government-
sponsored agencies which are hereafter created: Bank for Cooperatives; Federal
Intermediate Credit Bank; Consolidated Farm Credit System-wide Bonds; Federal
Financing Bank; Federal Home Loan Bank System; Export-Import Bank of the United
States; Farmers Home Administration; Small Business Administration; Inter-
American Development Bank; International Bank for Reconstruction and
Development; Federal Land Banks; and Government National Mortgage Association;

(d) Repurchase agreements for such obligations specified in paragraphs
(b) and (c) above subject to the limitations set forth below;

(e) Savings accounts, time deposits, certificates of deposit or other
interest-bearing accounts in any bank (including any Letter of Credit Issuer)
within the Commonwealth, or without the Commonwealth having shareholders' equity
of not less than $10,000,000, provided such investment is not then prohibited by
the laws of the Commonwealth and is collateralized or otherwise secured to the
full extent required by law, and provided, further, that no such deposits made
under this subsection (e) shall be made for any period in excess of one year;

36
<PAGE>

(f) Commercial paper, with a maturity of 270 days or less, of issuing
corporations organized under the laws of the United States or of any state
thereof, including paper issued by banks and bank holding companies, and if,
during the Rated Period, rated by Moody's within its NCO/Moody's ratings of
prime 1 or prime 2, or rated by S&P within its ratings of A-1 or A-2, or rated
by Fitch Investors Service within its ratings of F-1 or F-2, or rated by their
corporate successors, within their comparable ratings;

(g) Shares of an open-end, diversified investment company registered
under the Investment Company Act of 1940, as amended, or of a mutual fund or a
common trust fund of the Trustee, in any of which cases which (i) invests its
assets solely in obligations of or guaranteed by the United States of America or
any instrumentality thereof having in each instance a final maturity date of
less than one year from their date of purchase; (ii) seeks to maintain a
constant net asset value per share; and (iii) has aggregate net assets of not
less than $100,000,000 on the date of purchase of such shares including, but not
limited to, a registered investment company described herein for which the
Trustee or an affiliate of the Trustee serves as an investment advisor and
receives compensation from such investment company for that service;

(h) Before or after the Rated Period, any other securities listed as
possible investments for fiduciaries under Section 26-40 of the Code of Virginia
of 1950, as amended;

(i) Bonds, notes, debentures and evidences of indebtedness with a
maturity of one year or more of corporations organized under the laws of the
United States, or of any State thereof, carrying at least the third highest
rating of either one or both of the Rating Agencies, or their corporate
successors; and

(j) During any Letter of Credit Period, any other investments
permitted by the Letter of Credit Issuer.

A repurchase agreement pursuant to (d) above shall be made with any bank as
principal, including the Trustee or an affiliate of the Trustee (subject in
every instance to the last paragraph of this Section 801), within or without the
Commonwealth having a combined capital, surplus and undivided profits of not
less than $100,000,000, provided the bank is obligated to repurchase within one
year. Such repurchase agreement shall be considered a purchase of such
securities even if title and/or possession of such securities is not transferred
to the Trustee so long as (1) the repurchase obligation of the bank is
collateralized by the securities themselves and the interest to be paid is
secured by collateral of comparable credit rating to the securities which are
the subject of the repurchase agreement, (2) the securities have on each day the
repurchase agreement is in effect a fair market value equal to at least 100% of
the amount of the repurchase obligation of the bank (which shall include
principal and interest accrued thereunder), (3) the securities are free and
clear of any lien, charge or encumbrance of any person other than of the
Borrower, the Trustee or the Letter of Credit Issuer, (4) the securities are
held by a third party and segregated from securities owned generally by the
bank, (5) a perfected security interest under the Uniform Commercial Code

37
<PAGE>

of the applicable state or book entry procedures prescribed by Federal law in
such securities is created for the benefit of the holders of the Bonds, and (6)
if the repurchase agreement is with the bank serving as Trustee or any
affiliated party, the third party holding such securities holds them as agent
for the benefit of the holders of the Bonds rather than as agent for the bank
serving as Trustee or any other party.

The Trustee shall invest moneys held in any fund or account from time to
time maintained hereunder, subject to Section 803, in any of the foregoing
permitted investments at the request of, and in accordance with the directions
of, the Borrower; provided, however, that following the occurrence of an Event
of Default, or if facts exist (of which the Trustee has received written notice)
which, with the giving of notice, the passage of time, or both, would result in
an Event of Default, then so long as such Event of Default or such facts are
subsisting, the Trustee shall make such investments in accordance with
directions of the Letter of Credit Issuer. In the absence of directions from the
Borrower as to the investments desired at any time or from time to time, the
Trustee shall invest in investments permitted by subsection (g) hereof. Any such
investments shall be held by, or under the control of, the Trustee and while so
held shall be deemed a part of the fund in which such moneys were originally
held, and the interest accruing thereon and any profit realized from such
investments, including realized discounts on obligations purchased, shall be
credited to such funds or accounts, and any loss resulting from such investments
shall be charged to such funds or accounts. The Trustee shall sell and reduce to
cash a sufficient amount of such investments whenever the cash balance in any
fund or account established by this Indenture is insufficient for its purposes.

All investments not otherwise directed but held pursuant to this Section
shall mature or be subject to redemption at the option of the holder at the
times at which the Trustee reasonably estimates the invested moneys will be
needed for the purposes of the fund or account therein from which the investment
was made, except with respect to savings accounts, time deposits or certificate
of deposit, which shall have a maturity not in excess of that specified in
subsection (e) of this Section. Notwithstanding the foregoing, any investments
of proceeds of the Letter of Credit shall be made only in investments permitted
in subsection (b) or (g) hereof and shall have a maturity not in excess of
thirty (30) days.

Upon the clear written direction of the Borrower, so long as no Event of
Default has occurred or facts (of which the Trustee has written notice) which
with the giving of notice, the passage of time or both would constitute an Event
of Default, the Trustee shall redeem or sell all or any designated part of such
investments employing, in the case of a sale, any commercially reasonable method
of effecting the same. If the Trustee is unable, after reasonable effort and
within a reasonable time after receipt of the required written direction, to
sell any such investment, it shall notify in writing the Borrower, and thereupon
the Trustee shall be relieved of all liability or responsibility with respect
thereto. If the proceeds of the Letter of Credit are being held by the Trustee
following the occurrence of an Act of Bankruptcy, then while so held interest
earned on, or profits realized from the investment of,

38
<PAGE>

the proceeds of such Letter of Credit so held shall be paid to the Letter of
Credit Issuer upon its request.

Since the investments permitted by this Section have been included at the
request of the Borrower and the making of such investments from time to time may
be subject to the Borrower's direction, the Issuer, in addition to the
limitation of liability set forth in Section 501, and the Trustee specifically
disclaim, and shall not have, any obligation to the Bondholders or the Borrower
for any loss arising from investments pursuant to the provisions of this
Section.

Notwithstanding anything to the contrary contained herein, any moneys
(including investment earnings thereon), from time to time held in (i) the Bond
Fund which represent payments made by the Borrower to optionally redeem Bonds,
and (ii) any Net Proceeds, shall be invested at the direction of the Borrower in
either (x) such obligations so as to produce a yield computed in accordance with
Treasury Regulations Section 1.103-13(c), which is not greater than the yield on
the Bonds, computed in accordance with Section 148 of the Code and the
regulations thereunder, and so that the issue will meet the requirements of
Section 1.103-15AT(c) of the Temporary Regulations, or (y) obligations the
interest on which is excludable from gross income under Section 103(a) of the
Code.

Any investment earnings on amounts on deposit in the Bond Fund shall be
paid or credited by the Trustee in the Payments Account in accordance with the
procedures set forth in Section 701 or transferred by the Trustee to the Rebate
Fund, as directed by an Authorized Representative of the Borrower; provided,
however, that the Borrower shall direct that such earnings shall either be paid
before the expiration of the applicable temporary period under Section 148 of
the Code during which such earnings may be invested at an unrestricted yield or
shall be invested at a restricted yield in order to comply with any yield
limitations imposed by the Code.

Section 802. Investments through Trustee's Bond Department. Subject in
----------- ---------------------------------------------
every instance to the last paragraph of Section 801 and to Section 803, the
Trustee may make investments permitted by Section 801 through its own trust or
bond department.

Section 803. Arbitrage Covenant. The Issuer covenants that so long as
----------- ------------------
any of the Bonds remain outstanding, it will not knowingly take any action to
cause moneys on deposit in any of the funds established by this Indenture to be
used in a manner which will cause the Bonds to be classified as "arbitrage
bonds" within the meaning of Section 148 of the Code. The Trustee shall be
entitled to receive and may request from time to time from the Borrower written
directions from Bond Counsel, at the expense of the Borrower, regarding the
interpretation of Section 148 of the Code, and the Trustee agrees that it will
comply with such directions (upon which the Trustee and the Issuer may
conclusively rely) so as to enable the Issuer to perform its covenants under
this Section. The Trustee, however, shall have no liability to the Bondholders
or the Borrower, or to any party, for any loss or damage

39
<PAGE>

resulting from any investments made by it, except loss or damage caused by the
willful, knowing default or gross negligence of the Trustee.

ARTICLE IX

Discharge of Indenture
----------------------

Section 901. Discharge of Indenture. If (i) all Bonds secured by this
----------- ----------------------
Indenture shall have become due and payable (whether at maturity, by
acceleration, call for redemption or otherwise) or irrevocable instructions to
call the Bonds or pay them at maturity have been given by the Issuer to the
Trustee, and (ii) the Trustee holds Available Moneys which are cash or
noncallable direct obligations of, or obligations the payment of the principal
of, and premium, if any, and interest on, which is unconditionally guaranteed
by, the United States of America, which at maturity will be sufficient (A) if
Bonds have been called for redemption, to redeem in accordance with the relevant
Section of this Indenture all such Bonds on the date set for such redemption,
(B) to pay at maturity all Bonds Outstanding or, if a portion of the Bonds have
been called for redemption, all Bonds Outstanding not called for redemption, (C)
to pay interest accruing on all Bonds until their redemption or payment at
maturity, and (D) to pay to the Trustee its fees and expenses and any other fees
and expenses for which the Borrower is responsible under the Agreement,
including the costs and expenses of canceling and discharging this Indenture,
and the Borrower has delivered to the Trustee certifications satisfactory to the
Trustee to such effect, then the Trustee shall, upon the payment of its expenses
pursuant to Section 8.4 of the Agreement, deliver to the Issuer any property at
the time subject to this Indenture which may then be in its possession, except
(A) amounts in funds created by this Indenture required to be paid to the
Borrower or the Letter of Credit Issuer pursuant to Section 708 or to the United
States of America pursuant to Section 710 and (B) funds or securities held, and
to be used, by the Trustee in the payment of principal or redemption price of,
and interest on, or purchase price of, the Bonds. Prior to delivery by the
Trustee of property described in the first sentence of this Section 901 to the
Issuer, the Trustee shall, if S&P rates the Bonds, receive (i) written
confirmation from S&P that it has received an Opinion of Counsel reasonably
acceptable to S&P concerning preference issues and an accountant's certificate
in form reasonably acceptable to S&P verifying sufficiency of funds for the
purposes stated herein and (ii) written confirmation from S&P that deposit of
the funds or securities to be held for Payment of the Bonds will not result in a
reduction or withdrawal of the then current rating on the Bonds.

In the event that all of the Bonds secured by this Indenture are paid or
deemed paid in accordance with the terms of this Indenture, then the right and
interest of the Trustee in and to the trust estate created by this Indenture and
all covenants, agreements and other obligations of the Issuer to the registered
owners of the Bonds will cease and be discharged and satisfied. In the event the
Bonds are paid or deemed to be paid in accordance with the terms of this
Indenture, then such Bonds will cease to be entitled to any lien, benefit or
security under this Indenture (other than the right to receive payment) and all
covenants,

40
<PAGE>

agreements and other obligations of the Issuer to the registered owners of such
Bonds will cease and be discharged and satisfied.

Notwithstanding any other provision to the contrary in this Indenture, if
all of the Bonds have been paid, or deemed under the terms of this Indenture to
have been paid, in full, and if during the Letter of Credit Period, to the
extent that amounts have been drawn by the Trustee under the Letter of Credit,
and have not been reimbursed to such Letter of Credit Issuer pursuant to the
Letter of Credit Agreement or otherwise, the lien of this Indenture shall not be
discharged, but the Letter of Credit Issuer shall be subrogated to such extent
to all rights of the Bondholders to enforce the payment of the Bonds from the
property and interest subject to the lien of this Indenture and to all other
rights of the Bondholders under the Bonds and Bond Documents. The Trustee agrees
to execute and deliver all documents or instruments and to do all things which
may be reasonably required by the Letter of Credit Issuer and permissible
hereunder, in order to effect the subrogation of the Letter of Credit Issuer in
accordance with the intent of this paragraph, including, without limitation, the
assignment of the Agreement to the Letter of Credit Issuer without recourse or
warranty.

ARTICLE X

Default Provisions and Remedies
of Trustee and Bondholders
--------------------------

Section 1001. Events of Default. Each of the following shall be an
------------ -----------------
Event of Default:

(a) Default in the payment of any interest on any Bond when due and
payable;

(b) Default in the payment of the principal or redemption price of,
or the purchase price of, any Bond when due and payable (whether at maturity, by
acceleration, call for redemption, tender for purchase or otherwise);

(c) At any time which is not during a Letter of Credit Period,
receipt by the Trustee from the Holders of not less than 25% in aggregate
principal amount of the Bonds Outstanding at the time of notice that an Event of
Default under any of the Bond Documents has occurred and is subsisting;

(d) If during the Letter of Credit Period, receipt by the Trustee of
written notice from the Letter of Credit Issuer stating that a default has
occurred under the Letter of Credit Agreement and requesting that the Trustee
declare the Bonds to be immediately due and payable; or

(e) The occurrence of an Act of Bankruptcy.

41
<PAGE>

Section 1002. Acceleration. Upon the occurrence of an Event of Default
------------ ------------
under Section 1001(a), (b) or (e) hereof, the Bonds shall become immediately due
and payable. Upon the occurrence of an Event of Default under Section 1001(d),
the Trustee shall immediately declare, by written notice to the Borrower and the
Issuer, the entire principal of and interest on the Bonds due and payable. Upon
declaration of acceleration, the Trustee will establish the date for payment of
the Bonds in accordance with Section 1005 (which date will be prior to the
expiration date of the Letter of Credit). The Trustee will draw on the Letter of
Credit on the Business Day prior to the date established as the payment date for
Payment of the Bonds. The Trustee will apply the moneys drawn under the Letter
of Credit in accordance with Section 1005 hereof. Upon the occurrence of an
Event of Default under Section 1001(c), the Trustee may, and if requested by the
registered owners of not less than 25% in aggregate principal amount of Bonds
then outstanding shall, by notice in writing delivered to the Issuer and the
Borrower, declare the entire unpaid principal of and interest on the Bonds due
and payable.

Section 1003. Other Remedies; Rights of Bondholders. Upon the occurrence
------------ -------------------------------------
of an Event of Default, the Trustee may proceed to protect and enforce its
rights and the rights of the Bondholders by mandamus or other action, suit or
proceeding at law or in equity for specific performance of any agreement herein
contained.

Upon the occurrence of an Event of Default, if requested to do so by the
registered owners of not less than 25% in aggregate principal amount of Bonds
then outstanding and if indemnified as provided in Section 1101(l), the Trustee
shall exercise such one or more of the rights and remedies conferred by this
Article as the Trustee, upon being advised by counsel, shall deem most expedient
in the interests of the Bondholders.

No remedy conferred by this Indenture upon or reserved to the Trustee or to
the Bondholders is intended to be exclusive of any other remedy, but each such
remedy shall be cumulative and shall be in addition to any other remedy given to
the Trustee or to the Bondholders under this Indenture or now or hereafter
existing at law or in equity or by statute.

No delay or failure to exercise any right or power accruing upon any
default or Event of Default shall impair any such right or power or shall be
construed to be a waiver of any such default or Event of Default or acquiescence
therein, and every such right and power may be exercised from time to time and
as often as may be deemed expedient.

No waiver of any default or Event of Default under this Indenture, whether
by the Trustee pursuant to Section 1010 or by the Bondholder, shall extend to or
shall affect any subsequent default or Event of Default or shall impair any
rights or remedies consequent thereto.

Section 1004. Right of Bondholders To Direct Proceedings. Anything in
------------ ------------------------------------------
this Indenture to the contrary notwithstanding, and if during the Letter of
Credit Period, subject

42
<PAGE>

to the right of the Letter of Credit Issuer to direct proceedings (other than a
proceeding against the Letter of Credit Issuer) in the case of a notice to
accelerate given by the Letter of Credit Issuer to the Trustee pursuant to
Section 1001(d) and prior to dishonor of any drawing on the Letter of Credit,
the registered owners of a majority in aggregate principal amount of Bonds then
Outstanding shall have the right, at any time, by an instrument or instruments
in writing, executed and delivered to the Trustee, to direct the method and
place of conducting all proceedings to be taken in connection with the
enforcement of the terms and conditions of this Indenture; provided, however,
that such direction shall not be otherwise than in accordance with the
provisions of law and of this Indenture.

Section 1005. Application of Moneys. All moneys received by the Trustee
------------ ---------------------
pursuant to any right given or action taken under the provisions of this Article
shall, after payment of the cost and expenses of the proceedings resulting in
the collection of such moneys, the expenses, liabilities and advances incurred
or made by the Trustee and the fees and expenses of the Trustee and the fees and
expenses of the Issuer in carrying out this Indenture or the Agreement, be
deposited in the Bond Fund; provided, however, that moneys drawn under the
Letter of Credit shall not be used to pay the fees and expenses of the Trustee
or the Issuer. All moneys in the Bond Fund shall be applied as follows:

(a) Unless the principal of all the Bonds shall have become or shall
have been declared due and payable, all such moneys shall be applied:

FIRST - To the payment to the Bondholders entitled thereto
of all installments of interest then due on the Bonds, in the
order of the maturity of the installments of such interest; and,
if the amount available shall not be sufficient to pay in full
any particular installment, then to the payment ratably,
according to the amounts due on such installment, to the persons
entitled thereto, without any discrimination or preference;

SECOND - To the payment to the Bondholders entitled thereto
of the unpaid principal of any of the Bonds which shall have
become due (other than Bonds called for redemption for the
payment of which moneys are held pursuant to the provisions of
this Indenture), with interest on such Bonds at the rate
specified therein from the date on which they became due; and, if
the amount available shall not be sufficient to pay in full Bonds
due on any particular date, together with such interest, then
first to the payment of such interest, ratably, according to the
amount of such interest due on such date, and then to the payment
of such principal, ratably, according to the amount of such
principal due on such date, to the persons entitled thereto,
without any discrimination or preference; and

43
<PAGE>

THIRD - To the extent permitted by law, to the payment to
the persons entitled thereto of the unpaid interest on overdue
installments of interest, ratably, according to the amounts of
such interest due on such date, without any discrimination or
preference.

(b) If the principal of all the Bonds shall have become due or shall
have been declared due and payable, all such moneys shall be applied to the
payment of the principal and interest then due and unpaid on the Bonds, without
preference or priority of principal over interest or of interest over principal,
or of any installments of interest over any other installment of interest, or of
any Bond over any other Bond, ratably, according to the amounts due,
respectively, for principal and interest, to the person entitled thereto,
without any discrimination or preference.

(c) If the principal of all the Bonds shall have been declared due
and payable and if such declaration shall thereafter have been rescinded and
annulled under the provisions of this Article, then, subject to the provisions
of subsection (b) of this Section in the event that the principal of all the
Bonds shall later become due or be declared due and payable, the moneys shall be
applied in accordance with the provisions of subsection (a) of this Section.

Whenever moneys are to be applied pursuant to the provisions of this
Section, such moneys shall be applied at such times and from time to time as the
Trustee shall determine, having due regard to the amount of such moneys
available for application and the likelihood of additional moneys becoming
available for such application in the future. Whenever the Trustee shall apply
such moneys, it shall fix the date on which such application is to be made and
on such date interest on the amounts of principal to be paid on such dates shall
cease to accrue. The Trustee shall give such notice as it may deem appropriate
of the deposit with it of any such moneys and of the fixing of any such date,
and shall not be required to make payment to the registered owner of any Bond
until such Bond shall be presented to the Trustee for appropriate endorsement or
for cancellation if fully paid.

Whenever the principal of, and interest on, all Bonds have been paid under
the provisions of this Section and all expenses and charges of the Trustee have
been paid, any balance remaining in any fund or account held hereunder (other
than pursuant to Section 710) shall be paid to the Borrower or, if during the
Letter of Credit Period, to the Letter of Credit Issuer as provided in Section
708.

Section 1006. Remedies Vested in Trustee. All rights of action (including
------------ --------------------------
the right to file proof of claims) under this Indenture or under any of the
Bonds may be enforced by the Trustee without the possession of any of the Bonds
or the production thereof in any trial or other proceeding relating thereto and
any such suit or proceeding instituted by the Trustee may be brought in its name
as Trustee without the necessity of joining as plaintiffs or defendants any
Bondholders, and any recovery of judgment shall be for the equal benefit of the
Bondholders of the Outstanding Bonds.

44
<PAGE>

Section 1007. Limitations on Suits. Except to enforce the rights given
------------ --------------------
under Section 1008, no Bondholders shall have any right to institute any action,
suit or proceeding at law or in equity for the enforcement of this Indenture,
unless (i) an Event of Default has occurred and is continuing of which the
Trustee has been notified as provided in Section 1101(h), or of which by such
Section it is deemed to have notice, (ii) the registered owners of not less than
25% in aggregate principal amount of Bonds then Outstanding have made written
request to the Trustee and offered it reasonable opportunity either to proceed
to exercise the powers granted to it or to institute such action, suit or
proceeding in its own name, (iii) the Bondholders have offered to the Trustee
indemnity as provided in Section 1101(l), (iv) the Trustee has for thirty (30)
days after such notice failed or refused to exercise the powers hereinbefore
granted, or to institute such action, suit or proceeding, (v) no direction
inconsistent with such written request has been given to the Trustee during such
thirty (30) day period by the registered owners of a majority in aggregate
principal amount of Bonds then outstanding, and (vi) notice of such action, suit
or proceeding is given to the Trustee. It is intended that no one or more
registered owners of the Bonds shall have any right to affect, disturb or
prejudice this Indenture or to enforce any right hereunder, except in the manner
provided herein, and that all proceedings at law or in equity shall be
instituted and maintained in the manner provided herein and for the equal
benefit of the registered owners of all Bonds then outstanding. The
notification, request and offer of indemnity set forth above, at the option of
the Trustee, shall be conditions precedent to any action or cause of action for
the enforcement of this Indenture or for any other remedy hereunder.

Section 1008. Unconditional Right to Receive Principal and Interest.
------------ -----------------------------------------------------
Nothing in this Indenture shall, however, affect or impair the right of any
Bondholder to enforce, by action at law, payment of the principal of, premium,
if any, or interest on, any Bond at and after the maturity thereof, or on the
date fixed for redemption or (subject to the provisions of Section 1002) upon
the same being declared due before maturity as provided herein, or the
obligation of the Issuer to pay the principal of, and interest on, each of the
Bonds to the registered owners thereof at the time and place, from the source
and in the manner set forth in this Indenture and in the Bonds.

Section 1009. Termination of Proceedings. If the Trustee shall have
------------ --------------------------
commenced the enforcement of any right under this Indenture and such proceedings
shall have been discontinued or abandoned for any reason or shall have been
determined adversely to the Trustee, then the Issuer, the Borrower, the Letter
of Credit Issuer, and the Trustee shall be restored to their former positions
and rights under this Indenture, and all rights, remedies and powers of the
Trustee shall continue as if no such proceedings had been taken.

Section 1010. Waivers of Events of Default. The Trustee may, in its
------------ ----------------------------
discretion, waive an Event of Default under Section 1001(c) of this Indenture
and its consequences and rescind any acceleration of maturity of principal of,
and interest on, the Bonds, and shall do so at the written request of the
registered owners of a majority in aggregate principal amount of Bonds then
outstanding; provided, however, that

45
<PAGE>

(a) There shall not be waived without the consent of the Bondholders
of all Bonds then outstanding (i) any Event of Default in the payment of the
principal of any Outstanding Bonds (whether at maturity, upon redemption,
purchase or otherwise), or (ii) any default in the payment when due of the
interest on any such Bonds, unless, before such waiver or rescission:

(1) there shall have been paid or provided for in Available
Moneys all arrearages of interest in respect of which such default shall have
occurred, all arrearages of principal and all expenses of the Trustee in
connection with such default, and

(2) in case of any such waiver or rescission or in the case of
any discontinuance, abandonment or adverse determination of any proceeding taken
by the Trustee on account of any such default, the Issuer, the Trustee, the
Letter of Credit Issuer, and the Bondholders shall be restored to their former
positions and rights hereunder respectively.

(b) No acceleration of maturity under Section 1002 made at the
request of the registered owners of not less than 25% in aggregate principal
amount of Bonds then Outstanding shall be rescinded unless requested by the
Bondholders of a majority in aggregate principal amount of Bonds then
Outstanding.

(c) No Event of Default may be waived after a draw by the Trustee on the
Letter of Credit, unless the Letter of Credit is reinstated in full.

ARTICLE XI

The Trustee; Remarketing Agent; Tender Agent
--------------------------------------------

Section 1101. Acceptance of Trusts and Obligations. The Trustee hereby
------------ ------------------------------------
accepts the trusts and obligations imposed upon it by this Indenture and agrees
to perform such trusts and obligations, but only upon, and subject to, the
following express terms and conditions and no implied covenants or obligations
shall be read into this Indenture against the Trustee:

(a) The Trustee, before the occurrence of an Event of Default and
after the curing of all Events of Default which may have occurred, undertakes to
perform such duties and only such duties as are specifically set forth in this
Indenture and as a corporate trustee ordinarily would perform such duties under
a corporate indenture. In case an Event of Default has occurred (which has not
been cured or waived), the Trustee shall exercise such of the rights and powers
vested in it by this Indenture, and use the same degree of care and skill in
their exercise, as a prudent man would exercise or use under the circumstances
in the conduct of his own affairs.

46
<PAGE>

(b) The Trustee may execute any of the trusts or powers of this
Indenture and perform any of its duties by or through attorneys, accountants,
agents, receivers or employees and shall be entitled to act on the opinion or
advice of its counsel concerning all matters of trust and the duties under this
Indenture, and may be reimbursed for reasonable compensation to all such
attorneys, accountants, agents, receivers and employees as may reasonably be
employed in connection with this Indenture. The Trustee may act on an opinion of
Counsel and shall not be responsible for any loss or damage resulting from any
action or nonaction by it taken or omitted to be taken in good faith in reliance
on such opinion of Counsel.

(c) The Trustee shall not be responsible for any recital in this
Indenture or in the Bonds (except in respect to the certificate of
authentication of the Trustee endorsed on the Bonds), or for the filing or
re-filing of any financing or continuation statement or other document or
instrument, or for insuring the Project or collecting any insurance moneys, or
for the validity of the execution by the Issuer of this Indenture or of any
supplements thereto or instruments of further assurance, or for the sufficiency
of the security for the Bonds. The Trustee shall not be responsible or liable
for any loss suffered in connection with any investment of moneys made by it in
accordance with Article VIII.

(d) The Trustee shall not be accountable for the use of Bonds
authenticated or delivered under this Indenture. The bank or trust company
acting as Trustee and its directors, officers, employees or agents may in good
faith buy, sell, own, hold and deal in the Bonds and may join in any action
which any Bondholder may be entitled to take with like effect as if such bank or
trust company were not the Trustee. To the extent permitted by law, such bank or
trust company may also receive and purchase in good faith, Bonds from itself,
including any department, affiliate or subsidiary, with like effect as if it
were not the Trustee.

(e) The Trustee shall be protected in acting on any notice, request,
consent, certificate, order, affidavit, letter, telegram or other paper or
document or any oral or telephonic communication reasonably believed by it to be
genuine and correct and to have been signed or sent by the proper person or
persons. Any action taken by the Trustee pursuant to this Indenture at the
request or upon the authority or consent of any person who at the time of making
such request or giving such authority or consent is the Bondholder of a Bond
shall be conclusive and binding on all future Bondholders of the same Bond and
on Bonds issued in exchange therefor or in place thereof.

(f) As to the existence or non-existence of any fact or as to the
sufficiency or validity of any instrument, paper or proceeding, the Trustee
shall be entitled to rely on a certificate signed (i) on behalf of the Issuer by
the Chairman or Vice Chairman of the Issuer, or (ii) on behalf of the Borrower
by an Authorized Representative of the Borrower, as sufficient evidence of the
facts therein contained and before the occurrence of a default of which the
Trustee has been notified as provided in subsection (h) of this Section, or of
which, by such subsection, it is deemed to have notice, may also accept a
similar certificate

47
<PAGE>

to the effect that any particular dealing, transaction or action is necessary or
expedient, but may at its discretion secure such further evidence deemed
necessary or advisable, but shall in no case be bound to secure the same. The
Trustee may accept a certificate of the Chairman or Vice Chairman of the Issuer
to the effect that a resolution in the form therein set forth has been adopted
by the Issuer as conclusive evidence that such resolution has been duly adopted
and is in full force and effect.

(g) The permissive right of the Trustee to do things enumerated in
this Indenture shall not be construed as a duty (except as to the requirements
herein to notify Bondholders and to draw upon the Letter of Credit, which are
recognized by the Trustee as express duties), and the Trustee shall not be
answerable for other than its gross negligence or willful misconduct.

(h) The Trustee shall not be required to take notice or be deemed to
have notice, of any default under this Indenture (other than notices given
pursuant to Section 1001(d), except failure by the Issuer to cause to be made
any of the payments to the Trustee required to be made by Article V or failure
by the Issuer or the Borrower to file with the Trustee any document required by
this Indenture or any other Bond Document to be so filed, unless the Trustee
shall be notified of such default by the Issuer or by the Bondholders of not
less than 25% in aggregate principal amount of Bonds then Outstanding.

(i) The Trustee shall not be required to give any bond or surety with
respect to the execution of its rights and obligations hereunder.

(j) Notwithstanding any other provision of this Indenture, the
Trustee shall have the right, but shall not be required, to demand, as a
condition of (i) any action by the Trustee in respect of the authentication of
any Bonds, (ii) the withdrawal of any cash, (iii) the release of any property or
(iv) any action whatsoever within the purview of this Indenture, other than
draws on the Letter of Credit or the acceleration of the Bonds pursuant to
Sections 1001(d) and 1002, any showings, certificates, opinions, appraisals or
other information or corporate action or evidence thereof reasonably required by
the Trustee, in addition to that required by the terms hereof.

(k) All moneys received by the Trustee shall, until used or applied
or invested as herein provided, be held in trust in the manner and for the
purposes for which they were received but need not be segregated from other
funds except to the extent required by this Indenture or by law. The Trustee
shall not be under any liability for interest on any moneys received hereunder
except such as may be agreed upon in writing.

(l) Before taking any action under this Indenture, other than the
giving of required notices to Bondholders, the acceleration of Bonds pursuant to
Section 1002 and the required drawings under a Letter of Credit, the Trustee may
require that indemnity to its satisfaction be furnished to it for the
reimbursement of all expenses which may be incurred

48
<PAGE>

by it and to protect it against all liability by reason of any action so taken,
except liability which is adjudicated to have resulted from its gross negligence
or willful misconduct.

Section 1102. Fees, Charges and Expenses of Trustee. The Trustee shall be
------------ -------------------------------------
entitled to payment and reimbursement for such fees, charges and expenses as may
specifically be agreed upon with the Borrower and, absent such agreement, the
Borrower shall pay to the Trustee as Ordinary Expenses its reasonable fees,
expenses and charges for its Ordinary Services as Trustee and all advances,
reasonable counsel fees and other Ordinary Expenses reasonably and necessarily
made or incurred by the Trustee in connection with Ordinary Services, and if it
should become necessary that the Trustee perform Extraordinary Services, it
shall be entitled to reasonable charges for Extraordinary Services and all
advances, reasonable counsel fees and other Extraordinary Expenses in connection
therewith. Upon an Event of Default, but only upon an Event of Default, the
Trustee shall have a first lien with right of payment prior to payment on
account of principal of, premium, if any, and interest on any Bond upon the
trust estate and funds held hereunder, except amounts drawn by the Trustee on a
Letter of Credit, for the foregoing fees, charges and expenses incurred by the
Trustee. When the Trustee incurs expenses or renders services after the
occurrence of an Act of Bankruptcy, the expenses and the compensation for the
services are intended to constitute expenses of administration under any federal
or state bankruptcy, insolvency, arrangement, moratorium, reorganization or
other debtor relief law. As used herein, "Ordinary Services" and "Ordinary
Expenses" mean those services normally rendered and those expenses normally
incurred by a trustee under instruments similar hereto, including, but not
limited to, reasonable counsel fees; and "Extraordinary Services" and
"Extraordinary Expenses" means all services and all expenses incurred by the
Trustee under this Indenture other than Ordinary Services and Ordinary Expenses.

Section 1103. Notice Required of Trustee. If the Borrower fails to make
------------ --------------------------
any payment on the Bonds on the day such payment is due and payable, the Trustee
shall give notice thereof by telephone or telegram to the Borrower and the
Remarketing Agent on the next succeeding Business Day. In the event of (i) such
failure to make payment, (ii) failure by the Issuer to cause any of the payments
to be made to the Trustee as required by Article V, or (iii) notification to the
Trustee by the Bondholders of not less than 25% of aggregate principal amount of
Bonds then outstanding of any default hereunder, then the Trustee shall give
notice by first class mail thereof to the Bondholder of each Bond then
Outstanding and the Remarketing Agent. Failure of the Trustee to give any notice
required in this Section shall not subject the Trustee to any liability to any
person, firm, corporation or other entity, including, but not limited to, the
Issuer, the Borrower, the Remarketing Agent and the Bondholders (except for such
failure resulting from gross negligence or willful misconduct of the Trustee),
nor shall such failure relieve the Issuer or the Borrower of their respective
obligations to make payments under this Indenture or the Agreement or otherwise
exercise its remedies hereunder.

Section 1104. Intervention by Trustee. In any judicial proceeding to
------------ -----------------------
which the Issuer or the Borrower is a party and which in the opinion of the
Trustee has a substantial bearing

49
<PAGE>

on the interests of the Bondholders, the Trustee may intervene on behalf of
Bondholders and, subject to Section 1101(l), shall do so if requested by the
Bondholders of not less than 25% in aggregate principal amount of Bonds then
Outstanding. The rights and obligations of the Trustee under this Section are
subject to the approval of the court of competent jurisdiction or quasi-judicial
forum before which any such proceeding is pending.

Section 1105. Merger or Consolidation of Trustee. Any corporation or
------------ ----------------------------------
association into which the Trustee may be converted or merged, or with which it
may be consolidated, or to which it may sell or transfer its trust business and
assets as a whole or substantially as a whole, or any corporation or association
resulting from any such conversion, sale, merger, consolidation or transfer to
which it is a party shall be and become successor Trustee hereunder and vested
with all the trusts, powers, discretion, immunities, privileges and all other
matters as was its predecessor, without the execution or filing of any
instrument or any further act, deed or conveyance on the part of any of the
parties hereto, anything herein to the contrary notwithstanding.

Section 1106. Resignation by Trustee. In the event the Trustee desires to
------------ ----------------------
resign at any time from the trusts created by this Indenture, it shall give
notice to the Issuer, the Borrower and each Bondholder of Bonds then
Outstanding, but shall continue to serve as Trustee until such time as a
successor Trustee is appointed. The Trustee shall have the right to petition a
court of competent jurisdiction for appointment of a successor Trustee, and its
resignation shall become effective only upon designation of such successor
Trustee.

Section 1107. Removal of Trustee. The Trustee may be removed at any time
------------ ------------------
by an instrument or concurrent instruments in writing delivered to the Trustee
and to the Issuer and signed by the Bondholders of a majority in aggregate
principal amount of Bonds then Outstanding; provided, however, that nothing
contained herein shall relieve the Borrower of its obligation to pay the fees
and expenses of the Trustee incurred to the date of such removal. Such removal
shall only become effective upon appointment of and acceptance by a successor
Trustee.

Section 1108. Appointment of Successor Trustee; Temporary Trustee. In
------------ ---------------------------------------------------
case the Trustee shall resign, be removed, be dissolved, be in course of
dissolution or liquidation or otherwise become incapable of acting hereunder or
in case it shall be taken under the control of any public officer or officers or
of a receiver appointed by a court, a successor may be appointed by the
Bondholders of a majority in aggregate principal amount of Bonds then
Outstanding, by an instrument or concurrent instruments in writing signed by
such Bondholders. In case of such vacancy the Issuer, by an instrument signed by
its Authorized Representative, may appoint a temporary Trustee to fill such
vacancy until a successor Trustee shall be appointed by the Bondholders in the
manner provided above and any such temporary Trustee so appointed by the Issuer
shall immediately and without further act be superseded by the Trustee so
appointed by such registered owners. Every such Trustee appointed pursuant to
this Section shall be, if there be such an institution willing, qualified and
able to accept the trust upon reasonable or customary terms, (i) a bank or trust
company

50
<PAGE>

in the United States of America, in good standing and having a reported capital,
surplus and undivided profits of not less than $10,000,000, or (ii) a subsidiary
trust company under the Trust Subsidiary Act, Title 6.1, Chapter 2, Article 3.1,
Code of Virginia of 1950, as amended, whose parent Virginia bank or bank holding
company has undertaken to be responsible for the acts of such subsidiary trust
company pursuant to the provisions of Section 6.1-32.7(a) of the Trust
Subsidiary Act, or any successor provision of law, and whose capital, surplus
and undivided profits, together with that of its parent Virginia bank or bank
holding company, as the case may be, is not less than $10,000,000. Either (i) or
(ii) above, shall, if S&P rates the Bonds, maintain a S&P rating of not less
than BBB- or be otherwise reasonably acceptable, to S&P.

Section 1109. Concerning Any Successor Trustee. Every successor Trustee
------------ --------------------------------
appointed under this Indenture shall execute, acknowledge and deliver to its
predecessor and also to the Issuer, the Remarketing Agent and the Borrower an
instrument in writing accepting such appointment, and thereafter such successor,
without any further act, deed or conveyance, shall become fully vested with all
the properties, rights, powers, trusts, duties and obligations of its
predecessor. Such predecessor shall, nevertheless, on the written request of the
Issuer, the Borrower, the Remarketing Agent or the Trustee's successor, execute
and deliver an instrument transferring to such successor Trustee all the
properties, rights, power and trusts of such predecessor under this Indenture;
and every predecessor Trustee shall deliver all securities and moneys held by it
as Trustee hereunder to its successor and any records required hereunder to be
held. Should any instrument in writing from the Issuer be required by any
successor Trustee for more fully and certainly vesting in such successor the
properties, rights, powers and duties hereby vested or intended to be vested in
the predecessor, any and all such instruments in writing shall, on request, be
executed, acknowledged and delivered by the Issuer. The resignation of any
Trustee and the instrument or instruments removing any Trustee and appointing a
successor hereunder, together with all other instruments provided for in this
Article, shall be filed and/or recorded by the successor Trustee in each
recording office, if any, where this Indenture may have been filed and/or
recorded.

Section 1110. Trustee Protected in Relying on Resolutions. All
------------ -------------------------------------------
resolutions, opinions, certificates and other instruments provided for in this
Indenture may be accepted by the Trustee as conclusive evidence of the facts and
conclusions stated therein and shall be full warrant, protection and authority
to the Trustee for the release of property, the withdrawal of cash hereunder or
the taking of any other action by the Trustee as provided hereunder, unless the
Trustee has actual knowledge of or notice to the contrary.

Section 1111. Notification to Rating Agency. The Trustee shall notify the
------------ -----------------------------
applicable Rating Agency of (i) any amendment to any Basic Document of which the
Trustee receives notice, or the Letter of Credit, (ii) the appointment of any
successor Trustee under this Indenture, (iii) any material amendment of the
Remarketing Agreement or the Letter of Credit Agreement of which the Trustee
receives notice, (iv) any termination of the Letter of Credit, and (v) any
substitution of the Letter of Credit. Notice of any of the foregoing shall

51
<PAGE>

be given to the Rating Agency prior to occurrence thereof; provided, however,
that if such notice cannot be given prior to such occurrence, then notice shall
be given promptly after such occurrence.

Section 1112. Duties of Remarketing Agent. The Remarketing Agent will
------------ ---------------------------
determine the interest rate on the Bonds as provided in this Indenture as the
designee of the Issuer. The Remarketing Agent will use its best efforts to
remarket Bonds as provided in Section 407 hereof as the designee of the
Borrower. There may be separate Remarketing Agents for these functions. The
Remarketing Agent may for its own account or as broker or agent for others deal
in Bonds and may do anything any other Bondholder may do to the same extent as
if the Remarketing Agent were not serving as such.

Section 1113. Eligibility of Remarketing Agent; Replacement. The initial
------------ ---------------------------------------------
Remarketing Agent shall be The First National Bank of Maryland. Any successor
Remarketing Agent shall be a bank, trust company or member of the National
Association of Securities Dealers, Inc. acceptable to the Letter of Credit
Issuer (in writing) organized and doing business under the laws of the United
States or any state or the District of Columbia and having a capitalization of
at least $250,000,000 as shown in its most recent published annual report.

Any successor Remarketing Agent must be an institution rated at least
"Baa3/P-3" by Moody's (or Moody's shall have provided written evidence that such
successor Remarketing Agent is otherwise acceptable to Moody's) if the Bonds are
then rated by Moody's, and at least "BBB-" or "A-3" by S&P (or S&P shall have
provided written evidence that such successor Remarketing Agent is otherwise
acceptable to S&P) if the Bonds are then rated by S&P, and authorized by law to
perform all the duties imposed upon it as Remarketing Agent by this Indenture.

The Remarketing Agent may resign in accordance with the provisions for
resignation, removal and substitution set forth in the Remarketing Agreement.
Any such resignation or removal shall only become effective upon appointment of
and acceptance by a successor remarketing agent.

Section 1114. Compensation of Remarketing Agent. The Remarketing Agent
------------ ---------------------------------
will not be entitled to any compensation from the Issuer, the Trustee or any
property held under this Indenture but must make separate arrangements with the
Borrower for compensation.

Section 1115. Tender Agent. There shall be no Tender Agent during any
------------ ------------
period that the Bonds are held in a Book Entry System. During any period that
the Bonds are not held in a Book Entry System, the Borrower shall, with the
consent of the Letter of Credit Issuer and the Remarketing Agent, appoint a
Tender Agent for the Bonds. The Tender Agent shall accept its duties hereunder
by written certificate or tender agent agreement delivered to the Trustee, which
certificate or agreement shall designate the principal office of the Tender
Agent.

52
<PAGE>

The Tender Agent may at any time resign by giving thirty (30) days' notice
to the Issuer, the Trustee, the Borrower, the Letter of Credit Issuer and the
Remarketing Agent. The Tender Agent may be removed at any time by an instrument
in writing delivered to the Trustee, the Remarketing Agent and the Tender Agent
by the Borrower, with the prior written approval of the Letter of Credit Issuer.
In no event, however, shall any removal of the Tender Agent take effect until a
successor Tender Agent shall have been appointed.

In the case the Tender Agent shall resign or be removed or otherwise become
incapable of acting, a successor may be appointed by the Borrower with the prior
written approval of the Issuer, the Remarketing Agent and the Letter of Credit
Issuer. Any such successor shall be acceptable to the Trustee, the Remarketing
Agent and the Letter of Credit Issuer. Written notice of such appointment shall
immediately be given by the Borrower to the Trustee and the Issuer and the
Trustee shall cause written notice of such appointment to be given to the
Bondholders. If no successor to a Tender Agent has accepted appointment in the
manner provided above within 30 days after the Tender Agent has given notice of
its resignation as provided above, the Trustee shall serve as Tender Agent or
shall appoint an agent located in New York, New York to act in its stead.

Any successor Tender Agent must be an institution rated at least "Baa3/P-3"
by Moody's Investors Service (or Moody's Investors Service shall have provided
written evidence that such successor Tender Agent is otherwise acceptable to
Moody's Investors Service) if the bonds are then rated by Moody's Investors
Service, and at least "BBB-" or "A-3" by S&P (or S&P shall have provided written
evidence that such successor Tender Agent is otherwise acceptable to S&P) if the
Bonds are then rated by S&P, and authorized by law to perform all the duties
imposed upon it as Tender Agent by this Indenture.

ARTICLE XII

Supplemental Indentures
-----------------------

Section 1201. Supplemental Indentures Not Requiring Consent of
------------ ------------------------------------------------
Bondholders. The Issuer and the Trustee may, and, if during the Letter of
- -----------
Credit Period, with the consent of the Letter of Credit Issuer, but without the
consent of, or notice to, any of the Bondholders, enter into any indenture
supplementing or amending or indentures supplemental to this Indenture as shall
not be inconsistent with the terms and provisions hereof and shall not
prejudice, in any material respect, the rights of the holders of the Bonds then
outstanding or for any one or more of the following purposes:

(a) to cure any ambiguity or formal defect or omission or to clarify
or correct any provision in this Indenture;

(b) to grant to, or confer on, the Trustee for the benefit of the
Bondholders any additional rights, remedies, powers or authority that may
lawfully be granted to, or conferred by, the Bondholders or the Trustee;

53
<PAGE>

(c) to subject to the lien, security interest and pledge of this
Indenture additional Revenues, properties or collateral;

(d) to modify, amend or supplement this Indenture or any indenture
supplemental hereto in such manner as required to permit the qualification
hereof and thereof under the Trust Indenture Act of 1939, as amended, or any
similar federal statute hereafter in effect, or to permit the qualification of
the Bonds for sale under the securities laws of any of the states of the United
States, and, if they so determine, to add to this Indenture or any indenture
supplemental hereto such other terms, conditions and provisions as may be
permitted by said Trust Indenture Act of 1939, as amended, or similar federal
statute;

(e) to add to the covenants and agreements of the Issuer contained
herein other covenants and agreements thereafter to be observed for the
protection of the Bondholders or to surrender or to limit any right, power or
authority therein reserved to or conferred upon the Issuer;

(f) to provide further for the registration of the Bonds under a
book-entry system;

(g) to amend this Indenture in a manner required by the Rating
Agencies incident to seeking or maintaining a rating for the Bonds;

(h) to amend the rebate provisions of Section 710 to comply with any
applicable final regulations issued by the Department of the Treasury of the
United States; and

(i) to make any other change which shall not, in the opinion of the
Trustee, prejudice in any material respect the rights of the holders of the
Bonds then outstanding.

Section 1202. Supplemental Indentures Requiring Consent. Exclusive of
------------ -----------------------------------------
supplemental indentures covered by Section 1201 and subject to the terms and
provisions contained in this Section, the registered owners of a majority in
aggregate principal amount of Bonds then Outstanding shall have the right from
time to time, notwithstanding any other provision of this Indenture, to consent
to and approve the execution by the Issuer and the Trustee of such other
indenture or indentures supplemental hereto as shall be deemed necessary or
desirable by the Issuer for the amending, in any particular, any of the terms or
provisions contained in this Indenture or in any supplemental indenture;
provided, however, that no supplemental indenture permitted by this Section
shall permit, or be construed as permitting (i) an extension of the maturity of
the principal of, or the interest on, any Bond (ii) a reduction in the principal
amount of any Bond, (iii) an alteration of the Borrower's obligation to pay when
due amounts owing under the Agreement, (iv) a privilege or priority of any Bond
or Bonds over any other Bond or Bonds, or (v) a reduction in the aggregate
principal amount of

54
<PAGE>

Bonds required for consent to such supplemental indenture, without the consent
and approval of the Bondholders of all of the Bonds then Outstanding.

If at any time the Issuer shall request the Trustee to enter into any such
supplemental indenture for any of the purposes of this Section, the Trustee
shall, upon being satisfactorily indemnified with respect to expenses, including
but not limited to attorneys fees, cause notice of the proposed execution of
such supplemental indenture to be mailed to each Bondholder of Bonds then
Outstanding by first-class mail to the address of such Bondholder as it appears
on the registration books; provided, however, that failure to give such notice
by mailing, or any defect therein, will not affect the validity of any
proceedings pursuant hereto. Such notice shall briefly set forth the nature of
the proposed supplemental indenture and shall state that copies thereof are on
file at the principal office of the Trustee for inspection by all Bondholders.
If, within 60 days or such longer period as shall be prescribed by the Issuer
following the giving of such notice, the owners of a majority in aggregate
principal amount of Bonds then Outstanding shall have consented to and approved
the execution thereof as herein provided, the Issuer and the Trustee may enter
into such supplemental indenture, and no Bondholder shall have any right to
object to any of the terms and provisions contained therein, or the operation
thereof, or in any manner to question the propriety of the execution thereof, or
to enjoin or restrain the Trustee or the Issuer from executing such supplemental
indenture or from taking any action pursuant to the provisions thereof. Upon the
execution of any such supplemental indenture as in this Section permitted and
provided, this Indenture shall be, and be deemed to be, modified and amended in
accordance therewith.

Bonds owned or held by, or for the account of, the Issuer or the Borrower
or any person controlled by either of them shall not be deemed outstanding for
the purpose of consent or any calculation of outstanding Bonds provided for in
this Article XII or in Article XIII. At the time of any such calculation, the
Issuer and the Borrower shall furnish to the Trustee a certificate of an
Authorized Representative of the Issuer or the Borrower, upon which the Trustee
may rely, describing all Bonds so to be excluded.

Notwithstanding any other provision of this Indenture, a supplemental
indenture under this Article shall not become effective until the Borrower, so
long as it is not in default under the Bond Documents, and, if during the Letter
of Credit Period, the Letter of Credit Issuer shall have consented to the
execution and delivery of such supplemental indenture. In addition, no
supplemental indenture under this Article affecting the Remarketing Agent or the
Remarketing Agreement shall become effective until the Remarketing Agent shall
have consented, in writing, to the execution and delivery of such supplemental
indenture.

Anything contained in this Indenture to the contrary notwithstanding, the
Issuer and the Trustee may enter into any indenture supplemental to this
Indenture upon receipt of the consent of the Bondholders of all Bonds then
outstanding, the consent of the Borrower and, if during the Letter of Credit
Period, the consent of the Letter of Credit Issuer.

55
<PAGE>

Section 1203. Opinion of Counsel Required. The Trustee shall not
------------ ---------------------------
execute any indenture supplemental to this Indenture unless there shall have
been filed with the Trustee an Opinion of Counsel stating that such supplemental
indenture is authorized or permitted by this Indenture and complies with its
terms and that upon execution it will be valid and binding on the Issuer in
accordance with its terms.

ARTICLE XIII

Amendment of Agreement or Remarketing Agreement
-----------------------------------------------

Section 1301. Amendments Not Requiring Consent of Bondholders. The
------------ -----------------------------------------------
Issuer and the Trustee may, without the consent of, or notice to the registered
owners of the Bonds, consent to any amendment, change or modification of the
Agreement or Remarketing Agreement as may be required:

(a) by the provisions of the Agreement or Remarketing Agreement or
this Indenture;

(b) for the purpose of curing any ambiguity or formal defect or
omission or to clarify or correct any provision therein;

(c) to effect any other change therein which will not, in the opinion
of the Trustee, prejudice materially the rights of the holders or Owners of any
Bonds outstanding; or

(d) by the Rating Agencies incident to seeking or maintaining a
rating for the Bonds.

In rendering the opinion required by subsection (c) above, the Trustee may
require and shall be protected in relying upon an Opinion of Counsel to the
effect that an amendment, change or modification does not prejudice in any
material respect the rights of such Bondholders or Owners.

Section 1302. Amendments Requiring Consent. Except for amendments,
------------ ----------------------------
changes or modifications as provided in Section 1301, neither the Issuer nor the
Trustee shall consent to any amendment, change or modification of the Agreement
and Remarketing Agreement without the written approval or consent of the
registered owners of a majority in aggregate principal amount of Bonds then
Outstanding given and procured in the manner provided in Section 1202; except
that no amendment shall be made to the Agreement and Remarketing Agreement
without the consent of the Bondholder of each outstanding Bond affected thereby
that would (i) alter the obligation of the Borrower to make payments when due
under the Agreement or the Bonds, (ii) terminate or cancel the Agreement, or
(iii) decrease the minimum percentage amount of the principal amount of the
Bonds, the Bondholders of which must consent to any such amendment. If at any
time the Issuer and the Borrower shall

56
<PAGE>

request the consent of the Trustee to any such proposed amendment, change, or
modification, the Trustee shall, upon being satisfactorily indemnified with
respect to expenses including but not limited to attorneys' fees, cause notice
of such proposed amendment, change or modification to be given in the same
manner as provided by Section 1202 with respect to supplemental indentures
unless such notice is not required because the registered owners of all of the
Bonds then outstanding have consented to the proposed amendment, change or
modification in accordance with Section 1304. Such notice shall briefly set
forth the nature of such proposed amendment, change or modification and shall
state that a copy of the instrument embodying the same is on file at the
principal office of the Trustee for inspection by all Bondholders.

Section 1303. Limitation on Amendments. No amendment, change or
------------ ------------------------
modification may decrease the obligation of the Borrower under the Agreement to
pay amounts sufficient to pay the principal or the redemption price of, interest
on, or the purchase price of, the Bonds as the same become due. Notwithstanding
any other provision of this Indenture, any amendment, change or modification of
the Agreement and Remarketing Agreement, shall not become effective until
consented to by the Borrower and, if during the Letter of Credit Period, the
Letter of Credit Issuer. However, no amendments, changes, or modifications of
the Agreement which affect the Remarketing Agent or the Remarketing Agreement
shall become effective until the Remarketing Agent shall have consented in
writing.

Section 1304. Amendment by Unanimous Consent. Notwithstanding any other
------------ ------------------------------
provision of this Indenture, the Issuer and the Trustee may consent to any
amendment, change or modification of the Bond Documents upon receipt of the
consent of the Bondholders of all Bonds then outstanding and the consent of the
Borrower and if during the Letter of Credit Period, the Letter of Credit Issuer.

Section 1305. Opinion of Counsel Required. The Trustee shall not comsent
------------ ---------------------------
to any amendment, change or modification of the Bond Documents unless there
shall have been filed with the Trustee an Opinion of Counsel that such
amendment, change or modification is authorized or permitted by this Indenture
and complies with its terms and that on execution it will be valid and binding
on the party or parties executing it in accordance with its terms.

ARTICLE XIV

Miscellaneous
-------------

Section 1401. Borrower Bonds. Anything in this Indenture to the
------------ --------------
contrary notwithstanding, Bonds held by or for the account of the Borrower
(other than Pledged Bonds) shall not be deemed Outstanding or entitled to
payment, notices or any other rights hereunder.

Section 1402. Consents of Bondholders. Any consent, request, direction,
------------ -----------------------
approval, objection or other instrument required by this Indenture to be signed
and executed by the similar tenor and may be signed or executed by such
Bondholders in person or by agent appointed in writing. Proof of the execution
of any such consent, request, direction,

57
<PAGE>

approval, objection or other instrument or of the writing appointing any such
agent, if made in the following manner, shall be sufficient for any of the
purposes of this Indenture, and shall be conclusive in favor of the Trustee with
regard to any action taken under such request or other instrument. The fact and
date of the execution by any person of any such writing may be proved by the
certificate of any officer in any jurisdiction who by law has power to take
acknowledgments within such jurisdiction that the person signing such writing
acknowledged before him the execution thereof, or by affidavit of any witness to
such execution.

Section 1403. Limitation of Rights. With the exception of rights herein
------------ --------------------
expressly conferred, nothing expressed or mentioned in, or to be implied from,
this Indenture or the Bonds is intended or shall be construed to give to any
person or entity other than the parties hereto, the Bondholders, the Borrower,
the Remarketing Agent and the Letter of Credit Issuer any legal or equitable
right, remedy or claim under or in respect to this Indenture or any covenants,
conditions and agreements herein contained; this Indenture and all of the
covenants, conditions and agreements hereof being intended to be and being for
the sole and exclusive benefit of the parties hereto, the Bondholders, the
Borrower, the Remarketing Agent and the Letter of Credit Issuer.

Section 1404. Limitation of Liability of Directors, Officers, Etc., of
------------ --------------------------------------------------------
Issuer and the Trustee. No covenant, agreement or obligation contained herein
- ----------------------
shall be deemed to be a covenant, agreement or obligation of any present or
future director, officer, member, employee or agent of the Issuer or the Trustee
in his individual capacity, and neither the directors of the Issuer or the
Trustee nor any officer thereof executing the Bonds shall be liable personally
on the Bonds or be subject to any personal liability or accountability by reason
of the issuance thereof. No director, officer, member, employee, agent or
adviser of the Issuer or the Trustee shall incur any personal liability with
respect to any other action taken by him pursuant to this Indenture or the Act,
provided such director, officer, member, employee, agent or adviser does not act
in bad faith.

Section 1405. Notices. Except as otherwise expressly provided in this
------------ -------
Indenture, all notices or other instruments required or permitted under this
Indenture shall be in writing and shall be delivered by hand or reputable
overnight delivery service, or mailed by certified mail, postage prepaid, return
receipt requested, and addressed as follows:

If to the Issuer: Fairfax County Economic Development Authority
8330 Old Courthouse Road, Suite 400
Vienna, Virginia 22180
Attn: Chairman

If to the Trustee, The First National Bank of Maryland
Bond Registrar M/S 101-591
or Tender Agent: 25 South Charles Street, 16th Floor
Baltimore, Maryland 21201
Attn: Corporate Trust Dept.

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<PAGE>

If to the Borrower: Forman Development Associates Limited Partnership
c/o Forman Brothers, Inc.
3235 Sheriff Road, N.E.
Washington, D.C. 20019
Attn: Barry Forman, President

59
<PAGE>

If to the The First National Bank of Maryland
Remarketing Agent: M/S 101-343
25 South Charles Street
Baltimore, Maryland 21201
Attn: Structured Finance

If to the Letter of
Credit Issuer: At the address set forth in the Letter of Credit Agreement

Any such notice, demand or request may also be transmitted to the
appropriate party by telegram, telephone or electronic or other facsimile
transmission and shall be deemed to be properly given or made at the time of
such transmission if, and only if, such transmission of notice shall be
confirmed in writing and sent as specified above.

Any of such addresses may be changed at any time upon written notice of
such change given to the other parties by the party effecting the change.
Notices and consents given by mail in accordance with this Section shall be
deemed to have been given five (5) Business Days after the date of dispatch;
notices and consents given by any other means shall be deemed to have been given
when received. A duplicate copy of each demand, notice, approval, request,
consent, opinion or other communication given above shall be given to each
person referenced above. The Issuer, the Borrower, the Letter of Credit Issuer,
the Rating Agencies, the Remarketing Agent, and the Trustee may by notice given
hereunder, designate any further or different addresses to which subsequent
demands, notices, approvals, consents, requests, opinions or other
communications shall be sent or persons to whose attention the same shall be
directed.

Section 1406. Successors and Assigns. This Indenture shall be binding on
------------ ----------------------
on, inure to the benefit of, and be enforceable by, the parties hereto and their
respective successors and assigns.

Section 1407. Severability. If any clause, provision or section of this
------------ ------------
Indenture shall be held to be illegal or invalid by any court, the illegality or
invalidity of such clause, provision or section shall not affect any of the
remaining clauses, provisions or sections hereof, and this Indenture shall be
construed and enforced as if such illegal or invalid clause, provision or
section had not been contained herein. In case any agreement or obligation
contained in this Indenture shall be held to be in violation of law, then such
agreement or

60
<PAGE>

obligation shall be deemed to be the agreement or obligation of the parties
hereto to the full extent permitted by law.

Section 1408. Applicable Law. This Indenture shall be governed by the
------------ --------------
applicable laws of the Commonwealth of Virginia, without reference to its
conflicts of laws principles.

Section 1409. Counterparts. This Indenture may be executed in several
------------ ------------
counterparts, each of which shall be an original and all of which together shall
constitute but one and the same instrument.

Section 1410. Issuer's Reliance upon Certificates. The Issuer shall be
------------ -----------------------------------
protected in acting upon any notice, request, requisition, consent, certificate,
order, affidavit, letter, telegram or other paper or document reasonably
believed by it to be genuine and correct and to have been signed or sent by the
proper person or persons. As to (i) the existence or nonexistence of any fact;
or (ii) the sufficiency, authenticity or validity of any notice, requisition,
consent, permit, certificate, authorization, order, instrument, paper, document
or proceeding; or (iii) the accuracy, completeness, sufficiency or adequacy of
any statement, opinion or conclusion contained in any document or other paper,
the certificate, requisition, request, Issuer shall be entitled to rely
conclusively upon a certificate, requisition, request, document or other paper
signed on behalf of the Borrower or the Remarketing Agent by an Authorized
Representative of the Borrower or the Remarketing Agent unless the Issuer has
actual knowledge or notice to the contrary.

IN WITNESS WHEREOF, the Issuer and the Trustee have caused this Indenture
to be executed in their respective corporate names by their respective
authorized officers, all as of the day and in the month and year first above
written.

THE FAIRFAX COUNTY ECONOMIC
DEVELOPMENT AUTHORITY

By: ________________________________________

Its Chairman

THE FIRST NATIONAL BANK OF MARYLAND

By: ________________________________________
Its Authorized Officer

61
<PAGE>

EXHIBIT A

FORM OF BOND

No. _____________ $______________________

UNITED STATES OF AMERICA

COMMONWEALTH OF VIRGINIA
FAIRFAX COUNTY ECONOMIC
DEVELOPMENT AUTHORITY
VARIABLE RATE DEMAND REVENUE BONDS
(FORMAN DEVELOPMENT ASSOCIATES PROJECT) SERIES 1996

MATURITY DATE CUSIP _____________
November 30, 2007

Registered Owner: Cede & Co.
Principal Amount:

The Fairfax County Economic Development Authority (the "Issuer"), a
political subdivision of the Commonwealth of Virginia, for value received,
hereby promises to pay (but only out of the sources hereinafter provided) to the
Registered Owner identified above, or registered assigns, on the Maturity Date
identified above, unless this Bond shall have been called for earlier redemption
as provided herein, upon presentation and surrender hereof, the Principal Amount
identified above, and to pay (but only out of the sources hereinafter provided)
interest on the balance of said Principal Amount from time to time remaining
unpaid from and including the date hereof or from and including the most recent
Interest Payment Date (as defined in the hereinafter defined Indenture) with
respect to which interest has been paid or duly provided for, until payment of
said Principal Amount has been made or duly provided for, at the rates and on
the dates described herein.

Principal of, premium, if any, and interest on this Bond shall be payable
in lawful money of the United States of America at the principal corporate trust
office of The First National Bank of Maryland, Baltimore, Maryland, as Trustee,
or its successor in trust (the "Trustee"); provided, however, payment of
interest alone hereon shall be made to the Registered Owner (i) by check or
draft mailed on the applicable Interest Payment Date to such Registered Owner as
of the close of business on the applicable Record Date (as defined in the
Indenture hereinafter referred to) at his address as it appears on the
registration books of the Issuer maintained by the Trustee or at such other
address as is furnished in writing by such Registered Owner to the Trustee, or
(ii) as to any Registered Owner of $1,000,000 or more in aggregate principal
amount of Bonds who so elects, by wire transfer to such wire transfer address in
the continental United States as such Registered Owner shall have furnished to
the Trustee in writing on or prior to the Record Date.

A-1
<PAGE>

This Bond is one of an authorized issue of bonds limited in aggregate
principal amount to $2,665,000 (the "Bonds") of like date and tenor, except as
to number, denomination, rate of interest and privilege of redemption, issued
pursuant to, under authority of and in full compliance with the Constitution and
laws of the Commonwealth of Virginia, particularly Chapter 643 of the Virginia
Acts of Assembly of 1964, as amended, and executed under an Indenture of Trust
dated as of April 1, 1996 (the "Indenture") between the Issuer and the Trustee.
The Bonds are being issued for the purpose of providing funds to refund bonds
issued to finance all or a portion of the costs of acquiring, constructing,
equipping and furnishing an administrative office and warehouse facility of
approximately 72,000 square feet on 4.75 acres in Springbelt Center, Fairfax
County, Virginia (the "Project") owned by Forman Development Associates Limited
Partnership, a Virginia limited partnership (the "Borrower"). Payments
sufficient to provide for the payment when due of the principal of, premium, if
any, and interest on the Bonds are required to be made directly to the Trustee
for the account of the Issuer by the Borrower under the terms of a Loan
Agreement dated as of April 1, 1996 (the "Agreement") between the Issuer and the
Borrower relating to the Bonds. Capitalized terms herein which are not otherwise
defined shall have the meanings set forth in the Indenture.

The Bonds are all issued under and equally and ratably secured by and
entitled to the security of a pledge and assignment of certain revenues and
receipts derived by the Issuer pursuant to the Agreement, and all receipts of
the Trustee credited under the provisions of the Indenture against such
payments, including all moneys drawn by the Trustee under the irrevocable Letter
of Credit (together with any Alternate Credit Facility, as defined in the
Indenture, issued in substitution therefor, the "Letter of Credit") of The First
National Bank of Maryland (together with any bank issuing an Alternate Credit
Facility, the "Letter of Credit Issuer").

The Issuer has established a book-entry system of registration for the
Bonds. Except as specifically provided otherwise in the Indenture, an agent will
hold this Bond on behalf of the beneficial owner hereof. By acceptance of a
confirmation of purchase, delivery or transfer, the beneficial owner of this
Bond shall be deemed to have agreed to such arrangement. While the Bonds are in
the book-entry system of registration, the Indenture provides special provisions
relating to the Bonds which override certain other provisions hereof and the
Bond.

This Bond is transferable by the Registered Owner hereof in person or by
his attorney duly authorized in writing at the principal corporate trust office
of the Trustee but only in the manner, subject to the limitations and upon
payment of the charges provided in the Indenture, and upon surrender and
cancellation of this Bond. Upon such transfer, a new registered Bond or Bonds,
of authorized denomination or denominations, for the same aggregate principal
amount will be issued to the transferee in exchange herefor.

The Bonds are issuable only as fully registered Bonds in the authorized
denominations described in the Indenture.

Interest on the Bonds shall be paid on (i) the first Business Day (as
defined in the Indenture) of each calendar month (ii) any date on which the
Bonds are subject to mandatory

A-2
<PAGE>

tender under the Indenture, and (iii) on the Maturity Date hereof. Interest on
Bonds shall be calculated on the basis of a year of 365 or 366 days, as
appropriate, for actual days elapsed. If Bonds tendered are not immediately
remarketed, they will continue to bear interest at the rate applicable to the
Interest Period during which the Bonds were tendered until sixty (60) days has
elapsed, at which time the rate will adjust to LIBOR plus one hundred fifty
(150) basis points, unless such inability to remarket is due to a downgrade in
the rating of the Letter of Credit Issuer. The interest rate borne by Bonds
during such time as such Bonds cannot be remarketed and are in default shall be
equal to LIBOR plus three hundred and fifty (350) basis points.

The Bonds shall initially bear interest from the initial authentication and
delivery thereof at the Variable Rate (as defined in the Indenture). Thereafter
the Bonds shall bear interest at a rate determined by the Remarketing Agent
appointed under the Indenture with respect to such Interest Period (as
hereinafter defined) in accordance with the Indenture, provided that the Bonds
shall not bear interest at a rate greater than 10% per annum (the "Maximum
Rate") so long as the Letter of Credit is in effect. The Indenture provides that
the Bonds shall bear interest in a period being hereinafter referred to as an
"Interest Period"), and the interest rate shall be determined to be in effect
for the duration of each such Interest Period.

The determination of the interest rate on the Bonds by the Remarketing
Agent or otherwise as provided in the Indenture shall be conclusive and binding
upon the Owners of the Bonds, the Issuer, the Borrower, the Trustee and the
Tender Agent (as hereinafter defined).

The Bonds will be issued in fully registered form and registered in the
name of Cede & Co., a nominee of The Depository Trust Company, New York, New
York ("DTC") as Registered Owner of the Bonds, and immobilized in the custody of
DTC. One fully registered Bond for the principal amount will be registered to
Cede & Co. Beneficial Owners of Bonds will not receive physical delivery of
Bonds. Individual purchases of Bonds may be made in book-entry form only in
principal amounts of $100,000.00 and any integral multiples of $5,000
thereafter. Principal, premium, if any, and interest payments on the Bonds will
be made to DTC or its nominee as Registered Owner of such Bonds on the
applicable payment date.

Transfer of principal, premium, if any, and interest payments to the
participants of DTC, which include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations (the
"Participants") is the responsibility of DTC. Transfer of principal, premium, if
any, and interest payments to beneficial holders of the Bonds by the
Participants is the responsibility of the Participants and other nominees of
such beneficial holders. The Trustee shall notify DTC of any notice required to
be given pursuant to the Agreement not less than fifteen (15) calendar days
prior to the date upon which such notice is required to be given; provided that
-------- ----
the failure to provide such notice to DTC shall not invalidate any action taken
or notice given by the Trustee hereunder.

Transfer of ownership interest in the Bonds shall be made by DTC and its
Participants, acting as nominees of the beneficial owners of the Bonds, in
accordance with

A-3
<PAGE>

rules specified by DTC and its Participants. The Trustee makes no assurances
that DTC, its Participants or other nominees of the beneficial owners of the
Bonds will act in accordance with such rules or on a timely basis.

The Bonds are issuable as registered Bonds and shall be in denominations of
$100,000 or any integral multiples of $5,000 in excess thereof. Upon surrender
of this Bond at the principal corporate trust office of the Trustee, together
with an assignment duly executed by the Registered Owner or his duly authorized
attorney or legal representative in such form as shall be satisfactory to the
Trustee, the Trustee shall execute and deliver a new Bond in the manner and
subject to the limitations and conditions provided in the Indenture, having an
equal aggregate principal amount, in authorized denominations and bearing
interest at the same rate, and registered in names as requested by the then
Registered Owner hereof or his duly authorized attorney or legal representative.
This Bond may, at the option of the Registered Owner hereof and upon surrender
of this Bond at the principal corporate trust office of the Trustee, together
with an assignment duly executed by the Registered Owner or his duly authorized
attorney or legal representative in such form as shall be satisfactory to the
Trustee, be exchanged for an equal aggregate principal amount of new Bonds, in
authorized denominations, of the same series, form and maturity, bearing
interest at the same rate as this Bond.

If less than all of the Bonds are called for redemption, the Bonds shall be
called in such order as may be determined by the Trustee. If less than all of
the Bonds are called for redemption, the Bonds to be redeemed shall be selected
by DTC or any successor securities depository pursuant to its rules and
procedures or, if the book-entry system is discontinued, by the Trustee by lot.
In either case, (a) the portion of any Bond to be redeemed shall be in the
principal amount of $5,000 or an integral multiple thereof and (b) in selecting
Bonds for redemption, each Bond shall be considered as representing that number
of Bonds which is obtained by dividing the principal amount of such Bonds by
$5,000.

The Trustee, upon being satisfactorily indemnified with respect to
expenses, shall send notice of redemption by facsimile transmission, registered
or first class mail, postage prepaid, or overnight express delivery, not less
than fifteen (15) days nor more than sixty (60) days prior to the redemption
date, to DTC or its nominee as the Registered Owner of the Bonds. The Trustee
shall not be responsible for mailing notice of redemption to anyone other than
DTC or another qualified securities depository or its nominee unless no
qualified securities depository is the Registered Owner of the Bonds. If no
qualified securities depository is the Registered Owner of the Bonds, notice of
redemption shall be mailed to the respective Registered Owners of each Bond as
their names and addresses appear on the Bond Register.

The Registered Owner of this Bond may, under certain conditions set forth
in the Indenture, demand that this Bond be purchased at a price of 100% of the
principal amount hereof plus accrued interest, if any, to the Purchase Date by a
Tender Agent to be appointed if the Bonds are not in a Book Entry System (the
"Tender Agent") on any Business Day. In addition, this Bond is subject to
mandatory tender in whole to the Tender Agent at a purchase price equal to 100%
of the principal amount hereof plus accrued interest, if any, to the Purchase
Date, on each Mandatory Tender Date (as defined in the Indenture). If the

A-4
<PAGE>

Bonds are held in a Book Entry System on any Optional Tender Date or Mandatory
Tender Date, physical tender of the Bonds shall not be required and the Bonds
shall be purchased as provided in the Indenture and the rules and procedures of
the Securities Depository (as defined in the Indenture). No such purchase of
this Bond or advance or use of any funds to effectuate any such purchase shall
be deemed to be a payment or redemption of this Bond or of any portion thereof
and such purchase will not operate to extinguish or discharge the indebtedness
evidenced hereby.

The Borrower has caused the initial Letter of Credit to be delivered to the
Trustee pursuant to the requirements of the Agreement and the Indenture. The
Trustee shall be entitled under the initial Letter of Credit to draw up to an
amount sufficient to pay the principal of the Bonds and up to 60 days' interest
on the Bonds at the assumed rate of ten percent (10%) per annum, including the
payment of the principal and interest portions of the purchase price of Bonds
optionally or mandatorily tendered under the Indenture when due. The initial
Letter of Credit expires on April 15, 2001, subject to extension or earlier
termination as provided therein. The Borrower may, but is not required to,
extend the initial Letter of Credit or provide an Alternate Credit Facility
under the Indenture. Under certain circumstances under the Indenture, the
Letter of Credit Issuer may be required to provide an Alternate Credit Facility.

To the extent permitted by law, and, in accordance with the Indenture,
moneys may be paid to persons entitled thereto, representing interest on overdue
installments of interest, ratably, according to the amounts of such interest due
on such date, without any discrimination or preference.

The Bonds may be redeemed by the Issuer, at the option of the Borrower as
follows: Bonds may be redeemed in whole on any date after the giving of notice
as required by the Indenture and in part on each Interest Payment Date at the
redemption prices set forth in the Indenture. All such redemptions shall be at
a redemption price of 100% of the principal amount thereof without premium plus
accrued interest to the redemption date.

The Bonds may be redeemed in whole at the option of the Borrower at a
redemption price of 100% of the principal amount thereof plus accrued interest
to the redemption date at any time after the occurrence of either of the
following:

(a) All or substantially all of the Project is damaged, destroyed,
condemned or taken by eminent domain.

(b) The operation of the Project is enjoined or prevented or is
otherwise prohibited by, or conflicts with, any order, decree, rule or
regulation of any court or Federal, state or local regulatory body,
administrative agency or other governmental body.

The Bonds will be redeemed in whole (or in part as provided below) at a
redemption price of 100% of the principal amount of Bonds redeemed plus accrued
interest to the redemption date on any day within 180 days after a Determination
of Taxability. Fewer than all the Bonds may be redeemed if redemption of fewer
than all would result in the interest

A-5
<PAGE>

payable on the Bonds remaining outstanding being not includible in the gross
income for Federal income tax purposes of any owner other than a "substantial
user" or "related person." If fewer than all Bonds are redeemed, the Trustee
will select the Bonds to be redeemed by lot as provided in the Indenture or by
such other method acceptable to the Trustee as may be specified in an opinion of
Bond Counsel.

The Bonds are subject to mandatory sinking fund redemption commencing April
1, 1997 and on each April 1 thereafter and on the November 1 prior to maturity
as set forth in the Indenture. All such redemptions shall be at a redemption
price of 100% of the principal amount thereof, without premium, plus accrued
interest to the redemption date.

Notice of any redemption of Bonds shall be given as provided in the
Indenture.

This Bond and the series of which it forms a part are limited obligations
of the Issuer payable solely from the amounts derived under the Agreement or
otherwise assigned and pledged under the Indenture. No officer, agent,
director, member or employee of the Issuer shall be individually or personally
liable for any payment on the Bonds or be subject to any personal liability or
accountability by reason of the issuance of the Bonds, but this shall not
relieve an officer, agent, director, member or employee of the Issuer from the
performance of any official duty provided by law or the Indenture.

THE OWNER OF THIS BOND HEREBY ACKNOWLEDGES AND CONSENTS TO THE FACT THAT
THE FIRST NATIONAL BANK OF MARYLAND IS PROVIDING THE LETTER OF CREDIT AND IS
ACTING AS TRUSTEE AND AS REGISTRAR AND PAYING AGENT WITH RESPECT TO THE BONDS.

The Owner of this Bond shall have no right to enforce the provisions of the
Indenture or to institute action to enforce the covenants therein, or to take
any action with respect to any event of default under the Indenture, or to
institute, appear in or defend any suit or other proceedings with respect
thereto, except as provided in the Indenture. If an event of default as defined
in the Indenture occurs and is continuing, the principal of all Bonds then
outstanding issued under the Indenture may be declared due and payable upon the
conditions and in the manner and with the effect provided in the Indenture.

The Issuer, the Trustee and any agent of the Issuer or the Trustee may
treat the person in whose name this Bond is registered as the Owner hereof for
the purpose of receiving payment as herein and in the Indenture provided and for
all other purposes, whether or not this Bond is overdue, and neither the Issuer,
the Trustee, nor any such agent shall be affected by notice to the contrary.

The Indenture prescribes the manner in which it may be discharged and after
which the Bonds shall no longer be secured by or entitled to the benefits of the
Indenture, except as provided in the Indenture, including a provision that the
Bonds shall be deemed to be paid if non-callable governmental obligations
purchased with Available Moneys maturing as to principal and interest in such
amounts and at such times as to insure the availability of sufficient moneys to
pay the principal of and interest on the Bonds and all compensation and expenses
of the Trustee shall have been paid or provided for to the Trustee's
satisfaction.

A-6
<PAGE>

No recourse shall be had for the payment of the principal of, redemption
premium, if any, and interest on this Bond or for any claim based hereon or upon
any obligation, covenant or agreement contained in the Indenture or the
Agreement against any past, present or future member, officer, official, agent
or employee of the Issuer in his individual capacity, under any rule of law or
equity, statute or constitution or by the enforcement of any assessment or
penalty or otherwise, and neither the members, officers, officials, employees,
directors, or agents, nor any official executing this Bond, shall be liable
personally on this Bond or be subject to any personal liability or
accountability by reason of the issuance or sale of this Bond.

Modifications or alterations of the Indenture, or of any supplements
thereto, may be made only to the extent and in the circumstances permitted by
the Indenture.

THIS BOND AND THE PREMIUM, IF ANY, AND INTEREST HEREON DO NOT CONSTITUTE AN
INDEBTEDNESS OR AN OBLIGATION, GENERAL OR MORAL, OR A PLEDGE OF THE FAITH AND
CREDIT OF THE ISSUER, THE COMMONWEALTH OF VIRGINIA (THE "COMMONWEALTH") OR ANY
POLITICAL SUBDIVISION THEREOF, WITHIN THE PURVIEW OF ANY CONSTITUTIONAL OR
STATUTORY LIMITATION OR PROVISION, AND SHALL NEVER CONSTITUTE NOR GIVE RISE TO A
CHARGE AGAINST THE GENERAL CREDIT OR TAXING POWERS, IF ANY, OF THE ISSUER, THE
COMMONWEALTH OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE A SPECIAL,
LIMITED OBLIGATION OF THE ISSUER, PAYABLE SOLELY FROM THE REVENUES AND INCOME
DERIVED FROM PAYMENTS MADE BY THE BORROWER UNDER THE AGREEMENT AND PAYMENTS
UNDER THE LETTER OF CREDIT (AS SUCH TERMS ARE DEFINED HEREIN).

IT IS HEREBY CERTIFIED, RECITED AND DECLARED that all acts and conditions
required to be performed precedent to and in the execution and delivery of the
Indenture and the issuance of the Bond have been performed in due time, form and
manner as required by law, and that the issuance of the Bond and the series of
which it forms a part does not exceed or violate any constitutional or statutory
limitation.

This Bond shall not be valid or become obligatory for any purpose or be
entitled to any security or benefit under the Indenture unless and until the
certificate of authentication hereon shall have been duly executed by the
Trustee.

[SIGNATURE PAGE TO FOLLOW]

A-7
<PAGE>

IN WITNESS WHEREOF, The Fairfax County Economic Development Authority has
caused this Bond to be executed in its name by the manual or facsimile signature
of its Chairman and its corporate seal or a facsimile thereof to be impressed or
printed hereon and attested by the manual or facsimile signature of its
Secretary.

Dated: April 1, 1996

THE FAIRFAX COUNTY ECONOMIC
DEVELOPMENT AUTHORITY

By_______________________________
, Chairman

Attest:

_______________________
, Secretary

[SEAL]

This Bond is one of the Bonds described in the within-mentioned Indenture.

THE FIRST NATIONAL BANK OF
MARYLAND, as Trustee

By: _____________________________
Authorized officer

A-8
<PAGE>

[FORM OF ASSIGNMENT]

The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:

UNIF TRANSFERS MIN ACT---

TEN COM -- as tenants in common ________ Custodian _______
TEN ENT -- as tenants by the (Cust) (Minor)
entireties
JT TEN -- as joint tenants with right under Uniform Gifts to
of survivorship and not as Minors Act __________
tenants in common (State)

Additional abbreviations may also be used
though not in the above list.

FOR VALUE RECEIVED, the undersigned sells, assigns and transfers
unto____________________________________________________________________
(Name and Address of Assignee)

the within Bond of The Fairfax County Economic Development Authority and does
hereby irrevocably constitute and appoint __________________________________ to
transfer said Bond on the books kept for registration thereof with full power of
substitution in the premises.

Dated:___________________

Signature Guaranteed:________________________________________________
NOTICE: The signature to this assignment must correspond with the name as it
appears upon the face of the within Bond in every particular, without
alteration or enlargement or any change whatever. Signature(s) must be
guaranteed by an "eligible guarantor institution" meeting the
requirements of the Trustee, which requirements include membership or
participation in STAMP or such other "signature guaranty program" as
may be determined by the Trustee in addition to or in substitution for
STAMP, all in accordance with the Securities Exchange Act of 1934, as
amended.

If and to the extent that there shall be a default in the payment of the
interest due on any Interest Payment Date, such defaulted interest shall be paid
to the Owners in whose names such Bonds are registered at the close of business
on the fifth Business Day (as defined in the Indenture) next preceding the date
of payment of such defaulted interest.

A-9
<PAGE>

EXHIBIT B
<PAGE>

CLIENT/MATTER NAME: FORMAN BROS./REFUNDING

CLIENT/MATTER NUMBER: 00260/009

FILENAME: J:\DATA\CLIENT\00\00260\INDENT1.TST

ATTORNEY: C. HONIGBERG

DOCUMENT TITLE: INDENTURE

FILE SERVER: FX2

PLEASE KEEP THIS SHEET WITH THE DOCUMENT FOR ALL FURTHER REVISIONS.
THANK YOU.

REVISION INFORMATION: 02/23/96 07:25 Fair PCM
02/26/96 21:20 Fair MLS
02/28/96 09:44 Fair PCM
03/14/96 16:47 Fair MLS
03/19/96 08:12 Fair pcm
03/21/96 09:44AM FX2 CDLUC
04/12/96 08:44AM FX2 CDLUC
04/16/96 04:46PM FX2 PCROS

B-2

<PAGE>

LOAN AGREEMENT

between

THE FAIRFAX COUNTY ECONOMIC DEVELOPMENT AUTHORITY

and

FORMAN DEVELOPMENT ASSOCIATES LIMITED PARTNERSHIP,
a Virginia limited partnership

Dated as of April 1, 1996

THE FAIRFAX COUNTY ECONOMIC DEVELOPMENT AUTHORITY (THE "ISSUER") HAS ASSIGNED
ALL OF ITS INTEREST IN THIS AGREEMENT (EXCEPT CERTAIN PROVISIONS RELATING TO THE
PAYMENT OF EXPENSES AND INDEMNIFICATION CONTAINED IN SECTIONS 8.3 AND 8.4
HEREOF) TO THE FIRST NATIONAL BANK OF MARYLAND AS TRUSTEE UNDER AN INDENTURE OF
TRUST, DATED AS OF APRIL 1, 1996 AMONG THE ISSUER AND THE TRUSTEE. INFORMATION
CONCERNING THIS ASSIGNMENT MAY BE OBTAINED FROM THE TRUSTEE AT ITS PRINCIPAL
CORPORATE TRUST OFFICE IN BALTIMORE, MARYLAND.
<PAGE>

TABLE OF CONTENTS
-----------------

<TABLE>
<CAPTION>
Article Section
Number Number Page
- ------ ------ ----
<S> <C> <C>
I Definitions.......................................... 1

1.1. Definitions............................... 1
1.2. Rules of Construction..................... 1

II Representations and Covenants.......................... 2

2.1. Representations by Issuer................. 2
2.2. Representations and Covenants by Borrower. 4

III Issuance of the Bonds; Use of Proceeds................. 7

3.1. Agreement to Acquire Project.............. 7
3.2. Issuance of Bonds......................... 7
3.3. Limitation of Issuer's Liability.......... 7

IV Payment by the Borrower................................ 8

4.1. (a) Principal, Premium and Interest...... 8
4.2. Obligations of Borrower Unconditional..... 8
4.3. Payments Assigned......................... 9
4.4. Letter of Credit.......................... 9

V Operation and Use of Project........................... 9

5.1. Maintenance and Operation of the Project.. 9
5.2. Inspection of Project and Borrower's
Books and Records......................... 10

VI Governmental Charges and Insurance..................... 10

6.1. Governmental Charges...................... 10
6.2. Insurance................................. 11
6.3. Requirements of Policies.................. 11

VII Damage, Destruction or Condemnation.................... 11

7.1. Parties to Give Notice.................... 11
7.2. Damage and Destruction.................... 11
7.3. Condemnation and Loss of Title............ 12

VIII Special Covenants...................................... 12

8.1. Arbitrage and Rebate...................... 12
</TABLE>

i
<PAGE>

<TABLE>
<S> <C> <C>
8.2. Use of Proceeds; Other Matters with
Respect to Project, Bonds and Tax
Exemption.................................. 14
8.3. Indemnification by Borrower................ 15
8.4. Payment of Expenses........................ 16
8.5. Approval of Indenture...................... 17
8.6. Notice of Act of Bankruptcy................ 17

IX Events of Default and Remedies.......................... 17

9.1. Event of Default Defined................... 17
9.2. Remedies on Default........................ 18
9.3. No Remedy Exclusive........................ 19
9.4. Attorneys' Fees and other Expenses......... 19
9.5. No Additional Waiver Implied by One
Waiver..................................... 19

X Miscellaneous 20

10.1. Successors and Assigns..................... 20
10.2. Amendments................................. 20
10.3. Exculpation of Issuer...................... 20
10.4. Applicable Law............................. 20
10.5. Severability............................... 20
10.6. Notices.................................... 21
10.7. Agreements to Survive...................... 21
10.8. Right to Cure Default...................... 21
10.9. No Joint Venture........................... 21
10.10. Headings.................................. 22
10.11. Term of Agreement......................... 22
10.12. Counterparts.............................. 22
10.13. Trustee as Third Party Beneficiary........ 22
</TABLE>

ii
<PAGE>

THIS LOAN AGREEMENT is made as of April 1, 1996 between THE FAIRFAX COUNTY
ECONOMIC DEVELOPMENT AUTHORITY, a political subdivision of the Commonwealth of
Virginia (the "Issuer"), and FORMAN DEVELOPMENT ASSOCIATES LIMITED PARTNERSHIP,
a Virginia limited partnership (the "Borrower").

WHEREAS, on April 16, 1996, the Issuer adopted a resolution authorizing the
refunding, re-issuance and sale of the Issuer's Variable Rate Demand Revenue
Bonds (Forman Development Associates Project) Series 1996, in the aggregate
principal amount of up to $2,665,000 to refund bonds issued for the costs of
acquiring, constructing, equipping and furnishing an administrative office and
warehouse facility located on 4.75 acres in Springbelt Center, Fairfax County,
Virginia (the "Project"); and

WHEREAS, the parties desire to set forth in this Agreement certain of their
agreements and understandings with respect to these transactions.

NOW, THEREFORE, for and in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:

ARTICLE I

Definitions

Section 1.1. Definitions. Words and terms used but not defined herein
-----------
shall have the meaning set forth in the Indenture of Trust of even date herewith
between the Issuer and the Trustee (which is incorporated herein by this
reference) unless the context otherwise requires. In addition to, and not as a
limitation upon, the preceding sentence, all terms used herein which are defined
within the body of any of the Bond Documents or the Bonds shall have the same
meaning herein as therein, unless the context in which such terms are used
herein clearly requires that a different meaning be ascribed to such terms.

Section 1.2. Rules of Construction. The following rules shall apply to
---------------------
the construction of this Agreement unless the context otherwise requires:

(a) Singular words shall connote the plural number as well as the singular
and vice versa.

(b) Words importing the redemption or calling for redemption of Bonds shall
not be deemed to refer to or connote the payment of Bonds at their stated
maturity.
<PAGE>

(d) The headings herein are solely for convenience of reference and shall
not constitute a part of this Agreement nor shall they affect its meaning,
construction or effect.

(e) The masculine, feminine and neuter genders are used solely for
convenience of reference and not as terms of limitation. Accordingly, words of
the masculine, feminine and neuter genders shall be deemed and construed to
include correlative words of the masculine, feminine and neuter gender.

ARTICLE II

Representations and Covenants
-----------------------------

Section 2.1. Representations by Issuer. The Issuer makes the following
-------------------------
representations as the basis for its undertakings under this Agreement:

(a) The Issuer has been duly organized and operating under the Act since
its creation, and no dissolution proceedings have been undertaken by it. The
Issuer is, on the date of the issuance of the Bonds, a duly created and validly
existing political subdivision of the Commonwealth vested with the rights and
powers conferred upon economic development authorities under the Act.

(b) Each commissioner of the Issuer has satisfied the residency
requirements of the Act. No commissioner of the Issuer is an officer or
employee of the Municipality and each commissioner has taken and subscribed to
the oath prescribed by Section 49-1 of the Code of Virginia of 1950, as amended.

(c) The Issuer has complied in all respects with the Act and has legal
right, power and authority to (i) adopt the Resolution and execute and deliver
the Bond Documents to which it is a party and other documents related thereto;
(ii) issue, sell and deliver the Bonds to the initial purchasers thereof; (iii)
loan the proceeds of the Bonds to the Borrower to undertake the Project; and
(iv) carry out and consummate all other transactions to which it is a party and
which are contemplated by the Resolution, the Bonds and the Bond Documents.

(d) The Bonds and the Basic Documents to which the Issuer is a party have
been executed and delivered by duly authorized officers of the Issuer, were duly
authorized by the Resolution and are in substantially the same form and text as
the copies of

2
<PAGE>

such instruments presented to the Issuer at its meeting on March 19, 1996.

(e) The Bonds constitute the only bonds or other obligations of the Issuer
in any manner secured by, or payable from, the amounts due under the Bond
Documents and all revenues and receipts derived by the Issuer therefrom or from
the security therefor.

(f) The Issuer hereby finds and determines that financing the Project will
serve the purposes of the Act and that the Project constitutes an "authority
facility," within the meaning of the Act.

(g) When authenticated and delivered in accordance with the Indenture, the
Bonds will have been duly authorized, executed, issued and delivered and will
constitute legal, valid and binding limited obligations of the Issuer
enforceable against the Issuer in accordance with their terms.

(h) The adoption of the Resolution, the issuance of the Bonds, the
execution and delivery of the Bond Documents to which the Issuer is a party and
the compliance with the provisions thereof do not, and will not, conflict with
or constitute on the part of the Issuer a violation or breach of, or default
under, any statute, ordinance, bylaw, indenture, mortgage, deed of trust,
resolution, bond, note or other agreement or instrument to which the Issuer is a
party or by which it is bound or, to its knowledge, any judgment, decree, order,
rule or regulation of any court or governmental agency or body having
jurisdiction over the Issuer or any of the Issuer's activities or properties.

(i) No litigation or investigation by any judicial or governmental body or
agency is pending or, to the best of the Issuer's knowledge, threatened to (i)
enjoin, restrain or otherwise affect the execution, delivery or validity of the
Resolution, the Bonds or the Bond Documents, or (ii) challenge, contest or
affect the constitution, existence or powers of the Issuer, the incumbency of
the Issuer's officers or directors or the validity or enforceability of any
action taken by the Issuer with respect to the Resolution, the Bonds, or the
Bond Documents or any transactions authorized thereby or related thereto. No
litigation or investigation by any judicial or governmental body or agency is
pending or, to the best of the Issuer's knowledge, threatened which challenges
or contests the collection of revenues or receipts under the Bond Documents or
the payment thereof to the registered owners of the Bonds. There is no
litigation or investigation by any judicial or governmental body or agency
pending or, to the best of the Issuer's knowledge, threatened against the Issuer
or any of the property or assets

3
<PAGE>

under the control of the Issuer which involves the possibility of any judgment
or liability which may adversely affect the Project or the security for the
Bonds.

Section 2.2. Representations and Covenants by Borrower. The Borrower
-----------------------------------------
makes the following representations and covenants in connection with its
undertakings hereunder:

(a) The Borrower is duly organized and validly existing as a limited
partnership under the laws of the Commonwealth of Virginia and is duly
authorized and empowered to enter into the Bond Documents to which it is a party
and the Letter of Credit Agreement and the transactions contemplated hereby and
thereby and to perform its obligations hereunder and thereunder and has duly
executed and delivered the Bond Documents to which it is a party and the Letter
of Credit Agreement.

(b) The execution and delivery of the Bond Documents to which it is a party
and the Letter of Credit Agreement and the performance by the Borrower of its
obligations hereunder and thereunder do not and will not (1) conflict with or
violate the terms of partnership certificate or limited partnership agreement,
(2) constitute a default under any agreement or other instrument to which the
Borrower is a party or by which it is bound, or (3) result in a violation of any
agreement or other instrument to which the Borrower is a party or by which it is
bound or any constitutional or statutory provision or order, rule, regulation,
decree or ordinance of any court, government or governmental authority having
jurisdiction over the Borrower or its property.

(c) It has executed and delivered the Bond Documents to which it is a
party, and the Letter of Credit Agreement and such Bond Documents and Letter of
Credit Agreement, when so executed and delivered by other parties thereto, will
constitute the valid and legally binding obligations of the Borrower.

(d) There are no pending or, to the best of its knowledge, threatened
actions, suits, proceedings, or investigations of a legal, equitable,
regulatory, administrative or legislative nature, the judgment, order or
resolution of which may have a materially adverse effect on the Borrower or its
business, assets, condition (financial or otherwise), operations or prospects or
on its ability to perform its obligations under the Bond Documents or the Letter
of Credit Agreement.

(e) It is not in default in the payment of the principal of or interest on
any of its indebtedness for borrowed money or any instrument under and subject
to which any indebtedness has been incurred, and no event has occurred and is
continuing under the

4
<PAGE>

provisions of any such agreement that with a lapse of time or the giving of
notice, or both, would constitute a default thereunder.

(f) The Bonds are the only obligation of any state, territory or possession
of the United States, or any political subdivision of the foregoing, or of the
District of Columbia, the proceeds of which have been or are to be used
primarily with respect to a facility located in Fairfax County, Virginia, or in
any contiguous jurisdiction, a principal user of which is or will be the
Borrower, any other principal user(s) of the facilities financed with the
proceeds of the Bonds, or any "related persons" of the Borrower or such other
principal users, within the meaning of Section 144(a)(3) of the Code.

(g) The Bonds are neither directly nor indirectly "federally guaranteed"
(as defined under Section 149(b) of the Code), nor will the Borrower allow the
Bonds to be so guaranteed.

(h) The "average maturity" of the Bonds does not exceed one hundred twenty
percent (120%) of the "average reasonably expected economic life" of the
facilities financed with the proceeds of the Bonds, within the meaning of
Section 147(b) of the Code. The Borrower will not permit any change in the
Project that would, at the time made, cause the "average reasonably expected
economic life" of the components of the Project to be less than the "average
reasonably expected economic life" of the components of the Project as of the
Issue Date, without first providing the Trustee with an opinion of Bond Counsel
that such changes will not adversely affect the exemption of interest on the
Bonds from Federal income taxation.

(i) The "aggregate authorized face amount" of the Bonds allocated to any
"test period beneficiary" (as defined in Section 144(a)(10) of the Code) of the
facilities financed by the Bonds, when increased by the outstanding "tax-exempt
facility related" bonds allocated to such test period beneficiary, does not
exceed $40,000,000. The Borrower covenants that the Borrower will not allow any
person or entity to become a test period beneficiary of any facilities financed
by the Bonds, if such act would cause such $40,000,000 limit to be exceeded, as
provided in Section 144(a)(10) of the Code.

(j) To the best of its knowledge, neither the Borrower, any other
"substantial user" of the Project nor any "related person" of the Borrower, or
such substantial user (as such terms are used in Section 147(a) of the Code)
plans to purchase, hold or own the Bonds or any part thereof.

5
<PAGE>

(k) The information relating to the Bonds, the Project and the Borrower
contained in the Issuer's Form 8038 is true and correct.

(l) There are no other outstanding "qualified small issue bonds" or any
outstanding "exempt small issues" (as described in Section 103(b)(6) of the
Internal Revenue Code of 1954, as amended) other than the Bonds, with respect to
facilities used principally by the Borrower or any "related person" (as defined
in Section 144(a)(3) of the Code).

(m) The principal amount of the Bonds, and the outstanding principal
balances of all outstanding "qualified issue bonds" or any outstanding "exempt
small issues" described in subsection (l) above, is estimated to be less than
$10,000,000.

(n) The average maturity date of the Bonds is not later than the average
maturity date of the Refunded Bonds. The amount of the Bonds does not exceed
the outstanding amount of the Refunded Bonds. The net proceeds of the Bonds
will be used to redeem the Refunded Bonds not later than 90 days after the date
of issuance of the Bonds.

(o) The weighted average maturity of the Bonds is not greater than the
remaining weighted average maturity of the Refunded Bonds.

(p) The Borrower has obtained all consents, approvals, authorizations and
orders of any governmental or regulatory authority that are required to be
obtained by the Borrower as a condition precedent to the issuance of the Bonds
or the execution and delivery of the Bond Documents to which it is a party and
the Letter of Credit Agreement or the performance by the Borrower of its
obligations hereunder or thereunder. All approvals, certificates and permits
which were required for the acquisition and construction of the Project were
duly obtained and all approvals, certificates and permits required for the
operation of the Project have been issued and remain in full force and effect.

(q) No document or instrument executed or delivered by the Borrower, nor
any information (financial or otherwise) furnished by or on behalf of the
Borrower in connection with the negotiation of the sale of the Bonds contains
any untrue statement of a material fact or omits a material fact necessary to
make the statements contained herein or therein not misleading. There is no
fact that the Borrower has not disclosed in writing to the Issuer and the Letter
of Credit Issuer that materially adversely affects, or so far as it can now
foresee, based on facts known to it, will materially affect adversely the
properties, business, prospects, profits or condition (financial

6
<PAGE>

or otherwise) of the Borrower or the ability of the Borrower to perform its
obligations under the Bond Documents and the Letter of Credit Agreement.

(r) The Borrower understands that the certifications made in paragraphs (a)
through (q) are to be conclusively relied upon by Bond Counsel in giving its
opinion as to the tax-exempt status of the Bonds.

ARTICLE III

Issuance of the Bonds; Use of Proceeds
--------------------------------------

Section 3.1. Agreement to Acquire Project. As of the date hereof, the
----------------------------
construction and equipping of the Project has been completed. Simultaneously
with the issuance of the Bonds, the Issuer will sell, transfer and convey to the
Borrower, by deed (and such bills of sale as may be necessary) with special
warranty of title, the Project. The Borrower will purchase and accept the same
from the Issuer by entering into this Agreement prior to or simultaneously with
the issuance of the Bonds for assignment to the Trustee as security therefor.
The Borrower shall secure the Bonds, at its sole expense, by causing the Letter
of Credit Issuer to execute and deliver to the Trustee the Letter of Credit.
The Issuer agrees to execute and deliver to the Borrower such further deeds,
bills of sale and other evidence of title to the Project, and each part thereof
conveyed pursuant hereto as the Borrower may from time to time reasonably
request.

Section 3.2. Issuance of Bonds. In order to provide funds to refund the
-----------------
bonds issued for payment of the Cost of the Project, the Issuer, concurrently
with or as soon as practicable after the execution of this Agreement, will issue
the Bonds and deposit the proceeds thereof pursuant to written instructions to
defease the prior bonds.

Section 3.3. Limitation of Issuer's Liability. Anything contained in
--------------------------------
this Agreement to the contrary notwithstanding, any obligation the Issuer may
incur hereunder or in connection with the undertaking of the Project for the
payment of money shall not be deemed to constitute a debt or general obligation
of the Issuer within any constitutional or statutory limitations but shall be
payable solely from the revenues and receipts derived by it from financing of
the Project pursuant to this Agreement, including payments received under this
Agreement, and from payments under the Letter of Credit.

7
<PAGE>

ARTICLE IV

Payment by the Borrower
-----------------------

Section 4.1. (a) Principal, Premium and Interest. The Borrower agrees to
-------------------------------
repay the loan made under Article III as follows: On or before 10:00 a.m.
(local time at the principal corporate office of the Trustee) on each day on
which any payment of principal of, premium, if any or interest on the Bonds
shall become due (whether on an interest payment date, at maturity, or upon
redemption or acceleration or otherwise), the Borrower will pay, or cause to be
paid, an amount which, together with other moneys held by the Trustee in the
Bond Fund and available therefor (including, without limitation, proceeds of
draws under the Letter of Credit), will enable the Trustee to make such payment
in full in a timely manner. If the Borrower defaults in any payment required by
this Section, the Borrower will pay interest (to the extent allowed by law) on
such amount until paid at the rate provided for in the Bonds.

(b) Purchase Price. The Borrower agrees to pay to the Tender Agent
--------------
(or if the Bonds are in the Book Entry System, the Trustee) amounts sufficient
to pay the purchase price of Bonds on each Purchase Date and Mandatory Tender
Date pursuant to the Indenture, provided the Borrower shall receive a credit for
the amount of remarketing or Letter of Credit proceeds available for such
purpose in the Bond Fund on each such date.

(c) Borrower to Make up Deficiencies. In furtherance of the
--------------------------------
foregoing, so long as any Bonds are outstanding, the Borrower agrees to pay, or
cause to be paid, all amounts required to prevent any deficiency or default in
any payment of the principal or purchase price of, premium, if any, or interest
on the Bonds, including any deficiency caused by an act or failure to act by the
Trustee, the Borrower, the Issuer or any other person.

(d) Payments under Letter of Credit Agreement. The Borrower will pay
-----------------------------------------
all amounts owing to the Letter of Credit Issuer under the Letter of Credit
Agreement directly to the Letter of Credit Issuer when due and no such payment
shall be made to the Trustee.

Section 4.2. Obligations of Borrower Unconditional. The obligations of
-------------------------------------
the Borrower to make all payments pursuant to this Agreement and to observe and
perform all other covenants, conditions and agreements under the Bond Documents
and the Letter of Credit Agreement shall be absolute and unconditional,
irrespective of any rights of setoff, recoupment or counterclaim the Borrower
might otherwise have against the Issuer or the

8
<PAGE>

Trustee. Subject to prepayment as provided in this Agreement, the Borrower shall
not suspend or discontinue any such payment or fail to observe and perform any
of its other covenants, conditions and agreements under the Bond Documents and
the Letter of Credit Agreement for any cause, including without limitation any
acts or circumstances that may constitute an eviction or constructive eviction,
failure of consideration, failure of title to any part or all of the Project, or
commercial frustration of purpose, or any damage to or destruction or
condemnation of all or any part of the Project or any change in the tax or other
laws of the United States, the Commonwealth or any political subdivision of
either or any failure of the Issuer or any other person to observe and perform
any covenant, condition or agreement, whether express or implied, or any duty,
liability or obligation arising out of or in connection with the Bond Documents
and the Letter of Credit Agreement.

Section 4.3. Payments Assigned. The Borrower consents to the assignment
-----------------
of certain rights of the Issuer under this Agreement to the Trustee and agrees
to pay or cause to be paid to the Trustee all amounts payable by the Borrower
pursuant to the Bond Documents, except for amounts payable directly to the
Issuer and others pursuant to Sections 8.3 and 8.4 of this Agreement.

Section 4.4. Letter of Credit. On or before the Closing Date, in order
----------------
to commence the Letter of Credit Period, the Borrower shall deliver to the
Trustee an irrevocable Letter of Credit with a stated expiration date no earlier
than April 15, 2001. Thereafter, any replacement Letter of Credit must be
delivered to the Trustee on or before a date which is at least 15 days prior to
the stated expiration date of the Letter of Credit being replaced. Any
replacement Letter of Credit shall have an effective date no later than April 1
in the year in which it is delivered and an expiration date which is at least
three (3) years later for successive replacement Letters of Credit, until the
remaining term of the Bonds is less than three (3) years, whereupon the
expiration date shall be December 31, 2007 and shall be in all respects in
accordance with the requirements of Sections 709(b), (c) and (d) of the
Indenture.

ARTICLE V

Operation and Use of Project
----------------------------

Section 5.1. Maintenance and Operation of the Project. The Borrower
----------------------------------------
shall, at its expense, keep the Project in good repair and operating condition
and free and clear of all encumbrances except Permitted Encumbrances, as defined
in the Letter of Credit Agreement, making from time to time all necessary
repairs, renewals and replacements. The Borrower may, at its expense,

9
<PAGE>

make any additions, modifications or improvements to the Project that it may
deem desirable for its efficient operation as a office/warehouse facility and
that do not impair the revenue producing capacity of the Project, provided that
the Borrower provides the Letter of Credit Issuer with prior written notice of
any such additions, modifications or improvements and such additions,
modifications or improvements are located wholly on the Land and comply with all
Federal, state and local codes as applied to the Project, and further provided
that no liens or other encumbrances are filed on the Land as a result of such
additions, modifications or improvements. All such renewals, replacements,
additions, modifications and improvements shall become part of the Project.

The Borrower shall (a) use, maintain and operate, or cause to be used,
maintained and operated, the Project as a office/warehouse facility; (b) comply
with all laws, rules and regulations of any governmental body applicable to the
condition and operation of the Project, whether existing or later enacted or
foreseen or unforeseen and whether involving any change in governmental policy
or requiring structural or other changes to the Project; (c) neither commit nor
suffer others to commit a nuisance in or about the Project; and (d) provide at
its own cost and expense, or cause to be provided, to the extent not included
within the Project, the other personal property required for the proper use,
maintenance and operation of the Project in an economical and efficient manner.

Section 5.2. Inspection of Project and Borrower's Books and Records. The
------------------------------------------------------
Issuer and its duly authorized representatives and agents shall have such
reasonable rights of access to the Project as may be necessary to determine
whether the Borrower is in compliance with the requirements of the Bond
Documents and the Letter of Credit Agreement and shall have the right at all
reasonable times and upon reasonable prior notice to the Borrower to examine and
copy the books and records of the Borrower insofar as such books and records
relate to the Project.

ARTICLE VI

Governmental Charges and Insurance
----------------------------------

Section 6.1. Governmental Charges. The Borrower shall pay when due
--------------------
Governmental Charges. The Borrower, however, at its expense and in its name,
may contest in good faith any Governmental Charges. In the event of such a
contest, the Borrower may permit the same to remain unpaid during the period of
the contest and any subsequent appeal.

10
<PAGE>

Section 6.2. Insurance. The Borrower shall continuously maintain or
---------
shall cause to be maintained insurance against such risks as are customarily
insured against by businesses similar in size and character to the Project,
paying when due all premiums with respect thereto; provided, however, that
during any Letter of Credit Period, compliance with the insurance requirements
of the Letter of Credit Agreement then in effect shall be deemed compliance with
this Section and Section 6.3.

Section 6.3. Requirements of Policies. All insurance required by Section
------------------------
6.2 shall be maintained with generally recognized responsible insurance
companies qualified to do business in the Commonwealth of Virginia and selected
by the Borrower. Such insurance may be written with deductible amounts
comparable to those on similar policies carried by other businesses of like size
and character to the Project. In each policy, other than policies of worker's
compensation insurance, the Issuer and the Trustee shall be named as insureds,
additional insureds or loss payees, as appropriate, as their interests may
appear, provided, however, that the foregoing requirement shall not be
applicable during any Letter of Credit Period.

ARTICLE VII

Damage, Destruction or Condemnation
-----------------------------------

Section 7.1. Parties to Give Notice. In case of (i) any damage to, or
----------------------
destruction of, any material part of the Project, (ii) a taking of all or any
material part of the Project or any right thereunder under the exercise of the
power of eminent domain, (iii) any loss of all or any material part of the
Project because of failure of title or (iv) the commencement of any proceedings
or negotiations which might result in such a taking or loss, the Borrower shall
give prompt notice thereof to the Issuer, the Letter of Credit Issuer, and the
Trustee, describing generally the nature and extent of such damage, destruction,
taking, loss, proceedings or negotiations.

Section 7.2. Damage and Destruction. Unless Payment of the Bonds has
----------------------
occurred or the Borrower has provided for the redemption of all of the Bonds
pursuant to an extraordinary optional redemption, in accordance with Section
401(b) of the Indenture, if all or any part of the Project is destroyed or
damaged by fire or other casualty, then the Borrower shall restore promptly the
property damaged or destroyed to substantially the same condition as before such
damage or destruction, with such alterations and additions as the Borrower may
determine and which will not impair the capacity or character of the Project for
the purpose for which it then is being used or

11
<PAGE>

is intended to be used. Any Net Proceeds paid to the Trustee shall be deposited
in a sub-account of the Bond Fund created for this purpose. The Borrower may
apply so much as may be necessary of the Net Proceeds of insurance received on
account of any such damage or destruction to payment of the cost of such
restoration, either on completion or as the work progresses but only after
delivery to the Trustee of a certificate or certificates from the Borrower
containing such information regarding the restoration as the Trustee may
reasonably require. If such Net Proceeds are not sufficient to pay in full the
cost of such restoration, then the Borrower shall pay so much of the cost as may
be in excess of such Net Proceeds. Any balance of Net Proceeds held by the
Trustee, after payment of the cost of such restoration shall be deposited in a
separate segregated sub-account in the Bond Fund, invested in accordance with
Section 801 of the Indenture and used by the Trustee to redeem Bonds in
accordance with Section 703(a) of the Indenture.

Section 7.3. Condemnation and Loss of Title. Unless Payment of the Bonds
------------------------------
has occurred or the Borrower has provided for the redemption of all of the Bonds
pursuant to an extraordinary mandatory redemption in accordance with Section
401(b) of the Indenture, if title to, or the temporary use of, all or any part
of the Project shall be taken under the power of eminent domain or lost because
of failure of title, then the Borrower shall cause the Net Proceeds from any
such condemnation award or from title insurance to be paid over to the Trustee
to be held by it in a sub-account of the Bond Fund to be created for such
purpose and applied to the restoration of the Project to substantially its
condition before the exercise of such power of eminent domain or failure of
title but only upon delivery to the Trustee of a certificate or certificates
from the Borrower to contain such information as the Trustee and the Letter of
Credit Issuer may reasonably require. Any balance of Net Proceeds remaining
after payment of the cost of such restoration shall be deposited in a separate
segregated sub-account in the Bond Fund, invested in accordance with Section 801
of the Indenture and used by the Trustee to redeem Bonds in accordance with
Section 703(a) of the Indenture.

ARTICLE VIII

Special Covenants
-----------------

Section 8.1. Arbitrage and Rebate. The Borrower hereby covenants with,
--------------------
and certifies to, and for the benefit of, the holders of the Bonds and the
Issuer that so long as the Bonds remain Outstanding, moneys on deposit in any
fund or account established, maintained or permitted to be established or
maintained under the Indenture or under any of the Financing

12
<PAGE>

Documents in connection with the Bonds, whether or not such moneys were derived
from the proceeds of the sale of the Bonds or from any other source, will not be
used or invested in a manner which will cause the Bonds to be classified as
"arbitrage bonds" within the meaning of Section 148(a) of the Code. The Borrower
obligates itself to comply with the requirements of Section 148 of the Code and
any regulations, whether temporary or final, promulgated thereunder or relating
thereto, including but not limited to Temporary Treasury Regulation Sections
1.103-15AT and 1.148-l through 1.148-11 (such Section 148 and such regulations
hereinafter referred to as the "Arbitrage Rules"). The Borrower agrees to cause
to be prepared, by an independent certified public accountant or other expert in
tax arbitrage matters reasonably acceptable to the Trustee, a statement or
report as to the amount of "rebatable arbitrage" with respect to the Bonds,
computed in accordance with the Arbitrage Rules (hereinafter, a "Rebate
Statement") as of the end of the fifth and tenth years after the date of
issuance of the Bonds (the "Issue Date") and to furnish the same to the Trustee
not later than the fortieth (40th) day following each fifth anniversary of the
Issue Date while any Bonds are Outstanding. If at the end of each such five year
period, funds aggregating the Rebate Amount (hereinafter defined) do not exist
in the Rebate Fund, then the Borrower shall pay to the Trustee for deposit into
the Rebate Fund within forty (40) days after the end of such five year period
the amount needed to be paid into the Rebate Fund to increase the funds therein
to an amount equal to such Rebate Fund.

The Borrower further agrees to cause to be prepared a final Rebate
Statement and to furnish the same to the Trustee not later than the fortieth
(40th) day after final payment of the Bonds has occurred. If, on the date on
which final Payment of the Bonds occurs, funds aggregating the Rebate Amount
required to be paid to the United States within 60 days following final Payment
of the Bonds, in accordance with Section 710 of the Indenture, do not exist in
the Rebate Fund, then the Borrower contemporaneously with the delivery of the
final Rebate Statement shall pay to the Trustee for deposit in the Rebate Fund
the amount needed to increase funds on deposit in the Rebate Fund to an amount
equal to such Rebate Amount. The Trustee shall retain records with regard to
each Rebate Statement, including the Final Rebate Statement, for a period of six
(6) years following Payment of the Bonds. As used in this Section, the term
"Rebate Amount" shall mean the amount of 'rebatable arbitrage' with respect to
the Bonds, as such term is defined and used in the Arbitrage Rules.

NOTHING CONTAINED HEREIN SHALL BE INTERPRETED OR CONSTRUED TO REQUIRE THE
ISSUER OR THE TRUSTEE TO CALCULATE OR TO PAY THE "REBATE AMOUNT", THE SAME BEING
THE SOLE AND EXCLUSIVE RESPONSIBILITY AND OBLIGATION OF THE BORROWER.

13
<PAGE>

Section 8.2. Use of Proceeds; Other Matters with Respect to Project,
-------------------------------------------------------
Bonds and Tax Exemption.
- -----------------------

(a) Use of Proceeds: Prohibited Uses of Project, Etc. Neither the Issuer
nor the Borrower shall cause any proceeds of the Bonds to be expended except
pursuant to this Agreement, the Indenture and Borrower's Tax Compliance
Agreement and Certificate dated as of April 1, 1996, which is incorporated
herein by reference. Unless the Borrower shall deliver to the Trustee an Opinion
of Counsel recognized on the subject of municipal bonds satisfactory to the
Trustee to the effect that such use, occupation or ownership will not be an
Event of Taxability, the Borrower shall not:

(1) permit the proceeds of any Bonds to be used in any way that would
result in less than 100% of the net proceeds of any series of Bonds being
considered as having been used to refund the prior series of Bonds,

(2) take any action or approve the Trustee's taking any action or
making any investment or use of the proceeds of any Bonds (including failure to
spend the same with due diligence) that would cause such Bonds to be "arbitrage
bonds" within the meaning of Section 148 of the Code and the regulations and
rulings thereunder then applicable to such Bonds,

(3) barring unforeseen circumstances, approve the use of the proceeds
of any Bonds or any other funds other than in accordance with its "non-
arbitrage" certificate with respect to such use given immediately prior to the
delivery of such Bonds,

(4) permit the Project to be used or occupied by the United States or
any agency or instrumentality thereof in any manner for compensation, including
any entity with statutory authority to borrow from the United States (in any
case within the meaning of Section 149(b) of the Code), or in any way cause

the Bonds to be "federally guaranteed" within the meaning of Section 149(b) of
the Code,

(5) as long as the Bonds remain Outstanding, permit any portion of
the Project to be used for anything other than administrative offices and a
warehouse and industrial distribution facility,

(6) take any other action that would adversely affect the exemption
of interest on any Bonds from Federal income taxation.

14
<PAGE>

Without limiting the generality of the foregoing, the Borrower shall at its
sole expense take all action required under Section 148(f) of the Code and
Treasury Regulations thereunder or any successor Treasury Regulations to prevent
the Bonds from becoming "arbitrage bonds" under such Section, including but not
limited to compliance with Section 8.1.

(b) The Borrower shall not make any change in the Project that would, at
the time made, cause the "average reasonably expected economic life" of the
components of the Project, determined pursuant to Section 147(b) of the Code, to
be less than the "average reasonably expected economic life" of such components
set forth in the certificate or letters of representation of the Borrower
delivered at the time of issuance of the Refunded Bonds, unless the Borrower
furnishes to the Trustee an Opinion of Counsel recognized on the subject of
municipal bonds satisfactory to the Trustee that such change will not be an
Event of Taxability.

(c) The Borrower shall not take or omit to take any action the taking or
omission of which will result in more than 2% of the "aggregate face amount" of
any series of Bonds being used to finance the costs of issuance of such series
of Bonds.

(d) The Borrower shall not take any action or allow any action to be taken
that will cause the "aggregate authorized face amount" of the Bonds allocated to
any "test-period beneficiary", as defined in Section 144(a)(10) of the Code,
when increased by such obligations as provided in Section 144(a)(10) of the
Code, to exceed $40,000,000 without providing to the Trustee an Opinion of
Counsel recognized on the subject of municipal bonds satisfactory to the Trustee
stating that such shall not be an Event of Taxability.

(e) The Borrower shall take all action necessary to ensure that interest
on the Bonds is not included in gross income for Federal income tax purposes.

Section 8.3. Indemnification by Borrower. The Borrower, at all times,
---------------------------
shall protect, indemnify and save harmless the Issuer and the Trustee (the
"Indemnitee") from and against all liabilities, obligations, claims, damages,
penalties, fines, losses, costs and expenses (including, without limitation,
reasonable attorneys' fees) for all acts or failure to act in connection with
the Project and the issuance of the Bonds.

The foregoing indemnity shall be effective only as and to the benefits of
this Section shall not inure to any person other than the Indemnitee and its
successors. Nothing contained herein shall require the Borrower to indemnify
the Indemnitee for any

15
<PAGE>

claim or liability resulting from their gross negligence or willful, wrongful
act or willful, wrongful misconduct.

If any action, suit or proceeding is brought against any Indemnitee for any
loss or damage for which the Borrower is required to provide indemnification
under this Section, the Borrower, upon request, at its expense shall defend such
action, suit or proceeding, or cause the same to be defended by counsel
designated by the Borrower and approved by the Indemnitee against which it is
brought, and such approval shall not be withheld unreasonably, provided that
such approval shall not be required in the case of defense by counsel designated
by an insurance company undertaking such defense pursuant to any applicable
policy of insurance. The obligations of the Borrower under this Section shall
survive Payment of the Bonds.

All references in this Section to the Indemnitee shall include their
directors, officers, employees and agents and their respective successors.

Section 8.4. Payment of Expenses. The Borrower covenants to pay, within
-------------------
thirty (30) days after receiving written demand therefor, an amount sufficient
to pay the following costs and expenses, including reasonable counsel fees,
incurred by the Issuer or the Trustee as a result of actions taken pursuant to
the financing contemplated by this Agreement, which are not paid from the
proceeds of the Bonds:

(a) All reasonable fees and expenses of the Issuer and its counsel, the
Remarketing Agent and its counsel, the Trustee and its counsel, and Bond
Counsel, and all reasonable other costs, fees and expenses incident to this
financing of the Project;

(b) All reasonable costs, fees and expenses of surveyors, engineers,
architects, appraisers and accountants employed to make examinations or reports
or to render opinions required by the Bond Documents;

(d) All costs incurred in connection with the redemption or purchase of
the Bonds;

(e) The reasonable fees and other costs, not otherwise paid under this
Agreement, incurred by the Issuer by reason of: (i) its ownership,
administration, or financing of the Project; (ii) the purchase and sale of the
Bonds; or (iii) in connection with its administration and enforcement of and
compliance with this Agreement;

16
<PAGE>

(f) All amounts which are advanced by the Issuer or the Trustee under the
authority of this Agreement or the Indenture for the benefit of the Borrower;

(g) The Issuer's reasonable expenses, including the reasonable fees and
expenses of its counsel, directly related to the Project or the Bonds and also
those costs and expenses not directly related to the Project but attributable to
the Issuer's financing including, but not limited to, a reasonable share of the
cost of any audit of the funds of the Issuer, and all other amounts which the
Borrower agrees to pay under the terms of this Agreement;

(h) All costs of collection, including reasonable attorneys' fees,
incurred by the Issuer or the Trustee in connection with obtaining payment of
the Bonds or payment of any other amounts or performance by the Borrower under
the Bond Documents; and

(i) Any other payments required to be made pursuant to the Bond Documents.

Payments pursuant to this Section shall be made by the Borrower directly to
the persons, firms or governmental agencies entitled to such payments, or, at
the direction of the Issuer or the Trustee, to the Issuer or the Trustee as
reimbursement therefor.

Section 8.5. Approval of Indenture. The Borrower approves the terms and
---------------------
conditions of the Indenture and agrees to perform all obligations to be
performed by it under the Indenture.

Section 8.6. Notice of Act of Bankruptcy. The Borrower agrees promptly
---------------------------
to notify the Issuer, the Trustee and, during the Letter of Credit Period, the
Letter of Credit Issuer of the occurrence of an Act of Bankruptcy with respect
to it or if it becomes aware of an Act of Bankruptcy with respect to the Issuer.

ARTICLE IX

Events of Default and Remedies
------------------------------

Section 9.1. Event of Default Defined. Each of the following events,
------------------------
upon its occurrence and the expiration of the applicable grace period, is hereby
declared an Event of Default:

(a) Failure of the Borrower to make any payment under Section 4.1 when the
same becomes due and payable;

17
<PAGE>

(b) Failure of the Borrower to observe or perform any of its other
covenants, conditions or agreements hereunder for a period of thirty (30) days
after notice specifying such failure and requesting that it be remedied, given
by the Issuer, the Trustee or the Letter of Credit Issuer, if any, to the
Borrower; provided, however, that in the instance of any default which by its
nature can be cured but is not susceptible of being cured within such thirty
(30) day period, then it shall not constitute an Event of Default if the
Borrower commences the cure within such thirty (30) day period and thereafter
prosecutes the same with due diligence to conclusion, provided that Borrower
shall submit periodic documentation or evidence reasonably satisfactory to the
Trustee or the Letter of Credit Issuer of its efforts to cure and in no event
shall the cure period hereunder exceed sixty (60) days;

(d) An Event of Default under the Indenture; or

(e) If during the Letter of Credit Period, receipt by the Issuer and the
Trustee of written notice from the Letter of Credit Issuer stating that an Event
of Default has occurred under the Letter of Credit Agreement and demanding that
the Bonds be declared immediately due and payable.

Section 9.2. Remedies on Default. (a) Whenever an Event of Default has
-------------------
happened and is continuing, (i) if the Event of Default is that which is set out
in Section 9.1(a) and there has occurred and is continuing an Event of Default
under Section 1001(a) or (b) of the Indenture, or (ii) if the Event of Default
is that set forth in Section 9.1(c) or Section 9.1(e), then, and in any such
instance the Issuer, or the Trustee as assignee of the Issuer, shall; or (b)
whenever an Event of Default has happened and is continuing under Section 9.1(b)
or (d) then and in any such event, the Issuer or the Trustee may (shall, if
requested by the registered owners of not less than twenty-five percent (25%) in
aggregate principal amount of the Bonds then Outstanding):

(a) Declare all payments hereunder to be immediately due and payable in
the amount sufficient to pay all the principal of and interest on, and all other
amounts payable under the terms of the Bonds, whereupon the same shall become
immediately due and payable without notice or demand of any kind;

(b) Take whatever action at law or in equity as may appear necessary or
desirable to collect the amounts then due and thereafter to become due or to
enforce observance, or performance

18
<PAGE>

of any covenants, conditions or agreements of the Borrower in this Agreement or
any of the Bond Documents;

(c) Exercise any remedy afforded a secured party under the UCC then in
effect, to the extent that property subject to this Agreement or any other Bond
Document is property subject to the UCC;

(d) Exercise any remedy provided in the Bond Documents; or

(e) Draw upon the Letter of Credit.

The Issuer or the Trustee shall give notice to the Borrower, the
Remarketing Agent and the Letter of Credit Issuer of the exercise of any of the
rights or remedies under this Section.

Any balance of the moneys collected pursuant to action taken under this
Section remaining after payment of all costs and expenses of collection and
amounts due hereunder shall be used for the payment of the Bonds; provided that
after Payment of the Bonds any such balance shall be paid to the Borrower or to
the Letter of Credit Issuer, if at the time the Letter of Credit Issuer is
entitled to the benefits of the Indenture inasmuch as it has been subrogated to
the rights of the Trustee thereunder.

Section 9.3. No Remedy Exclusive. No remedy herein conferred upon or
-------------------
reserved to the Issuer or the Trustee is intended to be exclusive of any other
remedy, and every remedy shall be cumulative and in addition to every other
remedy herein or now or hereafter existing at law, in equity or by statute. No
delay or failure to exercise any right or power accruing upon an Event of
Default shall impair any such right or power or shall be construed to be a
waiver thereof, and any such right or power may be exercised from time to time
and as often as may be deemed expedient.

Section 9.4. Attorneys' Fees and other Expenses. The Borrower shall on
----------------------------------
demand pay to the Issuer and the Trustee the reasonable fees of attorneys and
other reasonable expenses incurred by any of them in the collection of payments
hereunder or the enforcement of any other obligations of the Borrower upon an
Event of Default.

Section 9.5. No Additional Waiver Implied by One Waiver. If either party
------------------------------------------
or its assignee waives a default by the other party under any covenant,
condition or agreement herein, such waiver shall be limited to the particular
breach hereunder.

19
<PAGE>

ARTICLE X

Miscellaneous
-------------

Section 10.1. Successors and Assigns. This Agreement shall be binding
----------------------
upon, inure to the benefit of, and be enforceable by the parties and their
respective successors and assigns. No assignment by the Borrower shall relieve
it of its obligations under this Agreement.

Section 10.2. Amendments. This Agreement may not be amended except by an
----------
instrument in writing signed by the parties and consented to by the Trustee
pursuant to Article XIII of the Indenture. The Borrower agrees that no amendment
to any of the Bond Documents shall be effective without the prior written
consent of the Trustee in accordance with the terms of the Indenture and, during
the Letter of Credit Period, the Letter of Credit Issuer.

Section 10.3. Exculpation of Issuer. Notwithstanding anything in the
---------------------
Bonds or the Bond Documents to the contrary, the obligations of the Issuer are
not general obligations of the Issuer, but are limited obligations payable
solely from the Revenues which are specifically pledged for such purpose.
Neither the Bonds nor the Bond Documents shall be deemed to create or constitute
a debt or a pledge of the faith and credit of the Commonwealth or any political
subdivision thereof, including the Municipality, and the Issuer. Neither the
Commonwealth nor any political subdivision thereof, including the Municipality,
and the Issuer is obligated to pay the Bonds or the redemption price or purchase
price thereof or the interest or premium, if any, thereon or other costs
incident thereto except from the special funds pledged therefor and the property
pledged or mortgaged therefor. No present or future director, member, officer,
employee or agent of the Issuer shall be liable personally in respect of this
Agreement or for any other action taken by such individual pursuant to or in
connection with the financing provided for in this Agreement. The Issuer shall
be protected in acting upon any notice, request, requisition, consent,
certificate or other writing reasonably believed by it to be genuine and correct
and to have been signed or sent by the proper person or persons.

Section 10.4. Applicable Law. This Agreement shall be governed by the
--------------
applicable laws of the Commonwealth.

Section 10.5. Severability. If any clause, provision or section of this
------------
Agreement shall be held illegal or invalid by any court, the illegality or
invalidity of such clause, provision or section shall not affect the remainder
of this Agreement which

20
<PAGE>

shall be construed and enforced as if such illegal or invalid clause, provision
or section had not been contained in this Agreement. If any agreement or
obligation contained in this Agreement is held to be in violation of law, then
such agreement or obligation shall be deemed to be the agreement or obligation
of the Issuer and the Borrower, as the case may be, only to the extent permitted
by law.

Section 10.6. Notices. Unless otherwise provided for herein, all
-------
demands, notices, approvals, consents, requests, opinions, and other
communications hereunder shall be in writing and shall be deemed to have been
given if given in accordance with the provisions of Section 1405 of the
Indenture.

Section 10.7. Agreements to Survive. The representations, warranties,
---------------------
covenants, terms and agreements contained in this Agreement shall survive the
execution and delivery of the Bonds and the Bond Documents.

Section 10.8. Right to Cure Default. If the Borrower shall fail to make
---------------------
any payment or to perform any act required of it under the Bonds or the Bond
Documents, the Issuer, the Letter of Credit Issuer, or the Trustee, without
prior notice to or demand upon the Borrower and without waiving or releasing any
obligation or default, may (but shall be under no obligation to) make such
payment or perform such act. All amounts so paid by the Issuer, the Letter of
Credit Issuer or the Trustee and all costs, fees and expenses, including but not
limited to attorneys' fees, so incurred shall be secured by the Letter of Credit
and shall be payable by the Borrower to the party making the payment or
incurring the cost, fee or expense as an additional obligation under the Bond
Documents, together with interest thereon at a per annum rate equal to the
Reimbursement Rate as defined in the Letter of Credit Agreement until paid. The
Borrower's obligation under this Section shall survive Payment of the Bonds.

Section 10.9. No Joint Venture. Nothing in this Agreement shall be
----------------
construed as making any party a partner or joint venturer with any other party.

21
<PAGE>

Section 10.10. Headings. The headings of the several articles and
--------
sections of this Agreement are inserted for convenience only and do not comprise
a part of this Agreement.

Section 10.11. Term of Agreement. This Agreement shall be effective upon
-----------------
its execution and delivery, provided that the Bonds and the other Bond Documents
previously or simultaneously have been executed and delivered. Except as
otherwise specified, the Borrower's obligations under the Bonds and the Bond
Documents shall expire upon Payment of the Bonds and all other amounts payable
by the Borrower under the Bond Documents.

Section 10.12. Counterparts. This Agreement may be executed in several
------------
counterparts, each of which shall be an original and all of which together shall
constitute but one and the same instrument, except that to the extent, if any,
that this Agreement shall constitute personal property under the UCC, no
security interest in this Agreement may be created or perfected through the
transfer or possession of any counterpart other than an original counterpart,
which shall be the counterpart containing the receipt therefor, executed by the
Trustee following the signatures to this Agreement.

Section 10.13. Trustee as Third Party Beneficiary. The rights of the
----------------------------------
Issuer under this Agreement (except for certain rights to payment of expenses
and indemnification contained in Section 8.3 and 8.4) are to be assigned to the
Trustee. The Borrower consents to such assignment and agrees that the Trustee
shall be entitled to enforce this Agreement directly against the Borrower as a
third party beneficiary hereof.

WITNESS the following signatures, as of the day and in the month and year
first above written.

FAIRFAX COUNTY ECONOMIC DEVELOPMENT
AUTHORITY

By:_____________________________________
Title: Patricia M. Woolsey, Chairman

FORMAN DEVELOPMENT ASSOCIATES LIMITED
PARTNERSHIP, a Virginia limited
partnership

By:_____________________________________
Title: Barry P. Forman, General Partner

22
<PAGE>

RECEIPT

Receipt of the foregoing original counterpart of the Loan Agreement, dated
as of April 1, 1996, between the Fairfax County Economic Development Authority
and Forman Development Associates Limited Partnership, a Virginia limited
partnership, is hereby acknowledged.

THE FIRST NATIONAL BANK OF MARYLAND, as Trustee

____________, 1996 By:_____________________________________
Its Authorized Officer

23
<PAGE>

CLIENT/MATTER NAME: FORMAN BOND DEAL/???

CLIENT/MATTER NUMBER: 00260/009

FILENAME: J:\DATA\CLIENT\00\00260\LOAN.AGT

ATTORNEY: L. HUGHES

DOCUMENT TITLE: AGREEMENT OF SALE

FILE SERVER: FX2

PLEASE KEEP THIS SHEET WITH THE DOCUMENT FOR ALL FURTHER REVISIONS.
THANK YOU.

REVISION INFORMATION: 02/22/96 03:44PM FX2 CDLUC
02/22/96 03:44PM FX2 CDLUC
02/23/96 12:47 Fair PCM
02/28/96 14:37 Fair PCM
03/13/96 08:51PM FX2 CASTR
03/14/96 14:46 Fair cdl
03/19/96 08:51 Fair PCM
04/22/96 Fair CJTAELMAN

<PAGE>

SHAREHOLDERS AGREEMENT
----------------------

This SHAREHOLDERS AGREEMENT is made as of February ___, 1997 by and among
Pen-Tab Holdings, Inc., a Virginia corporation (the "Company"), Citicorp Venture
-------
Capital, Ltd., a New York corporation ("CVC"), Alan Hodes ("Hodes"), Michael
--- -----
Greenberg ("Greenberg") and each other executive of the Company or its
---------
Subsidiaries who acquires Class A Common Stock from the Company after the date
hereof and executes a joinder hereto (collectively with Hodes and Greenberg, the
"Executives" and individually, an "Executive"). CVC and the Executives are
---------- ---------
collectively referred to as the "Shareholders" and individually as a
------------
"Shareholder."
-----------

CVC intends to purchase shares of Class A Common Stock, Class B Common
Stock and the Company's 12% Series 2 Senior Redeemable Preferred Stock and each
of Hodes and Greenberg intends to either retain or acquire, as the case may be,
shares of Class A Common Stock, the Company's 10% Series 1 Senior Redeemable
Preferred Stock (the "Series 1 Senior Preferred Stock") and the Company's 12%
-------------------------------
Series 3 Junior Redeemable Preferred Stock pursuant to a Recapitalization
Agreement among CVC, the Executives and the Company dated as of January 9, 1997
(the "Recapitalization Agreement").
--------------------------

The Company and the Shareholders desire to enter into this Agreement for
the purposes, among others, of (i) establishing the composition of the Company's
Board, (ii) assuring continuity in the management and ownership of the Company
and (iii) establishing the relative rights and obligations among the
Shareholders. The execution and delivery of this Agreement is a condition to
the purchase by CVC of the Company's capital stock pursuant to the
Recapitalization Agreement. Capitalized terms used herein are defined in
Section 1 hereof.

NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties to this Agreement hereby agree as follows:

1. DEFINITIONS. As used herein, the following terms shall have the
-----------
following meanings:

"Affiliate" shall mean, 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).
<PAGE>

"Approved Sale" means the sale of the Company, in a single transaction
-------------
or a series of related transactions, to an Unaffiliated Third Party (a) pursuant
to which such Unaffiliated Third Party proposes to acquire all or substantially
all of the outstanding Common Stock (whether by merger, consolidation,
recapitalization, reorganization, purchase of the outstanding Common Stock or
otherwise) or all or substantially all of the consolidated assets of the Company
and (b) which has been approved by the Board and holders of a majority of the
outstanding CVC Shareholder Shares, voting together as a single class.

"Board" means the Company's board of directors.
-----

"Class A Common" means the Company's Class A Common Stock, par value
--------------
$.01 per share, as adjusted for any stock split, stock dividend, share
combination, share exchange, recapitalization, merger, conversion, consolidation
or other reorganization.

"Class B Common" means the Company's Class B Common Stock, par value
--------------
$.01 per share, as adjusted for any stock split, stock dividend, share
combination, share exchange, recapitalization, merger, conversion, consolidation
or other reorganization.

"Closing" has the meaning set forth in the Recapitalization Agreement.
-------

"Common Stock" means, collectively, the Class A Common, the Class B
------------
Common and any other class of common stock of the Company.

"CVC Shareholder Shares" means all Shareholder Shares issued or
----------------------
issuable to CVC and its Permitted Transferees.

"Family Group" means, with respect to an individual Shareholder, such
------------
Shareholder's spouse and descendants (whether natural or adopted) and any trust
solely for the benefit of such Shareholder and/or such Shareholder's spouse,
their respective ancestors and/or descendants (whether natural or adopted).

"Other Shareholders" means, with respect to a Shareholder, all
------------------
Shareholders other than such Shareholder.

"Ownership Ratio" means, as to a Shareholder at the time of
---------------
determination, the percentage obtained by dividing the amount of shares of
Common Stock held by such Shareholder on a fully diluted basis at such time by
the aggregate amount of shares of Common Stock outstanding on a fully diluted
basis at such time.

"Permitted Transferees" has the meaning set forth in Section 4(c).
---------------------

-2-
<PAGE>

"Person" means an individual, a partnership, a corporation, a limited
------
liability company, an association, a joint stock company, a trust, a joint
venture, an unincorporated organization or a governmental entity or any
department, agency or political subdivision thereof.

"Preferred Stock" means, collectively, the Series 1 Senior Preferred
---------------
Stock, the Company's 12% Series 2 Senior Redeemable Preferred Stock, the
Company's 12% Series 3
Junior Redeemable Preferred Stock and any other series of Preferred Stock of the
Company.

"Public Sale" means any sale of Shareholder Shares to the public
-----------
pursuant to an offering registered under the Securities Act or to the public
effected through a broker, dealer or market maker pursuant to the provisions of
Rule 144 under the Securities Act.

"Qualified Public Offering" means the sale, in underwritten public
-------------------------
offerings, registered under the Securities Act, whether in one offering or as a
result of several offerings, of shares of the Company's Common Stock having an
aggregate value of at least $30 million.

"Recapitalization Agreement" has the meaning set forth in the
--------------------------
preamble.

"Regulatory Problem" means any set of facts or circumstances wherein
------------------
it has been asserted by any governmental regulatory agency (or CVC or any of its
Affiliates believes that there is a substantial risk of such assertion) that CVC
is not entitled to hold, or exercise any significant right, with respect to, the
CVC Shareholder Shares.

"Securities Act" means the Securities Act of 1933, as amended from
--------------
time to time.

"Senior Indebtedness" means (i) all liabilities and all other
-------------------
obligations of the Company or any of its Subsidiaries pursuant to the Senior
Notes, and (ii) all other indebtedness for borrowed money and guarantees of such
indebtedness of the Company or any of its Subsidiaries and all permissible
renewals, extensions or refundings thereof.

"Senior Notes" means the ___% Senior Subordinated Notes issued by Pen-
------------
Tab Industries, Inc. in the aggregate principal amount of up to $65.0 million.

"Shareholder Shares" means (i) any Common Stock acquired or held by
------------------
the Shareholders, and (ii) any equity securities issued or issuable directly or
indirectly with respect to the securities referred to in clause (i) above by way
of stock dividend or stock split or in connection with a combination of shares,
recapitalization, merger, conversion, consolidation or other reorganization. As
to any particular shares constituting Shareholder Shares, such shares will cease
to be Shareholder Shares when they have been sold in a Public Sale, an Approved
Sale, or upon the consummation of a Qualified Public Offering. For purposes of
this Agreement, a Person will be deemed to be a holder of Shareholder Shares
whenever such Person has the right to acquire directly or indirectly such
Shareholder Shares (upon conversion or

-3-
<PAGE>

exercise in connection with a transfer of securities or otherwise, but
disregarding any restrictions or limitations upon the exercise of such right),
whether or not such acquisition has actually been effected.

"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 shares of
stock 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,
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 ownership interest in a partnership, association or other
business entity if such Person or Persons shall be allocated a majority of
partnership, association or other business entity gains or losses or shall be or
control the managing director or a general partner of such partnership,
association or other business entity.

"Transaction Documents" means the following agreements, all of which
---------------------
are dated as of the date hereof: this Agreement, the Registration Rights
Agreement by and among the parties hereto, the Employment Agreements and Option
Agreements, both between the Company and each of Hodes and Greenberg and the
Recapitalization Agreement.

"Unaffiliated Third Party" means any Person who, immediately prior to
------------------------
the contemplated transaction, (i) does not own in excess of 5% of the Common
Stock on a fully diluted basis (a "5% Owner"), (ii) is not controlling,
--------
controlled by or under common control with any such 5% Owner and (iii) is not
the spouse or descendent (by birth or adoption) of any such 5% Owner or a trust
for the benefit of such 5% Owner and/or such other Persons.

2. BOARD OF DIRECTORS.
------------------

(a) From and after the Closing (as defined in the Recapitalization
Agreement) and until the provisions of this Section 2 cease to be effective,
each holder of Shareholder Shares shall vote all Shareholder Shares which are
voting shares and any other voting securities of the Company over which such
holder has voting control and shall take all other necessary or desirable
actions within his or its control (whether in his or its capacity as a
shareholder, director, member of a board committee or officer of the Company or
otherwise, and including, without limitation, attendance at meetings in person
or by proxy for purposes of obtaining a quorum and execution of written consents
in lieu of meetings), and the Company shall take all necessary or desirable
actions within its control (including, without limitation, calling special board
and shareholder meetings), so that:

-4-
<PAGE>

(i) the authorized number of directors on the Board shall be
established at five (5), and shall not be increased without the prior
written consent of Hodes;

(ii) the following individuals shall be elected to the Board:

(A) two (2) representatives designated by CVC determined by
a vote of the holders of a majority of the CVC Shareholder Shares (the
"CVC Directors");
-------------

(B) for so long as Hodes, in combination with his Permitted
Transferees (the "Hodes Shareholders"), holds at least 50% of the
------------------
Class A Common Stock held by Hodes upon the Closing, two (2)
representatives designated by the Hodes Shareholders, who shall
initially be Hodes and Deborah Lynn Hodes, determined by a vote of the
holders of a majority of the Shareholder Shares held by all Hodes
Shareholders; and

(C) one (1) representative designated by the holders of
Class A Common Stock, determined by a vote of the holders of a
majority of the Class A Common Stock, who shall initially be James
Stevens; provided, that if at any time Hodes, in combination with his
Permitted Transferees, shall cease to own the capital stock described
in Section 2(a)(ii)(B) above, then the representatives designated by
Section 2(a)(ii)(B) shall automatically cease to be members of the
Board and the holders of the Class A Common shall be entitled to
designate an additional two (2) representatives determined by a vote
of the holders of a majority of the Class A Common Stock.

(ii) the composition of the board of directors of each of the
Company's Subsidiaries (a "Sub Board") shall be the same as that of the
---------
Board;

(iv) any committees of the Board or a Sub Board shall be created
only upon the approval of three members of the Board and each such
committee (if any) shall include a CVC Director (or a designee of a CVC
Director);

(v) the removal from the Board or a Sub Board (with or without
cause) of any representative designated hereunder by CVC, by the Hodes
Shareholders or by the holders of the Class A Common Stock, as the case may
be, shall be at the written request of CVC, the Hodes Shareholders or by
the holders of the Class A Common Stock, respectively, but only upon such
written request and under no other circumstances (in each case, determined
on the basis of a vote of the holders of a majority of the Shareholder
Shares held by such Persons); and

-5-
<PAGE>

(vi) in the event that any representative designated hereunder
by CVC, by the Hodes Shareholders or by the holders of Class A Common Stock
ceases to serve as a member of the Board or a Sub Board during his term of
office, the resulting vacancy on the Board or the Sub Board shall be filled
by a representative designated by CVC, by the Hodes Shareholders, or by the
holders of Class A Common Stock, respectively, as provided hereunder.

(b) The Company shall pay the reasonable out-of-pocket expenses
incurred by each director in connection with attending the meetings of the
Board, any Sub Board and any committee thereof. So long as any director serves
on the Board, the Company's certificate of incorporation and bylaws shall
provide for indemnification and exculpation of directors to the fullest extent
permitted under applicable law.

(c) If any party fails to designate a representative to fill a
directorship pursuant to the terms of this Section 2, the individual previously
holding such directorship shall be elected to such position, or if such
individual fails or declines to serve, the election of an individual to such
directorship shall be accomplished in accordance with the Company's bylaws and
applicable law; provided that the Shareholders shall vote to remove such
--------
individual if the party that failed to designate such directorship so directs.

(d) The provisions of this Section 2 shall terminate automatically
and be of no further force and effect upon the consummation of a Qualified
Public Offering.

3. REPRESENTATIONS AND WARRANTIES. Each Shareholder represents and
------------------------------
warrants that (a) effective as of the Closing such Shareholder is the record
owner of the number of Shareholder Shares set forth opposite its name on
Schedule A attached hereto, (b) this Agreement has been duly authorized,
- ----------
executed and delivered by such Shareholder and constitutes the valid and binding
obligation of such Shareholder, enforceable in accordance with its terms, except
as such enforceability may be limited by (x) applicable insolvency, bankruptcy,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and (y) applicable equitable principles (whether considered in a
proceeding at law or in equity), and (c) such Shareholder has not granted and is
not a party to any proxy, voting trust or other agreement which is inconsistent
with, conflicts with or violates any provision of this Agreement. No holder of
Shareholder Shares shall grant any proxy or become party to any voting trust or
other agreement which is inconsistent with, conflicts with or violates any
provision of this Agreement.

4. RESTRICTIONS ON TRANSFER OF SHAREHOLDER SHARES.
----------------------------------------------

(a) Tag Along Rights. Subject to Sections 4(c) and 4(d), at least 15
----------------
days prior to any sale, transfer, assignment, pledge or other disposal (a
"Transfer") of Shareholder Shares by CVC or any of its Permitted Transferees,
--------
CVC or such Permitted Transferees, as the case

-6-
<PAGE>

may be, shall deliver a written notice (the "Sale Notice") to the Company and
-----------
the Other Shareholders, specifying in reasonable detail the identity of the
prospective transferee(s) and the terms and conditions of the Transfer and
enclosing therewith a true and complete copy of any written offer, letter of
intent or other written document setting forth the proposed terms and conditions
of the Transfer. The Other Shareholders may elect to participate in the
contemplated Transfer by delivering written notice to CVC within 10 days after
delivery of the Sale Notice. If any Other Shareholders have elected to
participate in such Transfer, each of CVC and such Other Shareholders shall be
entitled to sell in the contemplated Transfer, at the same price and on the same
terms, a number of Shareholder Shares of any class equal to the product of (i)
the quotient determined by dividing the percentage of Shareholder Shares owned
by such Shareholder by the aggregate percentage of Shareholder Shares owned by
CVC and the Other Shareholders participating in such Transfer and (ii) the
aggregate number of Shareholder Shares to be sold in the contemplated Transfer.

(b) First Offer Rights. Subject to Sections 4(c) and 4(d), at least
------------------
60 days prior to any Transfer of Shareholder Shares by any of the Executives or
their respective Permitted Transferees, such Person making such Transfer (the
"Offering Shareholder") shall deliver a written notice (the "Transfer Notice")
-------------------- ---------------
to the Company, CVC and the other nonselling shareholders of the Company
specifying in reasonable detail the number of shares proposed to be transferred,
the proposed purchase price (which shall be payable solely in cash) and the
other terms and conditions of the Transfer and enclosing therewith a true and
complete copy of any written offer, letter of intent or other written document
setting forth the proposed terms and conditions of the Transfer. The Company
may elect to purchase all (but not less than all) of the Shareholder Shares to
be transferred, upon the same terms and conditions as those set forth in the
Transfer Notice, by delivering a written notice of such election to the Offering
Shareholder (with a copy to CVC) within 30 days after the Transfer Notice has
been delivered to the Company. If the Company has not elected to purchase all
of the Shareholder Shares to be transferred, CVC (or its designee) and the other
nonselling Shareholders may elect to purchase all (but not less than all) of the
Shareholder Shares to be transferred, upon the same terms and conditions as
those set forth in the Transfer Notice, by giving written notice of such
election to the Offering Shareholder within 45 days after the Transfer Notice
has been given to CVC (the "CVC Option Period"). Each of CVC and the other
-----------------
nonselling shareholders shall have the right to purchase that portion of the
Shareholders Shares to be transferred which is equal to the ratio that the
shares of Common Stock owned by a purchasing party bears to the aggregate shares
of Common Stock owned by all purchasing Shareholders or in any other proportion
that the parties shall agree upon, it being understood that Hodes and Greenberg
shall have the right to purchase any shares available for purchase by any of
their respective Permitted Transferees in the event any such Permitted
Transferee elects not to exercise such option to purchase. If neither the
Company, the other nonselling Shareholders nor CVC (or its designee) elects to
purchase all of the Shareholder Shares specified in the Transfer Notice, then
the Offering Shareholder may transfer the Shareholder Shares specified in the
Transfer Notice at a price and on terms no more favorable to the transferee(s)
thereof than specified in the Transfer Notice during the 60-day

-7-
<PAGE>

period immediately following the expiration of the CVC Option Period. Any
Shareholder Shares not transferred within such 60-day period will be subject to
the provisions of this Section 4(b) upon subsequent transfer.

(c) Permitted Transfers. The restrictions contained in this Section
-------------------
4 shall not apply with respect to any Transfer of Shareholder Shares by any
Shareholder (i) in the case of an individual Shareholder, pursuant to applicable
laws of descent and distribution or to any member of such Shareholder's Family
Group, and (ii in the case of CVC (A) to its Affiliates, employees, officers,
directors and consultants and their respective Affiliates, (B) to any limited or
general partnership of which CVC's officers, employers or consultants are
limited or general partners, including, without limitation, CCT III Partners,
L.P., a Delaware limited partnership, and any successors thereto, (C) to any
employee, prospective employee, director or prospective director of the Company
or any Affiliate of the Company, (D) to any former or prospective employee,
director or prospective director of CVC or any Affiliate of CVC, or (E) to any
Person in order to resolve a Regulatory Problem; provided, that the restrictions
contained in this Section 4 shall continue to be applicable to such Shareholder
Shares after any such Transfer; and provided further, that the transferees of
such Shareholder Shares shall have agreed in writing to be bound by the
provisions of this Agreement which affect the Shareholder Shares so transferred
by executing a joinder in the form substantially attached hereto as Exhibit A.
---------
All transferees permitted under this Section 4(c) are collectively referred to
herein as "Permitted Transferees."
---------------------

(d) Termination of Restrictions. The restrictions set forth in this
---------------------------
Section 4 shall continue with respect to each Shareholder Share until the
earlier of (i) the Transfer of such Shareholder Share in a Public Sale or an
Approved Sale, or (ii) the consummation of a Qualified Public Offering.

5. SALE OF THE COMPANY.
-------------------

(a) In the event of an Approved Sale, each Shareholder will (i)
consent to, vote for, and raise no objections against the Approved Sale or the
process pursuant to which the Approved Sale was arranged, (ii) waive any
dissenter's rights and other similar rights, and (iii) if the Approved Sale is
structured as a sale of stock, each Shareholder will agree to sell its
Shareholder Shares and its Preferred Stock on the terms and conditions of the
Approved Sale; provided, however, that no terms of the Approved Sale shall alter
the rights and priorities of the Preferred Stock. Each Shareholder will take
all necessary and desirable actions as directed by the Board and the Approving
Shareholders in connection with the consummation of any Approved Sale, including
without limitation executing the applicable purchase agreement, making
representations and warranties, and granting identical indemnification rights.
Each Shareholder required to make indemnification payments in connection with
any Approved Sale shall have a right to recover from the Other Shareholders to
the extent that the amount required to be paid by such Shareholder was
disproportionate to the proportion of the total consideration

-8-
<PAGE>

received by all Shareholders, compared to the consideration actually received by
such Shareholder.

(b) If the Company or the holders of the Company's securities enter
into any negotiation or transaction for which Rule 506 (or any similar rule then
in effect) under the Securities Act may be available with respect to such
negotiation or transaction (including a merger, consolidation or other
reorganization), the Other Shareholders will, at the request of the Company,
appoint a purchaser representative (as such term is defined in Rule 501)
reasonably acceptable to the Company. If any Other Shareholder appoints a
purchaser representative designated by the Company, the Company will pay the
fees of such purchaser representative, but if any Other Shareholder declines to
appoint the purchaser representative designated by the Company such holder will
appoint another purchaser representative (reasonably acceptable to the Company),
and such holder will be responsible for the fees of the purchaser representative
so appointed.

(c) All Shareholders will bear their pro rata share (based upon the
number of shares sold) of the reasonable costs of any sale of Shareholder Shares
pursuant to an Approved Sale to the extent such costs are incurred for the
benefit of all selling Shareholders and are not otherwise paid by the Company or
the acquiring party. Costs incurred by any Shareholder on its own behalf will
not be considered costs of the transaction hereunder.

(d) This Section 5 shall automatically terminate upon a Qualified
Public Offering.

6. SPECIAL REPURCHASE PROVISIONS. Any capitalized terms used in this
-----------------------------
Section 6 and not otherwise defined herein shall have the meaning set forth in
that certain Employment Agreement of even date herewith between the Company and
Hodes. Anything in this Shareholders Agreement to the contrary notwithstanding,
and subject to the provisions of Section 6(g) below, in the event the employment
of Hodes by the Company or Pen-Tab shall terminate for any reason whatsoever
other than the death or Disability of Hodes, the following procedure set forth
below in this Section 6 shall be followed:

(a) Within ten (10) Business Days after the employment of Hodes shall
terminate, CVC and Hodes shall mutually agree upon the identity of an accounting
firm or investment banking firm which shall be retained to determine the per
share fair market value of all shares of Preferred Stock and Common Stock owned
by Hodes and Greenberg and their respective Permitted Transferees as of the date
Hodes' employment shall terminate. In the event Hodes and CVC, within the ten
(10) Business Day period referred to above, shall be unable to agree upon the
identity of a firm to determine the aforesaid valuation, then, within ten (10)
Business Days after the expiration of the initial ten (10) Business Days period,
each of Hodes and CVC shall appoint and designate an accounting firm or
investment banking firm as its representative, and shall give written notice of
such appointment and designation to the other

-9-
<PAGE>

party. Within ten (10) Business Days after the expiration of the second ten (10)
Business Days period provided for above, the two firms so appointed and
designated mutually shall appoint and designate an accounting firm or investment
banking firm which is unaffiliated with either appointing firm or any of the
parties hereto, and such firm so appointed and designated (the "Valuation Firm")
shall determine the Valuation provided for herein. The fees, costs and expenses
of the Valuation Firm and the firms engaged to appoint the Valuation Firm shall
be borne equally by Hodes and CVC. Hodes and CVC agree that any such retention
solely shall be on the basis that the Valuation Firm is being retained jointly
by Hodes and CVC, and the Valuation Firm shall be required to acknowledge in
writing that it is acting jointly on behalf of Hodes and CVC.

(b) The Company shall, and shall cause each of its Subsidiaries to,
make available to the Valuation Firm for inspection, review and copying, without
restriction, all assets, properties, books, records, data and information
(whether in written, computer or other form) regarding the business, assets,
financial condition and prospects of the Company and each of its Subsidiaries.
In addition, the Company shall, and shall cause each of its Subsidiaries to,
instruct their respective accountants to make their records and workpapers
regarding the Company and its Subsidiaries available to the Valuation Firm in
connection with the valuation provided for herein. Hodes agrees to cooperate
with the Valuation Firm to facilitate the Valuation, such facilitation to
include discussions with the Valuation Firm, access to personnel and records and
other cooperation as reasonably requested by the Valuation Firm.

(c) The Valuation Firm shall be required to prepare its valuation
strictly in accord with the following facts and assumptions:

(i) One hundred percent (100%) of the issued and
outstanding shares of Company Preferred Stock and Company Common Stock are
being sold to a financially responsible purchaser on an all cash purchase
price basis in an arms length negotiated transaction where neither
purchaser nor seller is under duress or subject to any other pressure to
consummate the transaction, and no discount for a minority interest shall
be applied;

(ii) The Company and its Subsidiaries are valued as a
going concern with their respective assets and business continuing in place
subsequent to the closing of any purchase transaction;

(iii) Any change of control clauses or other provisions in
any documents governing Indebtedness (as defined in the Recapitalization
Agreement) which would cause such Indebtedness to become due or permit such
Indebtedness to become accelerated upon a purchase of shares by CVC or
Hodes pursuant to this Section 6 will be recognized as creating an
obligation of a purchaser of shares of Preferred Stock and Common Stock to
refinance such Indebtedness;

-10-
<PAGE>

(iv) The Common Stock has not been registered under the
Securities Act; and

(v) Preferred Stock shall be valued at its stated
liquidation value plus all accrued but unpaid dividends thereon.

(d) The Valuation Firm shall be required to deliver a detailed
written valuation report (the "Valuation Report") to Hodes and CVC within ninety
(90) days after the date upon which the Valuation Firm is retained. The
valuation set forth in the Valuation Report shall set forth a detailed
determination of the value of the Company as well as the value of each of the
Shares of Preferred Stock and Common Stock owned by each of CVC, Hodes and
Greenberg, and their respective Permitted Transferees, shall contain a
certification by the Valuation Firm that all of the assumptions set forth in
Section 6(c) above were utilized, and shall be final and binding upon Hodes and
Greenberg and CVC and their respective Permitted Transferees.

(e) Within ten (10) Business Days after the receipt of the Valuation
Report, CVC shall deliver written notice to Hodes and Greenberg of whether CVC
(or its designee) desires to purchase for cash all of the shares of Preferred
Stock and Common Stock owned by Hodes and Greenberg and their respective
Permitted Transferees at a purchase price equal to the per share value thereof
set forth in the Valuation Report. If CVC fails to deliver the aforesaid written
notice within said ten (10) Business Days period, or if the notice so delivered
indicates that CVC shall not purchase the aforesaid shares, (i) CVC shall be
deemed to have waived and relinquished any right to purchase the shares owned by
Hodes and Greenberg and their respective Permitted Transferees under this
Section 6; and (ii for a period of ten (10) Business Days after the expiration
of the initial ten (10) Business Days period referred to in this Section 6(e),
Hodes shall have the right (exercisable by delivering written notice of exercise
to CVC within said ten (10) Business Day period) to purchase for cash all of the
shares of Preferred Stock and Common Stock owned by CVC and its Permitted
Transferees on the same per share valuation basis for such shares as was set
forth in the Valuation Report. The assignment by CVC to its designee of a
purchase obligation hereunder shall not in any way relieve CVC of the obligation
to pay the purchase price in the event CVC's designee shall default in such
payment. If Hodes fails to deliver written notice to CVC or if the notice so
delivered indicates that Hodes shall not purchase the shares, Hodes will be
deemed to have waived and relinquished his right to purchase the shares from CVC
under this Section 6.

(f) The closing of any purchase provided for in Section 6(e) above
shall take place at the offices of CVC in New York City within forty-five (45)
days after any option to purchase under Section 6(e) above is duly exercised.
The purchase price shall be payable by the wire transfer of immediately
available funds in exchange for the purchased shares, duly endorsed for transfer
or with executed stock powers attached, free and clear of all liens, claims,
security interests and encumbrances whatsoever. In connection with any sale of
shares under this Section 6, the selling party shall make representations and
warranties to the purchaser

-11-
<PAGE>

substantially in the form of the representations and warranties set forth in
Sections 6A, 6B and 6C of the Recapitalization Agreement.

(g) Anything in this Section 6 to the contrary notwithstanding, the
provisions of this Section 6 shall be null and void and shall terminate and be
of no further force or effect if, prior to the termination of Hodes' employment,
the Company or Pen-Tab Industries, Inc. ("Pen-Tab"), a wholly owned subsidiary
of the Company, shall have sold shares of its Common Stock pursuant to an
initial public offering or is contemplating such a sale. The Company and Pen-
Tab shall be deemed to have contemplated such a sale if shares of the Company's
Common Stock or Pen-Tab's Common Stock are sold pursuant to an initial public
offering within six (6) months after Hodes' employment shall terminate. If such
contemplated sale occurs after shares have been purchased hereunder then, within
ten (10) days after the initial public offering shall become effective, the
purchasing party shall pay to the selling party or parties, by wire transfer of
immediately available funds, an amount which is equal to the excess of the
initial public offering price for a share of Common Stock over the price per
share determined pursuant to the Valuation Report, if any, multiplied by the
number of shares of Common Stock purchased pursuant to this Section 6.

7. LEGEND. In addition to any legend required by any other Transaction
------
Document, each certificate evidencing Shareholder Shares and Preferred Stock and
each certificate issued in exchange for or upon the transfer of any Shareholder
Shares (if such shares remain Shareholder Shares as defined herein after such
transfer) and Preferred Stock shall be stamped or otherwise imprinted with a
legend in substantially the following form:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE
WERE ORIGINALLY ISSUED ON FEBRUARY 4, 1997, AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED. THE TRANSFER OF THE
SECURITIES REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO A SHAREHOLDERS AGREEMENT DATED AS OF
FEBRUARY 4, 1997, BY AND AMONG THE ISSUER OF SUCH
SECURITIES (THE "COMPANY") AND CERTAIN OF THE
COMPANY'S SHAREHOLDERS. A COPY OF SUCH
SHAREHOLDERS AGREEMENT WILL BE FURNISHED WITHOUT
CHARGE BY THE COMPANY TO THE HOLDER HEREOF UPON
WRITTEN REQUEST."

The Company shall imprint such legend on certificates evidencing Shareholder
Shares outstanding prior to the date hereof. The legend set forth above shall
be removed from the certificates evidencing any shares which cease to be
Shareholder Shares.

-12-
<PAGE>

8. TRANSFERS IN VIOLATION OF AGREEMENT. Any Transfer or attempted
-----------------------------------
Transfer of any Shareholder Shares in violation of any provision of this
Agreement shall be null and void, and the Company shall not record such Transfer
on its books or treat any purported transferee of such Shareholder Shares as the
owner of such shares for any purpose.

9. TRANSFER OF SHAREHOLDER SHARES.
------------------------------

(a) Shareholder Shares and shares of Preferred Stock are transferable
only pursuant to (i) public offerings registered under the Securities Act, (ii)
subject to the provisions of Section 4 above, Rule 144 or Rule 144A (or any
similar rule or rules then in effect) of the Securities and Exchange Commission
if such rule is available, and (iii) subject to Section 4 or 5 and Section 9(b)
below, any other legally available means of Transfer.

(b) In connection with the Transfer of any Shareholder Shares or
Preferred Stock other than a Transfer described in clause (i) or (ii) of Section
9(a) above, the holder thereof shall deliver written notice to the Company
describing in reasonable detail the Transfer or proposed Transfer, together with
an opinion of counsel reasonably acceptable to the Company to the effect that
such Transfer of Shareholder Shares or Preferred Stock may be effected without
registration of such Shareholder Shares or Preferred Stock under the Securities
Act. In addition, if the holder of the Shareholder Shares or Preferred Stock
delivers to the Company an opinion of counsel that no subsequent Transfer of
such Shareholder Shares or Preferred Stock shall require registration under the
Securities Act, the Company shall promptly upon such contemplated Transfer
deliver new certificates for such Shareholder Shares or Preferred Stock which do
not bear the legend set forth in Section 8 above. If the Company is not
required to deliver new certificates for such Shareholder Shares or Preferred
Stock not bearing such legend, the holder thereof shall not consummate a
Transfer of the same until the prospective transferee has confirmed to the
Company in writing its agreement to be bound by the conditions contained in this
Section 9 and Section 7 above.

(c) Upon the request of a holder of Shareholder Shares or Preferred
Stock, the Company shall promptly supply to such Person or its prospective
transferees all information regarding the Company required to be delivered in
connection with a Transfer pursuant to Rule 144A (or any similar rule or rules
then in effect) of the Securities and Exchange Commission.

(d) Upon the request of any holder of Shareholder Shares or Preferred
Stock, the Company shall remove the legend set forth in Section 7 above from the
certificates for such holder's Shareholder Shares or Preferred Stock; provided,
that such Shareholder Shares or Preferred Stock are eligible for sale pursuant
to Rule 144(k) (or any similar rule or rules then in effect) of the Securities
and Exchange Commission.

10. LIMITED PREEMPTIVE RIGHTS. If the Company issues any shares of Common
-------------------------
Stock or any securities containing options or rights to acquire any shares of
Common Stock or any

-13-
<PAGE>

securities convertible or exchangeable for Common Stock in each case, after the
date hereof to CVC, any Permitted Transferee of CVC or any Affiliate of CVC, the
Company will offer to sell to each Other Shareholder a number of such securities
("Offered Shares") so that the Ownership Ratio immediately after the issuance
--------------
of such securities for each Shareholder would be equal to the Ownership Ratio
for such Shareholder immediately prior to such issuance of securities. The
Company shall give each Shareholder at least 30 days prior written notice of any
proposed issuance, which notice shall disclose in reasonable detail the proposed
terms and conditions of such issuance (the "Issuance Notice"). Each Shareholder
----------------
will be entitled to purchase such securities at the same price, on the same
terms, and at the same time as the securities are issued by delivery of written
notice to the Company of such election within 15 days after delivery of the
Issuance Notice (the "Election Notice"); provided, that if more than one type of
--------------- --------
security was issued, each Shareholder shall, if it exercises its rights pursuant
to this Section 10, purchase such securities in the same ratio as issued. If any
of the Shareholders have elected to purchase any Offered Shares, the sale of
such shares shall be consummated as soon as practical (but in any event within
10 days) after the delivery of the Election Notice. In the event that any
Shareholder elects to purchase Offered Shares, at such Shareholder's request
(which request shall be included in the Election Notice), the Company shall
issue to such Shareholders, in lieu of the securities constituting Offered
Shares, nonvoting securities which shall otherwise be identical in all respects
to such securities constituting Offered Shares, except that it (i) shall be
nonvoting, (ii) shall be convertible into a voting security (including the
securities constituting Offered Shares) on such terms as are requested by such
Shareholder in light of the applicable regulatory considerations then
prevailing, and (iii) may not, at Shareholder's request, be a common equity
security. In the event any Shareholder elects not to exercise its rights
pursuant to this Section 10, no other Shareholder shall have the right to
purchase the securities offered to such Shareholder. This Section 10 will
terminate automatically, and be of no further force and effect, upon the
consummation of a Qualified Public Offering.

11. DIVIDEND PAYMENTS. The Company agrees that it shall make dividend
-----------------
payments in cash on the Series 1 Senior Preferred Stock on each Series 1
Dividend Reference Date (as defined in the Company's articles of incorporation
as in effect on the date hereof) if and to the extent permitted under the
documents governing Senior Indebtedness.

12. AMENDMENT AND WAIVER. Except as otherwise provided herein, no
--------------------
modification, amendment or waiver of any provision of this Agreement shall be
effective against the Company or the Shareholders unless such modification,
amendment or waiver is approved in writing by the Company or the holders of not
less than 75% of the Shareholder Shares, respectively. For the avoidance of
doubt, the addition of another party to this Agreement by execution of a joinder
to this Agreement substantially in the form of Exhibit A attached hereto is not
---------
an action which, in and of itself, requires an amendment to this Agreement. The
failure of any party to enforce any of the provisions of this Agreement shall in
no way be construed as a waiver of such provisions and shall not affect the
right of such party thereafter to enforce each and every provision of this
Agreement in accordance with its terms.

-14-
<PAGE>

13. SEVERABILITY. Whenever possible, each provision of this Agreement
------------
shall 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 shall not affect
any other provision or any other jurisdiction, but this Agreement shall be
reformed, construed and enforced in such jurisdiction as if such invalid,
illegal or unenforceable provision had never been contained herein.

14. ENTIRE AGREEMENT. Except as otherwise expressly set forth herein,
----------------
this document and the other Transaction Documents embody the complete agreement
and understanding among the parties hereto with respect to the subject matter
hereof 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, without limitation, the
Letter of Intent dated October 29, 1996 by and among CVC, Hodes, Greenberg and
the Company.

15. SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, this
----------------------
Agreement shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and the Shareholders and any subsequent
holders of Shareholder Shares and the respective successors and assigns of each
of them, so long as they hold Shareholder Shares.

16. COUNTERPARTS. This Agreement may be executed in separate counterparts
------------
each of which shall be an original and all of which taken together shall
constitute one and the same agreement.

17. REMEDIES. The parties hereto shall be entitled to enforce their
--------
rights under this Agreement specifically to recover damages by reason of any
breach of any provision of this Agreement and to exercise all other rights
existing in their 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 the Company, CVC, any Executive and any of their respective
Permitted Transferees may, in any such Person's sole discretion, apply to any
court of law or equity of competent jurisdiction for specific performance and/or
injunctive relief (without posting a bond or other security) in order to enforce
or prevent any violation of the provisions of this Agreement.

18. 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 facsimile to
the recipient (with telephonic confirmation from the recipient). Such notices,
demands and other communications will be sent to the address indicated below:

-15-
<PAGE>

To the Company:
--------------

Pen-Tab Holdings, Inc.
167 Kelley Drive
Front Royal, VA 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
Citicorp Center
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

-16-
<PAGE>

With a copy, which shall not constitute notice, to:
--------------------------------------------------

Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4900

To either of the Executives:
---------------------------

Pen-Tab Holdings, Inc.
167 Kelley Drive
Front Royal, VA 22630
Attention: Alan Hodes and Michael Greenberg
Telecopy No.: (540) 622-2008

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.

19. GOVERNING LAW. THE CORPORATE LAW OF VIRGINIA SHALL GOVERN ALL ISSUES
-------------
CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS SHAREHOLDERS. ALL OTHER
QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC
LAWS OF THE STATE OF NEW YORK, 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 NEW YORK.

20. DESCRIPTIVE HEADINGS. The descriptive headings of this Agreement are
--------------------
inserted for convenience only and do not constitute a part of this Agreement.

-17-
<PAGE>

* * * * *

IN WITNESS WHEREOF, the parties hereto have executed this Shareholders
Agreement as of the date first above written.

PEN-TAB HOLDINGS, INC.

By:_______________________________
Name:_____________________________
Title:____________________________

CITICORP VENTURE CAPITAL, LTD.

By:_______________________________
Name:_____________________________
Title:____________________________

__________________________________
ALAN HODES

__________________________________
MICHAEL GREENBERG

-18-
<PAGE>

EXHIBIT A
---------
FORM OF JOINDER TO
SHAREHOLDERS AGREEMENT
----------------------

THIS JOINDER to the Shareholders Agreement, dated as of _______ __,
1997 by and among Pen-Tab Holdings, Inc. a Virginia corporation (the "Company"),
-------
and certain shareholders of the Company (the "Agreement"), is made and entered
---------
into as of _________ __,____ by and between the Company and _________________

("Holder"). Capitalized terms used herein but not otherwise defined shall have
------
the meanings set forth in the Agreement.

WHEREAS, Holder has acquired certain shares of Common Stock ("Holder
------
Stock"), and the Agreement and the Company requires Holder, as a holder of
- -----
Common Stock, to become a party to the Agreement, and Holder agrees to do so in
accordance with the terms hereof.

NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Joinder hereby agree as
follows:

1. Agreement to be Bound. Holder hereby agrees that upon execution
---------------------
of this Joinder, it shall become a party to the Agreement and shall be fully
bound by, and subject to, all of the covenants, terms and conditions of the
Agreement as though an original party thereto and shall be deemed a Shareholder
[AND AN EXECUTIVE] for all purposes thereof. In addition, Holder hereby agrees
that all Common Stock held by Holder shall be deemed Shareholder Shares for all
purposes of the Agreement

A-1
<PAGE>

2. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Joinder shall bind and inure to the benefit of and be enforceable by the
Company and its successors and assigns and Holder and any subsequent holders of
Holder Stock and the respective successors and assigns of each of them, so long
as they hold any shares of Holder Stock.

3. Counterparts. This Joinder may be executed in separate
------------
counterparts each of which shall be an original and all of which taken together
shall constitute one and the same agreement.

4. Notices. For purposes of Section 18 of the Agreement, all
-------
notices, demands or other communications to the Holder shall be directed to:

[Name]

[Address]

[Facsimile Number]

5. GOVERNING LAW. THE CORPORATE LAW OF VIRGINIA SHALL GOVERN ALL
-------------
ISSUES CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS SHAREHOLDERS. ALL
OTHER QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
JOINDER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC LAWS
OF THE STATE OF NEW YORK, 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 NEW YORK.

6. DESCRIPTIVE HEADINGS. The descriptive headings of this Joinder
--------------------
are inserted for convenience only and do not constitute a part of this Joinder.

A-2
<PAGE>

* * * * *

A-3
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Joinder as
of the date first above written.

PEN-TAB HOLDINGS, INC.

By:__________________________

Name:________________________

Title:_______________________

[HOLDER]

By:__________________________

<PAGE>

REGISTRATION RIGHTS AGREEMENT
-----------------------------

This REGISTRATION RIGHTS AGREEMENT is made as of February ___, 1997,
by and among Pen-Tab Industries, Inc., a Virginia corporation (the "Company"),
-------
Citicorp Venture Capital, Ltd., a New York corporation ("CVC"), Alan Hodes
---
("Hodes"), Michael Greenberg ("Greenberg"). Hodes and Greenberg are
----- ---------
collectively referred to herein as the "Executives" and individually as an
----------
"Executive."
---------

The parties to this Agreement are parties to a Recapitalization
Agreement dated as of January __, 1997 (as amended and modified from time to
time in accordance with its terms, the "Recapitalization Agreement"). In order
--------------------------
to induce the CVC and the Executives to enter into the Recapitalization
Agreement, the Company has agreed to provide the registration rights set forth
in this Agreement. The execution and delivery of this Agreement is a condition
to the Closing under the Recapitalization Agreement. Unless otherwise provided
in this Agreement, capitalized terms used herein shall have the meanings set
forth in Section 1 hereof.

NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties to this Agreement hereby agree as
follows:

1. Definitions. As used herein, the following terms shall have the following
-----------
meanings.

"Common Stock" means, collectively, (i) the Class A Common and the
------------
Class B Common, and (ii) any capital stock of the Company issued or issuable
with respect to the securities referred to in clause (i) by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, conversion, merger, consolidation or other reorganization.

"CVC Registrable Securities" means (i) any Common Stock acquired by
--------------------------
CVC or its affiliates on or after the date hereof, and (ii) any shares of
capital stock of the Company issued or issuable with respect to the securities
referred to in clause (i) above by way of a stock dividend or stock split or in
connection with a combination of shares, recapitalization, conversion, merger,
consolidation or other reorganization. For purposes of this Agreement, a Person
will be deemed to be a holder of CVC Registrable Securities whenever such Person
has the right to acquire directly or indirectly such CVC Registrable Securities
(upon conversion or exercise in connection with a transfer of securities or
otherwise, but disregarding any restrictions or limitations upon the exercise of
such right), whether or not such acquisition has actually been effected.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
<PAGE>

"Executive Registrable Securities" means (i) any shares of Class A
--------------------------------
Common issued or issuable to the Executives on the date hereof or acquired by,
or issued or issuable to, the Executives after the date hereof and (ii) any
shares of capital stock of the Company issued or issuable with respect to the
securities referred to in clause (i) above by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization, merger,
consolidation or other reorganization. For purposes of this Agreement, a Person
will be deemed to be a holder of Executive Registrable Securities whenever such
Person has the right to acquire directly or indirectly such Executive
Registrable Securities (upon conversion or exercise in connection with a
transfer of securities or otherwise, but disregarding any restrictions or
limitations upon the exercise of such right), whether or not such acquisition
has actually been effected.

"Person" means an individual, a partnership, a corporation, an
------
association, a joint stock company, a limited liability company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.

"Qualified Public Offering" means the sale, in underwritten public
-------------------------
offerings registered under the Securities Act, whether in a single offering or
as a result of several offerings, of shares of the Company's Common Stock having
an aggregate value of at least $30 million.

"Registrable Securities" means, collectively, the CVC Registrable
----------------------
Securities and the Executive Registrable Securities.

"Registration Expenses" means all expenses incident to the Company's
---------------------
performance of or compliance with this Agreement, including without limitation
all registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery expenses,
fees and disbursements of counsel for the Company, fees and expenses of all
independent certified public accountants, fees and expenses of underwriters,
investment bankers or managers (in each case excluding discounts and
commissions) and fees and expenses of other Persons retained by the Company.

"Rule 144" means Rule 144 under the Securities Act (or any similar
--------
rule then in force).

"SEC" means the Securities and Exchange Commission.
---

"Securities Act" means the Securities Act of 1933, as amended.
--------------

-2-
<PAGE>

2. Demand Registrations.
--------------------

(a) Requests for Registration. Subject to Section 2(b) below, at any
-------------------------
time and from time to time, the holders of a majority of the CVC Registrable
Securities may request registration, whether underwritten or otherwise, under
the Securities Act of all or part of their Registrable Securities on Form S-1 or
any similar long-form registration ("Long-Form Registrations") or on Form S-2 or
-----------------------
S-3 or any similar short-form registration ("Short-Form Registrations") if
------------------------
available. In addition, subject to Section 2(g) below, the holders of a
majority of the CVC Registrable Securities may request that the Company file
with the SEC a registration statement under the Securities Act on any applicable
form pursuant to Rule 415 under the Securities Act (a "415 Registration"). Each
----------------
request for a Long-Form Registration or Short-Form Registration shall specify
the approximate number of Registrable Securities requested to be registered and
the anticipated per share price range for such offering. Within ten days after
receipt of any such request for a Long-Form Registration or Short-Form
Registration, the Company will give written notice of such requested
registration to all other holders of Registrable Securities and will include
(subject to the provisions of this Agreement) in such registration, all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the Company's
notice. All registrations requested pursuant to in this Section 2(a) are
referred to herein as "Demand Registrations".
--------------------

(b) Long-Form Registrations. The holders of a majority of the CVC
-----------------------
Registrable Securities will be entitled to request up to three (3) Long-Form
Registrations in which the Company will pay all Registration Expenses. A
registration will not count as the permitted Long-Form Registration until it has
become effective and unless the holders of Registrable Securities are able to
register and sell at least 90% of the Registrable Securities requested to be
included in such registration.

(c) Short-Form Registrations. In addition to the Long-Form
------------------------
Registrations provided pursuant to Section 2(b), (i) the holders of the CVC
Registrable Securities will be entitled to request an unlimited number of
Short-Form Registrations and (ii) the holders of a majority of Executive
Registerable Securities will be entitled to request an unlimited number of
Short-Form Registrations, respectively, in which the Company will pay all
Registration Expenses; provided, that with respect to clause (ii) above, if the
Company has been subject to the requirements of Section 12 or 15(d) of the
Exchange Act and the Company would be eligible to file a Short-Form Registration
but for the Company's failure to file the requisite reports in a timely manner
or any other reason, then the holders of Executive Registrable Securities will
be entitled to request up to three (3) Long-Form Registrations in which the
Company will pay all Registration Expenses. A registration will not count as the
permitted Long-Form Registration until it has become effective and unless the
holders of Registrable Securities are able to register and sell at least 90% of
the Registrable Securities requested to be included in such registration. Demand
Registrations (other than 415 Registrations) will be Short-Form Registrations
whenever

-3-
<PAGE>

the Company is permitted to use any applicable short form. After the Company has
become subject to the reporting requirements of the Exchange Act, the Company
will use its best efforts to make Short-Form Registrations available for the
sale of Registrable Securities.

(d) Priority on Demand Registrations. The Company will not include
--------------------------------
in any Long-Form Registration or Short-Form Registration any securities which
are not Registrable Securities without the prior written consent of the holders
of at least a majority of the Registrable Securities included in such
registration. If a Long-Form Registration or a Short-Form Registration is an
underwritten offering and the managing underwriters advise the Company in
writing that in their opinion the number of Registrable Securities and, if
permitted hereunder, other securities requested to be included in such offering
exceeds the number of Registrable Securities and other securities, if any, which
can be sold therein without adversely affecting the marketability of the
offering, the Company will include in such registration (i) first, the number of
Registrable Securities requested to be included in such registration pro rata,
if necessary, among the holders of Registrable Securities based on the number of
shares of Registrable Securities owned by each such holder and (ii) second, any
other securities of the Company requested to be included in such registration
pro rata, if necessary, on the basis of the number of shares of such other
securities owned by each such holder. Any Persons other than holders of
Registrable Securities who participate in Demand Registrations which are not at
the Company's expense must pay their share of the Registration Expenses as
provided in Section 6 hereof.

(e) Restrictions on Demand Registrations. The Company will not be
------------------------------------
obligated to effect any Demand Registration within six months after the
effective date of a previous Demand Registration.

(f) Selection of Underwriters. In the case of a Demand Registration
-------------------------
for an underwritten offering, the holders of a majority of the Registrable
Securities to be included in such Demand Registration will have the right to
select the investment banker(s) and manager(s) to administer the offering, which
investment banker(s) and manager(s) will be nationally recognized, subject to
the Company's approval which will not be unreasonably withheld.

(g) 415 Registrations.
-----------------

(i) The holders of a majority of the CVC Registrable
Securities will be entitled to request one (1) 415 Registration. Subject to the
availability of required financial information, within 45 days after the Company
receives written notice of a request for a 415 Registration, the Company shall
file with the SEC a registration statement under the Securities Act for the 415
Registration. Within ten days after receipt of any such request for a 415
Registration, the Company will give written notice of such requested
registration to all other holders of Registrable Securities and will include
(subject to the provisions of this Agreement) in such registration, all
Registrable Securities with respect to which the Company has received written
requests for inclusion therein within 20 days after the receipt of the Company's
notice.

-4-
<PAGE>

The Company shall use its best efforts to cause the 415 Registration to be
declared effective under the Securities Act as soon as practical after filing,
and once effective, the Company shall (subject to the provisions of clause (ii)
below) cause such 415 Registration to remain effective for such time period as
is specified in such request, but for no time period longer than the period
ending on the earlier of (i) the third anniversary of the date of filing of the
415 Registration or (ii) the date on which all CVC Registrable Securities have
been sold pursuant to the 415 Registration or (iii) the date as of which there
are no longer any CVC Registrable Securities in existence; provided if the 415
Registration included Executive Registrable Securities, Section 2(g)(ii) and
(iii) shall also apply to such Executive Registrable Securities.

(ii) If the holders of a majority of the CVC Registrable
Securities or the holders of Executive Registrable Securities notify the Company
in writing that they intend to effect the sale of all or substantially all of
the CVC Registrable Securities or Executive Registrable Securities, respectively
held by such holders pursuant to a single integrated offering pursuant to a then
effective registration statement for a 415 Registration (a "Takedown"), the
--------
Company and each holder of Registrable Securities shall not effect any public
sale or distribution of its equity securities, or any securities convertible
into or exchangeable or exercisable for its equity securities, during the 90-day
period beginning on the date such notice of a Takedown is received.

(iii) If in connection with any Takedown the managing
underwriters (selected in accordance with clause (iv) below) advise the Company
that, in its opinion, the inclusion of any other securities other than CVC
Registrable Securities and/or Executive Registrable Securities would adversely
affect the marketability of the offering, then no such securities shall be
permitted to be included. Additionally, if in connection with such an offering,
the number of CVC Registrable Securities and/or Executive Registrable Securities
and other securities (if any) requested to be included in such Takedown exceeds
the number of CVC Registrable Securities and/or Executive Registrable Securities
and other securities which can be sold in such offering without adversely
affecting the marketability of the offering, the company shall include in such
Sale (i) first, the CVC Registrable Securities and/or Executive Registrable
Securities requested to be included in such Takedown, pro rata among the holders
of such Registrable Securities on the basis of the number of CVC Registrable
Securities and/or Executive Registrable Securities owned by each such holder,
and (ii) second, other securities requested to be included in such Takedown to
the extent permitted hereunder.

(iv) The holders of a majority of the CVC Registrable Securities
and/or Executive Registrable Securities shall have the right to retain and
select an investment banker and manager to administer the 415 Registration and
any Takedown pursuant thereto, subject to the Company's approval which will not
be unreasonably withheld.

(v) In addition to the provisions in Section 6 below, all
Registration Expenses incurred in connection with the management of the 415
Registration (whether incurred

-5-
<PAGE>

by the Company or the holders of the CVC Registrable Securities and/or Executive
Registrable Securities) shall be borne by the Company.

(h) Other Registration Rights. Except as provided in this Agreement,
-------------------------
the Company will not grant to any Persons the right to request the Company to
register any equity securities of the Company, or any securities convertible or
exchangeable into or exercisable for such securities, without the prior written
consent of the holders of a majority of the Registrable Securities.

(i) Deferral of Rights. Notwithstanding any provision of this
------------------
Agreement to the contrary, CVC shall have no right to require the registration
of or to sell any CVC Registrable Shares during the period any shares of Series
1 Senior Preferred Stock of the Company is issued and outstanding.

3. Piggyback Registrations.
-----------------------

(a) Right to Piggyback. Whenever the Company proposes to register
------------------
any of its Common Stock under the Securities Act (other than pursuant to a
Demand Registration, and other than pursuant to a registration statement on Form
S-8 or S-4 or any similar form or in connection with a registration the primary
purpose of which is to register debt securities (i.e., in connection with a
----
so-called "equity kicker") and a registration form to be used may be used for
the registration of Registrable Securities (a "Piggyback Registration"), the
----------------------
Company will give prompt written notice to all holders of Registrable Securities
of its intention to effect such a registration and will include in such
registration all Registrable Securities with respect to which the Company has
received written requests for inclusion therein within 20 days after the receipt
of the Company's notice. Notwithstanding the foregoing, in connection only with
the initial registered public offering of the Company's securities which
offering is a primary offering (other than as set forth in Section 5(c) below),
no Registrable Securities shall be included in such registration without the
prior written consent of the holders of a majority of Registrable Securities.

(b) Priority on Primary Registrations. If a Piggyback Registration
---------------------------------
is an underwritten primary registration on behalf of the Company, the Company
will include in such registration all securities requested to be included in
such registration; provided, that if the managing underwriters advise the
Company in writing that in their opinion the number of securities requested to
be included in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering, the
Company will include in such registration (i) first, the securities the Company
proposes to sell, (ii) second, the Registrable Securities requested to be
included in such registration, pro rata among the holders of such Registrable
Securities on the basis of the number of shares of Registrable Securities owned
by each such holder, and (iii) third, other securities, if any, requested to be
included in such registration.

-6-
<PAGE>

(c) Priority on Secondary Registrations. If a Piggyback Registration
-----------------------------------
is an underwritten secondary registration on behalf of holders of the Company's
securities (which registration was consented to pursuant to Section 2(h) above),
and the managing underwriters advise the Company in writing that in their
opinion the number of securities requested to be included in such registration
exceeds the number which can be sold in such offering without adversely
affecting the marketability of the offering, the Company will include in such
registration (i) first, the securities requested to be included therein by the
holders requesting such registration, (ii) second, the Registrable Securities
requested to be included in such registration, pro rata among the holders of
such Registrable Securities on the basis of the number of shares of Registrable
Securities owned by each such holder, and (iii) third, other securities
requested to be included in such registration not covered by clause (i) above.

(d) Selection of Underwriters. If any Piggyback Registration is an
-------------------------
underwritten offering, the investment banker(s) and manager(s) for the offering
will be selected by the Company.

(e) Other Registrations. If the Company has previously filed a
-------------------
registration statement with respect to Registrable Securities pursuant to this
Section 3, and if such previous registration has not been withdrawn or
abandoned, the Company will not file or cause to be effected any other
registration of any of its equity securities or securities convertible or
exchangeable into or exercisable for its equity securities under the Securities
Act (except on Forms S-4 or S-8 or any successor forms), whether on its own
behalf or at the request of any holder or holders of such securities, until a
period of at least six months has elapsed from the effective date of such
previous registration.

4. Holdback Agreements.
-------------------

(a) Each holder of Registrable Securities hereby agrees not to effect
any public sale or distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or exchangeable or
exercisable for such securities, during the seven days prior to and the 180-day
period beginning on the effective date of any Demand Registration (other than a
415 Registration) or Piggyback Registration for a public offering to be
underwritten on a firm commitment basis in which Registrable Securities are
included (except as part of such underwritten registration), unless the
underwriters managing the registered public offering otherwise agree.

(b) The Company agrees (i) not to effect any public sale or
distribution of its equity securities, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days prior to
and during the 180-day period beginning on the effective date of any
underwritten Demand Registration (other than a 415 Registration) or Piggyback
Registration (except as part of such underwritten registration or pursuant to
registrations on Forms S-4 or S-8 or any successor forms), unless the
underwriters managing

-7-
<PAGE>

the registered public offering otherwise agree, and (ii) to cause each holder of
Registrable Securities (other than the Other Purchaser) and each other holder of
at least 5% (on a fully diluted basis) of Common Stock, or any securities
convertible into or exchangeable or exercisable for Common Stock, purchased from
the Company at any time after the date of this Agreement (other than in a
registered public offering) to agree not to effect any public sale or
distribution (including sales pursuant to Rule 144) of any such securities
during such period (except as part of such underwritten registration, if
otherwise permitted), unless the underwriters managing the registered public
offering otherwise agree.

5. Registration Procedures. Whenever the holders of Registrable
-----------------------
Securities have requested that any Registrable Securities be registered pursuant
to this Agreement, the Company will use its best efforts to effect the
registration and the sale of such Registrable Securities in accordance with the
intended method of disposition thereof, and pursuant thereto the Company will as
expeditiously as possible:

(a) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective (provided that before filing a
registration statement or prospectus or any amendments or supplements thereto,
the Company will furnish to the counsel selected by the holders of a majority of
the Registrable Securities covered by such registration statement copies of all
such documents proposed to be filed);

(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective for a period of
not less than six months and comply with the provisions of the Securities Act
with respect to the disposition of all securities covered by such registration
statement during such period in accordance with the intended methods of
disposition by the sellers thereof set forth in such registration statement;

(c) if requested by the holders of a majority of the CVC Registrable
Securities in connection with any Demand Registration requested by such holders,
use its commercially reasonable efforts to cause to be included in such
registration Common Stock having an aggregate value (based on the midpoint of
the proposed offering price range specified in the registration statement used
to offer such securities) of up to $30 million, to be offered in a primary
offering of the Company's securities contemporaneously with such offering of
Registrable Securities;

(d) furnish to each seller of Registrable Securities such number of
copies of such registration statement, each amendment and supplement thereto,
the prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as such seller may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such seller;

-8-
<PAGE>

(e) use its best efforts to register or qualify such Registrable
Securities under such other securities or blue sky laws of such jurisdictions as
any seller reasonably requests and do any and all other acts and things which
may be reasonably necessary or advisable to enable such seller to consummate the
disposition in such jurisdictions of the Registrable Securities owned by such
seller (provided that the Company will not be required to (i) qualify generally
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this subsection, (ii) subject itself to taxation in any such
jurisdiction or (iii) consent to general service of process (i.e., service of
process which is not limited solely to securities law violations) in any such
jurisdiction);

(f) notify each seller of such Registrable Securities, at any time
when a prospectus relating thereto is required to be delivered under the
Securities Act, of the happening of any event as a result of which the
prospectus included in such registration statement contains an untrue statement
of a material fact or omits any fact necessary to make the statements therein
not misleading, and, at the request of any such seller, the Company will
promptly prepare a supplement or amendment to such prospectus so that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus will not contain an untrue statement of a material fact or omit to
state any fact necessary to make the statements therein not misleading;

(g) cause all such Registrable Securities to be listed on each
securities exchange on which similar securities issued by the Company are then
listed and, if not so listed, to be listed on the Nasdaq National Market System
("Nasdaq Market") and, if listed on the Nasdaq Market, use its best efforts to
-------------
secure designation of all such Registrable Securities covered by such
registration statement as a Nasdaq "National Market System security" within the
meaning of Rule 11Aa2-1 of the SEC or, failing that, to secure Nasdaq Market
authorization for such Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register as such with respect to such Registrable Securities with the National
Association of Securities Dealers;

(h) provide a transfer agent and registrar for all such Registrable
Securities not later than the effective date of such registration statement;

(i) enter into such customary agreements (including underwriting
agreements in customary form) and take all such other actions as the holders of
a majority of the Registrable Securities being sold or the underwriters, if any,
reasonably request in order to expedite or facilitate the disposition of such
Registrable Securities (including, without limitation, effecting a stock split
or a combination of shares);

(j) make available for inspection by any seller of Registrable
Securities, any underwriter participating in any disposition pursuant to such
registration statement and any attorney, accountant or other agent retained by
any such seller or underwriter, all financial and other records, pertinent
corporate documents and properties of the Company, and cause the

-9-
<PAGE>

Company's officers, directors, employees and independent accountants to supply
all information reasonably requested by any such seller, underwriter, attorney,
accountant or agent in connection with such registration statement;

(k) otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make available to its security holders, as
soon as reasonably practicable, an earning statement covering the period of at
least twelve months beginning with the first day of the Company's first full
calendar quarter after the effective date of the registration statement, which
earning statement shall satisfy the provisions of Section 11(a) of the
Securities Act and Rule 158 promulgated thereunder;

(l) permit any holder of Registrable Securities which holder, in its
sole and exclusive judgment, might be deemed to be an underwriter or a
controlling person of the Company, to participate in the preparation of such
registration or comparable statement and to require the insertion therein of
material, furnished to the Company in writing, which in the reasonable judgment
of such holder and its counsel should be included;

(m) in the event of the issuance of any stop order suspending the
effectiveness of a registration statement, or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any common stock included in such registration statement for sale in any
jurisdiction, the Company will use its reasonable best efforts promptly to
obtain the withdrawal of such order;

(n) use its best efforts to cause such Registrable Securities covered
by such registration statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the sellers
thereof to consummate the disposition of such Registrable Securities; and

(o) obtain a "cold comfort" letter from the Company's independent
public accountants in customary form and covering such matters of the type
customarily covered by "cold comfort" letters as the holders of a majority of
the Registrable Securities being sold reasonably request.

If any such registration or comparable statement refers to any holder by name or
otherwise as the holder of any securities of the Company and if, in its sole and
exclusive judgment, such holder is or might be deemed to be a controlling person
of the Company, such holder shall have the right to require (i) the insertion
therein of language, in form and substance satisfactory to such holder and
presented to the Company in writing, to the effect that the holding by such
holder of such securities is not to be construed as a recommendation by such
holder of the investment quality of the Company's securities covered thereby and
that such holding does not imply that such holder will assist in meeting any
future financial requirements of the Company, or (ii) in the event that such
reference to such holder by name or otherwise is not required by

-10-
<PAGE>

the Securities Act or any similar Federal statute then in force, the deletion of
the reference to such holder; provided that with respect to this clause (ii)
such holder shall furnish to the Company an opinion of counsel to such effect,
which opinion and counsel shall be reasonably satisfactory to the Company.

6. Registration Expenses.
---------------------

(a) All expenses incident to the Company's performance of or
compliance with this Agreement, including, without limitation, all Registration
Expenses, will be borne by the Company.

(b) In connection with each Demand Registration, each Piggyback
Registration and each 415 Registration, the Company will reimburse the holders
of Registrable Securities covered by such registration for the reasonable fees
and disbursements of one counsel chosen by the holders of a majority of the
Registrable Securities initially requesting such registration.

7. Indemnification.
---------------

(a) The Company agrees to indemnify, to the extent permitted by law,
each holder of Registrable Securities, its officers and directors and each
Person who controls such holder (within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses arising out of or
based upon any untrue or alleged untrue statement of material fact contained in
any registration statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged omission of a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and shall reimburse such holder, director, officer or
controlling person for any legal or other expenses reasonably incurred by such
holder, director, officer or controlling person in connection with the
investigation or defense of such loss, claim, damage, liability or expense,
except insofar as the same are caused by or contained in any information
furnished in writing to the Company by such holder expressly for use therein or
by such holder's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company has
furnished such holder with a sufficient number of copies of the same. In
connection with an underwritten offering, the Company will indemnify such
underwriters, their officers and directors and each Person who controls such
underwriters (within the meaning of the Securities Act) to the same extent as
provided above with respect to the indemnification of the holders of Registrable
Securities.

(b) In connection with any registration statement in which a holder
of Registrable Securities is participating, each such holder will furnish to the
Company in writing such information and affidavits relating to such holder as
the Company reasonably requests for use in connection with any such registration
statement or prospectus and, to the extent permitted by law, will indemnify the
Company, its directors and officers and each Person who controls

-11-
<PAGE>

the Company (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue or alleged
untrue statement of material fact contained in the registration statement,
prospectus or preliminary prospectus or any amendment thereof or supplement
thereto or any omission or alleged omission of a material fact required to be
stated therein or necessary to make the statements therein not misleading, but
only to the extent that such untrue statement or omission is contained in any
information or affidavit so furnished in writing by such holder; provided, that
the obligation to indemnify will be individual to each holder and will be
limited to the net amount of proceeds received by such holder from the sale of
Registrable Securities pursuant to such registration statement.

(c) Any Person entitled to indemnification hereunder will (i) give
prompt written notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. If such defense is assumed, the
indemnifying party will not be subject to any liability for any settlement made
by the indemnified party without its consent (but such consent will not be
unreasonably withheld). An indemnifying party who is not entitled to, or elects
not to, assume the defense of a claim will not be obligated to pay the fees and
expenses of more than one counsel for all parties indemnified by such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with respect to such
claim.

(d) The indemnification provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the indemnified party or any officer, director or controlling Person of such
indemnified party and will survive the transfer of securities. The Company also
agrees to make such provisions, as are reasonably requested by any indemnified
party, for contribution to such party in the event the Company's indemnification
is unavailable for any reason.

8. Participation in Underwritten Registrations. No Person may
-------------------------------------------
participate in any registration hereunder which is underwritten unless such
Person (a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Person or Persons entitled hereunder
to approve such arrangements and (b) completes and executes all customary
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements; provided, that no holder of Registrable Securities included in any
underwritten registration shall be required to make any representations or
warranties to the Company or the underwriters other than representations and
warranties regarding such holder and such holder's intended method of
distribution.

-12-
<PAGE>

9. Rule 144 Reporting. With a view to making available to the
------------------
holders of Registrable Securities the benefits of certain rules and regulations
of the SEC which may permit the sale of the Registrable Securities to the public
without registration, the Company agrees to use its best efforts to:

(a) make and keep current public information available, within the
meaning of Rule 144 or any similar or analogous rule promulgated under the
Securities Act, at all times after it has become subject to the reporting
requirements of the Exchange Act;

(b) file with the SEC, in a timely manner, all reports and other
documents required of the Company under the Securities Act and Exchange Act
(after it has become subject to such reporting requirements); and

(c) so long as any party hereto owns any Registrable Securities,
furnish to such Person forthwith upon request, a written statement by the
Company as to its compliance with the reporting requirements of said Rule 144
(at any time commencing 90 days after the effective date of the first
registration filed by the Company for an offering of its securities to the
general public), the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements); a copy of the most recent
annual or quarterly report of the Company; and such other reports and documents
as such Person may reasonably request in availing itself of any rule or
regulation of the SEC allowing it to sell any such securities without
registration.

10. 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
facsimile to the recipient 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:
--------------

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attention: Mr. Alan Hodes
Telecopy No.: (540) 622-2008

-13-
<PAGE>

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

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

-14-
<PAGE>

To either of the Executives:
---------------------------

Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, VA 22630
Attention: Alan Hodes and Michael Greenberg
Telecopy No.: (540) 622-2008

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.

11. Miscellaneous.
-------------

(a) No Inconsistent Agreements. The Company will not enter into any
--------------------------
agreement which is inconsistent with or violates the rights granted to the
holders of Registrable Securities in this Agreement.

(b) Remedies. Any Person having rights under any provision of this
--------
Agreement will be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. 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 other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.

(c) Amendments and Waivers. Except as otherwise provided herein, the
----------------------
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and holders of 75% of the Registrable Securities;
provided, that no amendment or waiver which adversely affects the holders of the
Executive Registrable Securities vis-a-vis the other holders of Registrable
Securities shall be effective without the prior written consent of the holders
of 75% of the Executive Registrable Securities. For avoidance of doubt, the
addition of a party to this Agreement shall not, in and of itself, be considered
an amendment which

-15-
<PAGE>

adversely effects the holders of the Executive Registrable Securities vis-a-vis
the other holders of Registrable Securities.

(d) Successors and Assigns. All covenants and agreements in this
----------------------
Agreement by or on behalf of any of the parties hereto will bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.

(e) 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 prohibited
by or invalid under applicable law, such provision will be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.

(f) Counterparts. This Agreement may be executed simultaneously in
------------
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.

(g) Descriptive Headings. The descriptive headings of this Agreement
--------------------
are inserted for convenience only and do not constitute a part of this
Agreement.

(H) GOVERNING LAW. THE CORPORATE LAWS OF THE STATE OF VIRGINIA WILL
-------------
GOVERN ALL QUESTIONS CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS
STOCKHOLDERS. ALL OTHER QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND
INTERPRETATION OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE DOMESTIC LAWS OF THE STATE OF NEW YORK, 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 NEW YORK.

* * * * *

-16-
<PAGE>

IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement as of the date first above written.

PEN-TAB INDUSTRIES, INC.

By:_____________________________________
Name:
Title:

CITICORP VENTURE CAPITAL, LTD.

By:_____________________________________
Name:
Title:

________________________________________
ALAN HODES

________________________________________
MICHAEL GREENBERG

<PAGE>

EMPLOYMENT AGREEMENT
--------------------

WHEREAS, the Company, Pen-Tab and the Executive desire to enter into an
agreement regarding the employment of the Executive as President and Chief
Executive Officer of the Company and Pen-Tab; and

NOW, THEREFORE, the parties hereto agree as follows:

1. DEFINITIONS. As used herein, the following terms shall have the
-----------
following meanings.

"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.

"CVC" means Citicorp Venture Capital, Ltd., a New York corporation.
---

"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.

2
<PAGE>

"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.
----------

(b) Position and Duties.
-------------------

3
<PAGE>

(i) If the Employment Period is terminated on or before
February 4, 2002:

4
<PAGE>

consecutive monthly installments) (1) the stated Base Salary
through the period ending on February 4, 2002, and (2) the
amount of the most recent bonus payment earned by the
Executive prior to the year in which Executive's employment
terminates, and (3) all vested benefits to which Executive
is 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.

5
<PAGE>

obligation to the Executive pursuant to this Section 2(d)
except as provided by law.

(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

6
<PAGE>

7
<PAGE>

5. RIGHTS OF FORMER EMPLOYERS AND OTHERS.
-------------------------------------

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 third 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 thirty-six (36) 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

8
<PAGE>

9
<PAGE>

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

10
<PAGE>

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

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.
167 Kelley Drive
Front Royal, VA 22630
Attention: Alan Hodes
Telecopy No.: (540) 622-2008

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.
-------------

11
<PAGE>

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.

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:

ALAN HODES

_____________________________

13
<PAGE>

ACKNOWLEDGMENT

State of New York ) ss.:
County of New York )

__________________________________
Notary Public
My commission expires:

State of New York ) ss.:
County of New York )

__________________________________
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
-----------------

A-1

<PAGE>

================================================================================

PEN-TAB HOLDINGS, INC.

1997 STOCK OPTION PLAN

================================================================================
<PAGE>

PEN-TAB HOLDINGS, INC.
1997 STOCK OPTION PLAN

ARTICLE I

PURPOSE OF PLAN

This 1997 Stock Option Plan (the "Plan") of Pen-Tab Holdings, Inc. (the
----
"Company"), adopted by the Board of Directors of the Company effective February
-------
4, 1997, is intended to advance the Company's best interests by providing
additional incentives to members of the senior management of the Company or any
Subsidiary. As such, these persons will be allowed hereunder to acquire an
ownership interest in the Company. The availability and offering of stock
options under the Plan also increases the Company's and its Subsidiaries'
ability to attract and retain individuals of exceptional managerial talent upon
whom, in large measure, the sustained progress, growth, and profitability of the
Company depends. The Plan is a compensatory benefit plan within the meaning of
Rule 701 under the Securities Act of 1933, as amended (the "Securities Act")
--------------
and, unless and until the Common Stock is publicly traded, the issuance of
options and Common Stock pursuant to the Plan is intended to qualify for the
exemption from registration under the Securities Act provided by Rule 701.

ARTICLE II

DEFINITIONS

For purposes of the Plan the following terms have the indicated meanings:

"Board" means the Board of Directors of the Company.
-----

"Cause" means (i) a breach of the Participant's covenants under such
-----
Participant's Employment Agreement with the Company (if any) or any other
agreements with the Company or its Subsidiaries, (ii) the commission by the
Participant 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 Participant's repeated failure to comply with the
written directives of the Board.

"Class A Common" means the Company's Class A common stock, $.01 par value
--------------
per share, or if any of such Class A Common is hereafter converted into or
exchanged for different stock or securities of the Company, such other stock or
securities, all as adjusted for any stock split, stock dividend, share
combination, share exchange, conversion, recapitalization, merger, consolidation
or reorganization.

"Class B Common" means the Company's Class B common stock, $.01 par value
--------------
per share, or if any of such Class B Common is hereafter converted into or
exchanged for different stock
<PAGE>

or securities of the Company, such other stock or securities, all as adjusted
for any stock split, stock dividend, share combination, share exchange,
conversion, recapitalization, merger, consolidation or other reorganization.

"Code" means the Internal Revenue Code of 1986, as amended, and any
----
successor statute.

"Committee" means the Compensation Committee or such other committee of
---------
the Board as the Board may designate to administer the Plan or, if for any
reason the Board has not designated such a committee, the Board. The Committee,
if other than the Board, shall be composed of two or more directors as appointed
from time to time by the Board.

"Common Stock" means the Class A Common and Class B Common, or if the
------------
outstanding Common Stock is hereafter changed into or exchanged for different
stock or securities of the Company, such other stock or securities.

"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 Participant 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 90 consecutive days or for shorter periods
aggregating at least 120 days (whether or not consecutive) during any twelve-
month period, as determined in the reasonable judgment of the Board.

"Expiration Date" means, with respect to each Participant, the close of
---------------
business on the day specified in the Participant's Option Agreement as the last
day a Participant can exercise options granted pursuant to such Option
Agreement, subject to earlier expiration as provided in Section 5.7 hereof.

"Fair Market Value" per share on any given date means the average of the
-----------------
closing prices of the sales of the Class A Common on all securities exchanges on
which such stock may at the time be listed, or, if there have been no sales on
any such exchange on any day, the average of the highest bid and lowest asked
prices on all such exchanges at the end of such day, or, if on any day such
stock is not so listed, the average of the representative bid and asked prices
quoted on the Nasdaq National Market System ("Nasdaq") as of 4:00 P.M., Eastern
------
Standard Time, or, if on any day such stock is not quoted on Nasdaq, the average
of the highest bid and lowest asked prices on such day in the domestic over-the-
counter market as reported by the National Quotation Bureau, Incorporated. If at
any time the Class A Common is not listed or quoted, the Fair Market Value per
share of the Class A Common shall be the fair market value as determined by the
Committee or the Board in its reasonable business judgment.

"Form" means those forms of the Internal Revenue Service used by
----
taxpayers to file federal income tax returns.

"Independent Third Party" means any person who, immediately prior to the
-----------------------
contemplated transaction, does not own in the aggregate in excess of 5% of the
Common Stock, (a "5% Owner"),
--------

-2-
<PAGE>

who is not controlling, controlled by or under common control with any such 5%
Owner and who is not the spouse or descendent (by birth or adoption) of any such
5% Owner and/or such other persons. Notwithstanding the foregoing, in no event
shall a Participant be deemed an Independent Third Party.

"Measurement Date" means the date on which any taxable income resulting
----------------
from the exercise of an Option is determined under applicable federal income tax
law.

"Option Agreement" has the meaning ascribed thereto in Section 6.1.
----------------

"Option Grant" means the awarding of Options to Participants under
------------
Article 5.1(a).

"Option Shares" means (i) all shares of Class A Common issued upon the
-------------
exercise of an Option, and (ii) all shares of Class A Common issued with respect
to the Class A Common referred to in clause (i) above by way of stock dividend,
stock split, share combination, share exchange or in connection with any
conversion, merger, consolidation, recapitalization, or other reorganization
affecting the Class A Common. Unless provided otherwise herein or in the terms
of Participant's Option Agreement, Option Shares will continue to be Option
Shares in the hands of any holder other than the Participant (except for the
Company), and each such transferee thereof will succeed to the rights and
obligations of a holder of Option Shares hereunder.

"Options" has the meaning set forth in Article IV.
-------

"Participant" means any executive or other key employee of the Company or
-----------
any Subsidiary who has been selected to participate in the Plan by the Committee
or the Board.

"Permitted Transferee" means those persons to whom the Participant is
--------------------
authorized (1) pursuant to Section 5.9, to transfer Option Shares, or (2)
pursuant to Section 6.3, to transfer Options.

"Repurchase Notice" has the meaning ascribed thereto in Section 5.8(b)
-----------------
hereof.

"Repurchase Option" has the meaning ascribed thereto in Section 5.8(a)
-----------------
hereof.

"Sale Notice" has the meaning ascribed thereto in Section 5.9(a) hereof.
-----------

"Sale of the Company" means the sale of the Company to an Independent
-------------------
Third Party or group of Independent Third Parties pursuant to which such party
or parties acquire (a) substantially all of the capital stock of the Company
(whether by merger, consolidation, recapitalization, sale or transfer) or (b)
all or substantially all of the Company's assets determined on a consolidated
basis.

"Securities Act" has the meaning ascribed thereto in Article 1 hereof.
--------------

-3-
<PAGE>

"Shareholders Agreement" means the Shareholders Agreement, dated as of
----------------------
February 4, 1997, by and among the Company, CVC, and certain other parties, as
may be amended.

"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 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 Date" means the date upon which a Participant's employment
----------------
with the Company terminated including by reason of death or Disability.

ARTICLE III

ADMINISTRATION

The Plan shall be administered by the Committee. Subject to the
limitations of the Plan, the Committee shall have the sole and complete
authority to: (i) select Participants, (ii) grant Options to Participants in
such forms and amounts as it shall determine, (iii) impose such limitations,
restrictions, and conditions upon such Options as it shall deem appropriate,
(iv) interpret the Plan and adopt, amend, and rescind administrative guidelines
and other rules and regulations relating to the Plan, (v) correct any defect or
omission or reconcile any inconsistency in the Plan or in any Options granted
under the Plan, and (vi) make all other determinations and take all other
actions necessary or advisable for the implementation and administration of the
Plan. The Committee's determinations on matters within its authority shall be
conclusive and binding upon the Participants, the Company, and all other
persons. All expenses associated with the administration of the Plan shall be
borne by the Company. The Committee may, as approved by the Board and to the
extent permissible by law, delegate any of its authority hereunder to such
persons or entities as it deems appropriate.

-4-
<PAGE>

ARTICLE IV

LIMITATION ON AGGREGATE SHARES

The number of shares of Class A Common with respect to which stock
purchase options ("Options") may be granted under the Plan shall not exceed, in
-------
the aggregate, 527,777 shares, subject to adjustment in accordance with Section
6.4. To the extent that any Options expire unexercised or are canceled,
terminated, or forfeited in any manner without the issuance of Class A Common
thereunder, or if any Options are exercised and the shares of Common Stock
issued thereunder are repurchased by the Company, such shares shall again be
made available under the Plan. The shares of Class A Common available under the
Plan may consist of authorized and unissued shares, treasury shares, or a
combination thereof, as the Committee shall determine.

ARTICLE V

AWARDS

5.1 GRANT OF OPTIONS.

(a) GRANT. The Committee may grant Options to Participants from time to
time in accordance with this Article V. Options granted under the Plan shall be
nonqualified stock options and are not intended to be "incentive stock options"
---
within the meaning of Code (S)422 or any successor provision.

(b) EXERCISE PRICE. The exercise price per share of Class A Common under
each Option shall be determined by the Committee at the time of grant.

(c) EXERCISABILITY. Subject to Section 5.6, Options shall be exercisable
at such time or times as the Committee shall determine.

(d) OPTION TERM. The Committee shall determine the term of each Option,
which term shall not exceed ten years from the date of grant of the Option.

5.2 EXERCISE PROCEDURE. Options shall be exercisable by written notice to
the Company's Secretary (which notice shall constitute notice to the Company)
accompanied by payment in full of the applicable exercise price. Payment of
such exercise price may be made by check, bank draft, money order or wire
transfer of immediately available funds.

5.3 EXCHANGE OF PREVIOUSLY ACQUIRED STOCK. The Committee, in its discretion
and subject to such conditions as the Committee may determine, may permit the
exercise price for the shares being acquired upon the exercise of an Option to
be paid, in full or in part, by the delivery to the Company of Class A Common.
Any Class A Common so delivered shall be treated as the payment of cash equal to
the Fair Market Value of such Class A Common.

-5-
<PAGE>

5.4 WITHHOLDING TAX REQUIREMENTS.

(a) AMOUNT OF WITHHOLDING. It shall be a condition to the exercise of
any Option that the Participant exercising the Option make appropriate payment
or other provision acceptable to the Company with respect to any withholding tax
requirement arising from such exercise. The amount of withholding tax required,
if any, with respect to any Option exercise (the "Withholding Amount") shall be
------------------
determined by the Treasurer or other appropriate officer of the Company, and the
Participant shall furnish such information and make such representations as such
officer requires to make such determination.

(b) WITHHOLDING PROCEDURE. If the Company determines that withholding
tax is required with respect to any Option exercise, the Company shall notify
the Participant of the Withholding Amount, and the Participant shall pay to the
Company an amount not less than the Withholding Amount. In lieu of making such
payment, the Participant may pay the Withholding Amount by either (i) delivering
to the Company a number of shares of Class A Common having an aggregate Fair
Market Value as of the Measurement Date not less than the Withholding Amount, or
(ii) directing the Company to withhold and not deliver or issue to the
Participant a number of shares of Class A Common, otherwise issuable upon the
exercise of the Option, having an aggregate Fair Market Value as of the
Measurement Date not less than the Withholding Amount. In addition, if the
Committee approves, a Participant may elect pursuant to the prior sentence to
deliver or direct the withholding of shares of Class A Common having an
aggregate Fair Market Value in excess of the minimum Withholding Amount but not
in excess of the Participant's applicable highest marginal combined federal
income and state income tax rate, as estimated in good faith by such
Participant. Any fractional share interests resulting from the delivery or
withholding of shares of Class A Common to meet withholding tax requirements
shall be settled in cash. All amounts paid to or withheld by the Company and
the value of all shares of Class A Common delivered to or withheld by the
Company pursuant to this Section 5.4 shall be deposited in accordance with
applicable law by the Company as withholding tax for the Participant's account.
If the Treasurer or other appropriate officer of the Company determines that no
withholding tax is required with respect to the exercise of any Option, but it
is determined subsequently that the exercise resulted in taxable income as to
which withholding is required (as a result of a disposition of shares or
otherwise), the Participant shall promptly, upon being notified of the
withholding requirement, pay to the Company (by means acceptable to the Company)
the amount required to be withheld.

5.5 NOTIFICATION OF INQUIRIES AND AGREEMENTS. Each Participant and each
Permitted Transferee shall notify the Company in writing within 10 days after
the date such Participant or Permitted Transferee (i) first obtains knowledge of
any Internal Revenue Service inquiry, audit, assertion, determination,
investigation, or question relating in any manner to the value of Options
granted hereunder; (ii) includes or agrees (including, without limitation, in
any settlement, closing, or other similar agreement) to include in gross income
with respect to any Option granted under this Plan (A) any amount in excess of
the amount reported on Form 1099 or Form W-2 to such Participant by the Company,
or (B) if the Participant received no such Form, any amount; and (iii) sells,
disposes, or otherwise transfers Option Shares acquired pursuant to this Plan.
Upon request, a Participant or Permitted Transferee shall provide to the Company
any information or document relating to any event described in the preceding
sentence which the Company (in its sole discretion)

-6-
<PAGE>

requires in order to calculate and substantiate any change in the Company's tax
liability as a result of such event.

5.6 CONDITIONS AND LIMITATIONS ON EXERCISE.

(a) TIMING OF EXERCISE. At the discretion of the Committee at the time
of grant, Options may only be exercised, in one or more installments, to the
extent such Options have become vested. In each case as the Committee shall
decide at the time Options are granted, Options shall vest upon (i) the
fulfillment of certain conditions, and (ii) the passage of specified periods of
time.

(b) VESTING OF OPTION. The Option shall be subject to such vesting
provisions as the Committee shall set forth at the time that the Options are
granted under the Option Agreement. In the event of a Sale of the Company, the
Committee may provide, in its discretion, that the Options held by Participants
who are then employed by the Company shall become immediately vested; provided
that such Participants have been continuously employed by the Company from the
date of the Option grant to the date of the Sale of the Company, and that such
Options shall terminate if not exercised as of the date of the Sale of the
Company.

5.7 EXPIRATION OF OPTIONS.

(a) NORMAL EXPIRATION. In no event shall any part of any Option be
exercisable after the Expiration Date.

(b) EARLY EXPIRATION UPON TERMINATION OF EMPLOYMENT. Any part of any
Option that was not vested and exercisable on a Participant's Termination Date
shall expire and be forfeited on such date, and any part of any Option that was
vested and exercisable on the Termination Date shall also expire and be
forfeited; provided, however, that if a Participant (i) dies or becomes subject
to any Disability, the part of a Participant's Options that are vested and
exercisable shall expire 90 days from the date of death or Disability, but in no
event after the Expiration Date, (ii) retires (with the approval of the
Committee), the part of Participant's Options that are vested and exercisable
shall expire 60 days from the date of retirement, or (iii) is discharged other
than for Cause, the part of Participant's Options that are vested and
exercisable shall expire 30 days from the date of discharge, but in no event
after the Expiration Date. In the event of the death of a Participant, Options
that are vested as of the date of death may be exercised by only the executor or
administrator of the Participant's estate or the person or persons to whom the
Participant's rights under the Options pass by will or by the laws of descent
and distribution.

5.8 RIGHT TO REPURCHASE OPTION SHARES UPON TERMINATION OF EMPLOYMENT.

(a) REPURCHASE RIGHT. In the event a Participant's employment with the
Company is terminated for any reason (including death or Disability), the Option
Shares (whether held by such Participant or one or more Permitted Transferees
and including any Option Shares acquired subsequent to such termination of
employment) will be subject to repurchase by the Company, CVC and Hodes pursuant
to the terms and conditions set forth in this Section 5.8 (the "Repurchase
----------
Option") at a price per share determined as of the Termination Date equal to the
- ------
Fair Market Value thereof. Notwithstanding the foregoing, if the Participant's
employment was terminated for Cause

-7-
<PAGE>

or by reason of the Executive's voluntary resignation, then the purchase price
for each Option Share will be the lower of (x) Fair Market Value as of the
Termination Date and (y) the price paid by the Participant for such Option
Shares.

(b) REPURCHASE ELECTION. (i) The Company may elect to purchase all or
any portion of the Option Shares by delivery of written notice (the "Company
-------
Repurchase Notice") to the holder or holders of the Option Shares, a copy of
- -----------------
which shall be delivered to CVC and Alan Hodes, within 120 days after the
Termination Date (or within 270 days after the Termination Date if such
termination was caused by death or Disability). The Company Repurchase Notice
will set forth the number of Option Shares to be acquired from such holder, the
aggregate consideration to be paid for such shares, and the time and place for
the closing of the transaction.

(ii) If for any reason the Company does not elect to purchase all of the
Option Shares pursuant to such Repurchase Option, CVC and Alan Hodes shall be
entitled to exercise the Repurchase Option for the Option Shares the Company has
not elected to purchase (the "Available Shares"). As soon as practicable after
----------------
the Company has determined that there will be Available Shares, but in any event
within 120 days after the Termination Date (or within 270 days after the
Termination Date if such termination was caused by death or Disability), the
Company shall give written notice (the "Option Notice") to CVC and Alan Hodes
-------------
setting forth the number of Available Shares. CVC and Alan Hodes may elect to
purchase all or a portion of the Available Shares by giving written notice to
the holder or holders of the Available Shares within 45 days after the Option
Notice has been given by the Company (each a "Shareholder Repurchase Notice").
-----------------------------
In the event CVC and Alan Hodes elect to purchase more shares than the Available
Shares, each of CVC and Alan Hodes shall be entitled to purchase the Available
Shares pro rata based on their ownership of Common Stock.

(c) CLOSING OF REPURCHASE. The closing of the repurchase transaction
will take place on the date designated by the Company in the Company Repurchase
Notice or by CVC and/or Alan Hodes in the Shareholder Repurchase Notice(s),
which date shall not be more than 30 days nor less than 10 days after the
delivery of such notice. The applicable purchasers will pay for the Option
Shares to be purchased pursuant to the Repurchase Option by delivering to such
Participant or Permitted Transferees a check in the amount of the aggregate sale
price of the Option Shares to be repurchased. The Participant and each other
seller will deliver the certificates representing the Option Shares to be sold,
duly endorsed in form, for transfer to the applicable purchaser or its designee,
and the applicable purchaser will be entitled to receive customary
representations and warranties from the Participant or Permitted Transferee
regarding title to the Option Shares.

5.9 RESTRICTIONS ON OPTION SHARES. The Option Shares shall be subject to the
terms and conditions of the Shareholders Agreement and shall be deemed
"Shareholder Shares" for all purposes thereof.

-8-
<PAGE>

ARTICLE VI

GENERAL PROVISIONS

6.1 WRITTEN AGREEMENT. The terms and conditions of each Option granted
hereunder shall be embodied in a written agreement (the "Option Agreement") that
----------------
shall be signed by the Participant to whom the Option is granted and be subject
to the terms and conditions set forth herein.

6.2 LISTING, REGISTRATION, AND LEGAL COMPLIANCE. If at any time the
Committee, in its discretion, determines that the listing, registration, or
qualification of the shares subject to Options upon any securities exchange or
under any state or federal securities or other law or regulation, or the consent
or approval of any governmental regulatory body, is necessary or desirable as a
condition to or in connection with the granting of Options or the purchase or
issuance of shares thereunder, no Options may be granted or exercised, in whole
or in part, unless such listing, registration, qualification, consent, or
approval shall have been effected or obtained free of any conditions not
acceptable to the Committee. The holders of such Options will supply the
Company with such certificates, representations, and information as the Company
shall request and shall otherwise cooperate with the Company in obtaining such
listing, registration, qualification, consent, or approval. In the case of
officers and other persons subject to Section 16(b) of the Securities Exchange
Act of 1934, as amended, the Committee may impose, at any time, any limitations
upon the exercise of Options that, in the Committee's discretion, are necessary
or desirable in order to comply with such Section 16(b) and the rules and
regulations thereunder. If the Company, as part of an offering of securities or
otherwise, finds it desirable because of federal or state regulatory
requirements to reduce the period during which any Options may be exercised, the
Committee may, in its discretion and without the Participant's consent, so
reduce such period on not less than 15 days' written notice to the holders
thereof.

6.3 OPTIONS NOT TRANSFERRABLE. Options may not be transferred other than by
will or by the laws of descent and distribution and, during the lifetime of the
Participant to whom they were granted, may be exercised only by such Participant
(or, if such Participant is incapacitated, by such Participant's legal guardian
or legal representative).

6.4 ADJUSTMENTS. In the event of a reorganization, recapitalization, stock
dividend, stock split, or such other combination or other change in the shares
of Common Stock, the Board or the Committee may, in order to prevent the
dilution or enlargement of rights under the Plan or outstanding Options, and as
such Board or Committee determines to be appropriate and equitable, adjust (1)
the number and type of shares as to which options may be granted under the Plan,
(2) the number and type of shares covered by outstanding Options, (3) the
exercise prices specified therein, and (4) other provisions of this Plan
specifying a number of shares.

6.5 RIGHTS OF PARTICIPANTS. Nothing in the Plan shall interfere with or
limit in any way the right of the Company or any Subsidiary to terminate any
Participant's employment at any time (with or without cause), or to confer upon
any Participant any right to continue in the employ of the Company or any
Subsidiary for any period of time, or to continue to receive such Participant's
current (or other) rate of compensation. No employee shall have a right to be
selected as a Participant or, having been so selected, to be selected again as
such.

-9-
<PAGE>

6.6 AMENDMENT, SUSPENSION, AND TERMINATION OF PLAN. The Board or the
Committee may suspend or terminate the Plan, or any portion thereof, at any time
and may amend it from time to time in such respects as the Board or the
Committee may deem advisable; provided, however, that no such amendment shall be
made without shareholder approval, to the extent such approval is required by
law, agreement, or the rules of any exchange upon which the Common Stock is
listed, and no such amendment, suspension, or termination shall impair the
rights of Participants under outstanding Options without the consent of the
Participants affected thereby, except as provided below. No Options shall be
granted hereunder after the tenth anniversary of the adoption of the Plan.

6.7 AMENDMENT OF OUTSTANDING OPTIONS. The Committee may amend or modify any
Option in any manner to the extent that the Committee would have had initial
authority under the Plan to grant such Option; provided, however, that except as
expressly contemplated elsewhere herein, or in any Option Agreement, no such
amendment or modification shall impair the rights of any Participant under any
outstanding Option without the consent of such Participant.

6.8 INDEMNIFICATION. In addition to such other rights of indemnification as
they may have as members of the Board or the Committee, the members of the
Committee shall be indemnified by the Company against (i) all costs and expenses
reasonably incurred by them in connection with any action, suit, or proceeding
to which they or any of them may be party by reason of any action or omission
undertaken in connection with the Plan or any Option granted under the Plan, and
(ii) all amounts paid by them in settlement thereof (provided such settlement is
approved by independent legal counsel selected by the Company) or paid by them
in satisfaction of a judgment in any such action, suit, or proceeding.
Notwithstanding the foregoing, any such Committee member shall be entitled to
the indemnification rights set forth in this Section 6.8 only if such member (1)
acted in good faith and in a manner that such member reasonably believed to be
in, and not opposed to, the best interests of the Company, and (2) with respect
to any criminal action or proceeding, (A) had no reasonable cause to believe
that such conduct was unlawful, and (B) upon the institution of any such action,
suit, or proceeding, gave the Company written notice thereof as well as an
opportunity to defend the same before undertaking to defend it on his own
behalf.

6.9 RESTRICTED SECURITIES. All Class A Common issued pursuant to the terms
of this Plan shall constitute "restricted securities," as that term is defined
in Rule 144 promulgated by the Securities and Exchange Commission pursuant to
the Securities Act, and may not be transferred except in compliance with the
registration requirements of the Securities Act or an exemption therefrom. In
connection with any such transfer, the Company may require the transferor to
provide a written opinion of counsel to the effect that such transfer complies
with the Securities Act and other applicable securities laws. The certificates
representing the Option Shares shall bear the following legends:

"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON
___________, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), OR UNDER ANY STATE SECURITIES LAWS AND MAY NOT BE
SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT AND APPLICABLE STATE SECURITIES

-10-
<PAGE>

LAWS OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES
REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL
RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER
AGREEMENTS AS SET FORTH IN THE COMPANY'S 1997 STOCK OPTION PLAN, A COPY
OF WHICH MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL
PLACE OF BUSINESS WITHOUT CHARGE."

In addition, each Participant agrees by acceptance of the Option not to
effect any public sale or distribution of any equity securities of the Company,
or any securities convertible into or exchangeable or exercisable for such
securities, during the seven days prior to and the 180 days after the
effectiveness of any underwritten Demand Registration or any underwritten
Piggyback Registration (as such terms are defined in the Registration Rights
Agreement dated as of February 4, 1997 between the Company and certain of its
shareholders), except as part of such underwritten registration if otherwise
permitted.

* * * * *

-11-
<PAGE>

PEN-TAB HOLDINGS, INC.

AGREEMENT EVIDENCING A GRANT OF A NONQUALIFIED
STOCK OPTION UNDER 1997 STOCK OPTION PLAN

This OPTION AGREEMENT (the "Agreement") is made as of ___________,
---------
1997, between Pen-Tab Holdings, Inc. a Virginia corporation (the "Company"), and
-------
_________________________ ("Grantee"). Capitalized terms used but not defined
-------
herein shall have the meanings assigned to such terms in the Plan (as defined
below).

1. Grant of Option. Pursuant to the Pen-Tab Holdings, Inc. 1997
---------------
Stock Option Plan (the "Plan"), the Company hereby grants to Grantee, as of the
----
grant date specified above, a nonqualified stock option (the "Option") to
------
purchase ________________ shares of the Company's Class A common stock, par
value $.01 per share, (the "Class A Common") (which number of shares may be
--------------
adjusted as provided in the Plan) at the exercise price per share of $1.00,
subject to the terms and conditions set forth herein and in the Plan.

2. Grantee Bound by Plan. Attached hereto as Annex A is a copy of
--------------------- -------
the Plan which is incorporated herein by reference and made a part hereof.
Grantee hereby acknowledges receipt of a copy of the Plan and agrees to be bound
by all the terms and provisions thereof. Capitalized terms used but not defined
herein shall have the meanings ascribed to them in the Plan. The Plan should be
carefully examined before any decision is made to exercise the Option.

3. Exercise of Option. Subject to Section 5, the Option may be
------------------
exercised by written notice to the Company's Secretary at any time and from time
to time but only to the extent it has become vested. An Option shall not be
exercisable, in any event, after the tenth anniversary of grant. An Option may
not be exercised for a fraction of a share of Common Stock. Options are subject
to cancellation as provided in the Plan.

4. Vesting of Options.
------------------

(a) Normal Vesting. Subject to the earlier expiration of any
--------------
Options pursuant to Section 5.7 of the Plan, the Option shall vest and become
---
exercisable in the amounts set forth opposite the dates set forth below:
<PAGE>

<TABLE>
<CAPTION>
Vesting Date Vested Percentage of Option
------------ ---------------------------
<S> <C>
First anniversary of the date hereof 20%

Second anniversary of the date hereof 40%

Third anniversary of the date hereof 60%

Fourth anniversary of the date hereof 80%

Fifth anniversary of the date hereof 100%
</TABLE>

(b) Acceleration of Vesting on a Sale of the Company.
------------------------------------------------

(i) If the Grantee has been continuously employed by the
Company from the date of the grant of the Option until the event of a Sale
of the Company, the portion of the Option which has not vested as of the
date of such Sale of the Company shall be deemed to be immediately vested
and will become exercisable. If the Grantee elects to exercise any portion
of the Option in connection with the Sale of the Company, such exercise,
subject to the Grantee's compliance with Section 5, will be deemed to occur
immediately prior to the consummation of such Sale of the Company.

(ii) Notwithstanding any other provisions of this Option, if all
or any portion of the payments or benefits provided under Section 4(b), by
reason of acceleration of vesting or otherwise, either alone or together
with other payments or benefits which the Grantee receives or is then
entitled to 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"), the acceleration of
vesting upon a sale of the Company shall apply only to so much of the
Option that does not cause such acceleration to be subject to the excise
tax imposed by Section 4999 of the Code; but only if, by reason of such
limited acceleration, the Grantee'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 4(b)(ii) shall mean the sum of (w)
the total amount payable to the Grantee under this Section 4, plus (x) all
----
other payments and benefits which the Grantee 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 Grantee (based upon the rate in effect for

-2-
<PAGE>

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.

5. Conditions to Exercise. The Option may not be exercised by
----------------------
Grantee unless the following conditions are met:

(a) Grantee shall deliver an executed Joinder to the Shareholders
Agreement, dated as of _________, 1997, by and among the Company, CVC and
certain other parties, as may be amended from time to time (the "Shareholders
------------
Agreement"), in the form of Exhibit A to the Shareholders Agreement;
- --------- ---------

(b) legal counsel for the Company must be satisfied at the time
of exercise that the issuance of shares of Common Stock upon exercise will be in
compliance with the Securities Act, and applicable United States federal, state,
local, and foreign laws; and

(c) Grantee must pay at the time of exercise the full purchase
price for the shares of Common Stock being acquired hereunder pursuant to
Section 5.2 of the Plan and must pay, or make adequate provision for the payment
of, the withholding amount pursuant to Section 5.4 of the Plan.

6. Transferability.
---------------

(a) Transfer Restrictions. This Option may not be sold,
---------------------
assigned, transferred, pledged, hypothecated, or otherwise disposed of by
Grantee, except by will or by the laws of descent and distribution and is
exercisable during Grantee's lifetime only by Grantee (or, if Grantee is
incapacitated, by Grantee's legal guardian or legal representative). If Grantee
or anyone claiming under or through Grantee attempts to violate this Paragraph
6, such attempted violation shall be null, void, and without effect, and the
Company's obligation hereunder shall terminate. If at the time of Grantee's
death the Option has not been fully exercised, Grantee's estate or any person
who acquires the right to exercise the Option by bequest or inheritance or by
reason of Grantee's death may, at any time within 90 days after the date of
Grantee's death (but in no event after the expiration of ten years from the
grant date), exercise the Option with respect to the number of shares
(determined under Paragraph 4 above) as to which Grantee could have exercised
the Option at the time of Grantee's death, or with respect to such greater
number of shares as determined by the Committee in its sole discretion. The
applicable requirements of Paragraph 5 above must be satisfied at the time of
such exercise.

-3-
<PAGE>

(b) Additional Transfer Restrictions. Any Option Shares received
--------------------------------
upon exercise of this Option (i) are subject to the repurchase right set forth
in Section 5.8 of the Plan and (ii) shall constitute "Shareholder Shares" for
all purposes of the Shareholders Agreement and shall be subject to the
restrictions and obligations of the Shareholders Agreement.

7. Administration. Any action taken or decision made by the
--------------
Company, the Board, or the Committee or its delegates arising out of or in
connection with the construction, administration, interpretation or effect of
the Plan or this Agreement shall lie within its sole and absolute discretion, as
the case may be, and shall be final, conclusive, and binding on Grantee and all
persons claiming under or through Grantee. By accepting this grant or other
benefit under the Plan, Grantee and each person claiming under or through
Grantee shall be conclusively deemed to have indicated acceptance and
ratification of, and consent to, any action taken under the Plan by the Company,
the Board, or the Committee or its delegates.

8. No Rights as Shareholder. Unless and until a certificate or
------------------------
certificates representing such shares of Common Stock shall have been issued to
Grantee (or any person acting under Paragraph 7 above), Grantee shall not be or
have any of the rights or privileges of a shareholder of the Company with
respect to shares of Common Stock acquired upon exercise of the Option.

9. Investment Representation. Grantee hereby represents and
-------------------------
warrants that the shares of Common Stock that Grantee may acquire by exercising
the Option shall be acquired for investment without a view to distribution,
within the meaning of the Securities Act, and shall not be sold, transferred,
assigned, pledged, or hypothecated in the absence of an effective registration
statement for the shares of Common Stock under the Securities Act and applicable
state securities laws or an applicable exemption from the registration
requirements of the Act and any applicable state securities laws. Grantee also
agrees that the shares of Common Stock that Grantee may acquire by exercising
the Option will not be sold or otherwise disposed of in any manner that would
constitute a violation of any applicable federal or state securities laws.

10. Listing and Registration of Common Stock. The Company, in its
----------------------------------------
discretion, may postpone the issuance, delivery, or both, of shares of Common
Stock upon any exercise of the Option until completion of such stock exchange
listing, or registration, or other qualification of such shares under any state
and/or federal law, rule or regulation as the Company may consider appropriate.

11. Rights of Participants. Neither this Agreement nor the Plan
----------------------
creates any employment rights in Grantee and the Company shall have no liability
for terminating Grantee's employment or materially reducing Grantee's
responsibilities.

-4-
<PAGE>

12. Notices. Any notice hereunder to the Company shall be addressed
-------
to the attention of the president of the Company, and any notice hereunder to
Grantee shall be addressed to Grantee at Grantee's last address on the records
of the Company, subject to the right of the Company or Grantee to designate at
any time hereafter in writing some other address. Any notice shall be deemed to
have been duly given when delivered personally, one day following dispatch if
sent by reputable overnight courier, fees prepaid, or three days following
mailing if sent by registered mail, return receipt requested, postage prepaid
and addressed as set forth above.

13. Binding Effect. This Agreement shall be binding upon and inure
--------------
to the benefit of any successors to the Company and all persons lawfully
claiming under Grantee.

14. GOVERNING LAW. THE CORPORATE LAW OF VIRGINIA SHALL GOVERN ALL
-------------
ISSUES CONCERNING THE RELATIVE RIGHTS OF THE COMPANY AND ITS SHAREHOLDERS. ALL
OTHER QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE DOMESTIC
LAWS OF THE STATE OF NEW YORK, 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 NEW YORK.

* * * * *

-5-
<PAGE>

IN WITNESS WHEREOF, the Company and Grantee have executed this Agreement as
of the date first above written.

PEN-TAB HOLDINGS, INC.

____________________________
Name:
Title:

GRANTEE

____________________________
Employee's Signature

____________________________
Name of Employee (Print)

-6-
<PAGE>

ANNEX A
-------
Pen-Tab Holdings, Inc.
1997 Stock Option Plan

See attached.

-7-

<PAGE>

STATEMENT OF COMPUTATION OF RATIOS
----------------------------------

CALCULATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands, except ratios)

<TABLE>
<CAPTION>
PRO
HISTORICAL FORMA
--------------------------------------------------
1992 1993 1994 1995 1996 1996
--------- -------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes $ 2,511 $ 1,405 $ 4,138 $ 4,565 $ 13,218 $ 6,651

Fixed charges:
Interest expense 1,900 2,097 2,410 2,883 2,346 8,613
Amortization of deferred financing costs -- -- -- -- -- 300
One third of rental cost 438 471 482 490 383 383
--------- -------- -------- -------- --------- --------
Total fixed charges - (A) 2,338 2,568 2,892 3,373 2,729 9,296
--------- -------- -------- -------- --------- --------

Income before income taxes plus fixed charges - (B) $ 4,849 $ 3,973 $ 7,030 $ 7,938 $ 15,947 $15,947
========= ======== ======== ======== ========= ========

Ratio of earnings to fixed charges = (B) / (A) 2.1 1.5 2.4 2.4 5.8 1.7
======== ======== ======== ======== ========= =======
</TABLE>

<PAGE>

SUBSIDIARIES
------------

The Company currently has no subsidiaries, but prior to the date hereof,
Prudential Paper Products Co., Inc., a New York corporation (which subsequently
changed its name to Prudential-Feldco, Inc., (a New York corporation), which
subsequently changed its name to Pen-Tab Industries, Inc. (a New York
corporation), which subsequently merged with and into Pen-Tab Industries of
Virginia, Inc., (a Virginia corporation), which subsequently changed its name to
Pen-Tab Industries, Inc., (a Virginia corporation)) had subsidiaries by the
names of Papers by Brandt, Inc. and Nathan Minness Co., Inc., which were merged
with and into Prudential Paper Products Co., Inc., on December 10, 1969 and
October 20, 1970 respectively.

<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 the Registration Statement (Form
S-4 No. 333- ) 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
April 3, 1997

<PAGE>

FORM T-1
==============================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________

STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
__________________

CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
__________________

UNITED STATES TRUST COMPANY OF NEW YORK
(Exact name of trustee as specified in its charter)

New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)

114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)

United States Trust Company of New York
114 West 47th Street
New York, NY 10036-1532
(212) 852-1000
(Agent for Service)
__________________
Pen-Tab Industries, Inc.
(Exact name of obligor as specified in its charter)

Delaware 54-1833398
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

167 Kelley Drive
Front Royal, VA 22630
(Address of principal executive offices) (Zip Code)
__________________
Series B
10-7/8% Senior Subordinated Notes due 2007
(Title of the indenture securities)
==============================================
<PAGE>

-2-

GENERAL

1. GENERAL INFORMATION
-------------------

Furnish the following information as to the trustee:

(a) Name and address of each examining or supervising authority to which
it is subject.

Federal Reserve Bank of New York (2nd District), New York, New
York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York

(b) Whether it is authorized to exercise corporate trust powers.

The trustee is authorized to exercise corporate trust powers.

2. AFFILIATIONS WITH THE OBLIGOR
-----------------------------

If the obligor is an affiliate of the trustee, describe each such
affiliation.

None

3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:

Pen-Tab Industries, Inc. currently is not in default under any of its
outstanding securities for which United States Trust Company of New York is
Trustee. Accordingly, responses to Items 3, 4, 5, 6, 7, 8, 9, 10, 11, 12,
13, 14 and 15 of Form T-1 are not required under General Instruction B.

16. LIST OF EXHIBITS
----------------

T-1.1 -- Organization Certificate, as amended, issued by
the State of New York Banking Department to transact
business as a Trust Company, is incorporated by reference to
Exhibit T-1.1 to Form T-1 filed on September 15, 1995 with
the Commission pursuant to the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990
(Registration No. 33-97056).

T-1.2 -- Included in Exhibit T-1.1.

T-1.3 -- Included in Exhibit T-1.1.
<PAGE>

-3-

16. LIST OF EXHIBITS
----------------
(cont'd)

T-1.4 -- The By-Laws of United States Trust Company of
New York, as amended, is incorporated by reference to
Exhibit T-1.4 to Form T-1 filed on September 15, 1995 with
the Commission pursuant to the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990
(Registration No.
33-97056).

T-1.6 -- The consent of the trustee required by
Section 321(b) of the Trust Indenture Act of 1939, as
amended by the Trust Indenture Reform Act of 1990.

T-1.7 -- A copy of the latest report of condition of
the trustee pursuant to law or the requirements of its
supervising or examining authority.

NOTE
====

As of March 25, 1997, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States
Trust Company of New York and its parent company, U. S. Trust Corporation.

In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.

__________________

Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 25th day
of March, 1997.

UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee

By:
Margaret Ciesmelewski
Assistant Vice President

PC/pg

<PAGE>

EXHIBIT T-1.6
-------------

The consent of the trustee required by Section 321(b) of the Act.

United States Trust Company of New York
114 West 47th Street
New York, NY 10036

January 7, 1997

Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549

Gentlemen:

Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.

Very truly yours,

UNITED STATES TRUST COMPANY
OF NEW YORK

/s/Gerard F. Ganey
------------------
By: Gerard F. Ganey
Senior Vice President
<PAGE>

EXHIBIT T-1.7

UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
SEPTEMBER 30, 1996
------------------
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
- ------
<S> <C>
Cash and Due from Banks $ 38,257

Short-Term Investments 82,377

Securities, Available for Sale 861,975

Loans 1,404,930
Less: Allowance for Credit Losses 13,048
----------
Net Loans 1,391,882
Premises and Equipment 60,012
Other Assets 133,673
----------
TOTAL ASSETS $2,568,176
==========

LIABILITIES
- -----------
Deposits:
Non-Interest Bearing $ 466,849
Interest Bearing 1,433,894
----------
Total Deposits 1,900,743

Short-Term Credit Facilities 369,045
Accounts Payable and Accrued Liabilities 143,604
----------
TOTAL LIABILITIES $2,413,392
==========

STOCKHOLDER'S EQUITY
- --------------------
Common Stock 14,995
Capital Surplus 42,394
Retained Earnings 98,402
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Taxes (1,007)
----------
TOTAL STOCKHOLDER'S EQUITY 154,784
----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $2,568,176
==========
</TABLE>

I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.

Richard E. Brinkman, SVP & Controller

October 24, 1996

<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-END> DEC-28-1996
<CASH> 111
<SECURITIES> 0
<RECEIVABLES> 12,072
<ALLOWANCES> 1,375
<INVENTORY> 14,738
<CURRENT-ASSETS> 26,123
<PP&E> 28,408
<DEPRECIATION> 11,641
<TOTAL-ASSETS> 43,504
<CURRENT-LIABILITIES> 20,279
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 15,052
<TOTAL-LIABILITY-AND-EQUITY> 43,504
<SALES> 106,365
<TOTAL-REVENUES> 106,365
<CGS> 74,781
<TOTAL-COSTS> 74,781
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,346
<INCOME-PRETAX> 13,218
<INCOME-TAX> (191)
<INCOME-CONTINUING> 13,409
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,409
<EPS-PRIMARY> 0
<EPS-DILUTED> 0

</TABLE>