<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the fiscal year ended January 2, 1999
or
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Transition period from to
Commission file number 333-24519
Pen-Tab Industries, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1833398
(State or other jurisdiction (I.R.S. Employer
Incorporation or organization) Identification 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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this from 10-K. [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date. As of April 1,
1999, there were outstanding 100 shares of common stock, $0.01 par value, all
of which are privately owned and are not traded on a public market.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
Pen-Tab Industries, Inc.
Form 10-K
For the Fiscal Year Ended January 2, 1999
Certain statements contained in this Annual Report are forward-looking
statements (as such term is defined in the Private Securities Litigation Reform
Act of 1995). Because such statements include risks and uncertainties, actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, risks associated with the
integration of businesses following an acquisition, competitors with broader
product lines and greater resources or the Company's inability to attract and
retain highly qualified management, technical, creative and sales and marketing
personnel. The Company disclaims any intent or obligation to update any
forward-looking statements.
Index
<TABLE>
<CAPTION>
Part I. Page
----
<C> <S> <C>
Item 1. Business................................................... 1
Item 2. Properties................................................. 7
Item 3. Legal Proceedings.......................................... 7
Item 4. Submission of Matters to a Vote of Security Holders........ 7
Part II.
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matter........................................ 8
Item 6. Selected Financial Data.................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 7a. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 15
Item 8. Financial Statements and Supplementary Data................ 15
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 15
Part III.
Item 10. Directors and Executive Officers of the Registrant......... 16
Item 11. Executive Compensation..................................... 17
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 18
Item 13. Certain Relationships and Related Transactions............. 18
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K....................................................... 19
Signature............................................................... 22
</TABLE>
<PAGE>
Part I
Item 1. Business
General
Pen-Tab Industries, Inc. (together with its majority-owned subsidiaries, the
"Company") was incorporated in 1997 in the state of Delaware, the successor
corporation to a Virginia corporation of the same name. The Company is a
wholly-owned subsidiary of Pen-Tab Holdings, Inc. ("Holdings") a Virginia
corporation.
The Company is a leading U.S. manufacturer and marketer of school, home and
office supply products. The Company'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. The Company pioneered a line of
these differentiated higher price point, branded products to serve the school
and office product markets. The Company 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. The Company's August 1998 acquisition of Stuart Hall Company, Inc.
("Stuart Hall") has expanded the Company's product line into the market of
licensed products. The acquisition broadens the Company's product offerings by
adding licensed products to Pen-Tab's proprietary styles and brands. Stuart
Hall's license portfolio includes Looney Tunes, Coca-Cola(R) brand,
Nickelodeon(TM), Rugrats(R), MTV: Music Television(TM) and Disney's Winnie the
Pooh. The Company, through its Vinylweld L.L.C. Subsidiary, is also a leading
U.S. manufacturer of vinyl packaging products designed primarily for audio and
video cassette tapes. For fiscal 1998, core products represented an estimated
57.9% of revenue, differentiated products represented an estimated 34.6% of
revenue and Vinylweld represented an estimated 7.5% of revenue. For fiscal
1998, school-related products represented an estimated 60.9% of revenue,
office-related products represented an estimated 31.6% of revenue and Vinylweld
represented an estimated 7.5% of revenue.
The Company's move into differentiated products is primarily responsible for
the increases in sales and profitability. From 1994 to 1998, the Company's
sales have grown from $90.5 million to $124.1 million and EBITDA (as defined
herein) has grown from $8.9 million to $14.6 million. During the same period,
the Company's EBITDA margin increased from 9.8% to 11.7%. The Company's
strategy is to grow through continued internal design of new, differentiated
product lines and strategic acquisitions.
The Company has a long-standing customer base featuring mass merchandisers,
national discount stores, wholesale clubs, and office supply superstores in the
United States and Canada. The Company is headquartered in a state-of-the-art
282,000 sq. ft. facility in Front Royal, Virginia. The Company also maintains
manufacturing facilities in Chicago, Los Angeles, and Kansas City. The Company
has invested heavily in state-of-the-art automated production equipment to
provide a low cost manufacturing environment. As of January 2, 1999, the
Company employed approximately 900 people in its four facilities.
Competitive Strengths
The combination of the Company's products, customers and proven track record
distinguishes it as a leading manufacturer and marketer of school, home and
office products in North America. The Company attributes this success and it's
continued opportunities for growth and profitability to the following
competitive strengths:
Market leader in differentiated, branded school, home and office
products. The Company is a market leader in differentiated, branded school,
home and office products. The Company has pioneered a line of high-quality,
functionally superior, higher price point and margin, branded items to serve
the school and office products markets. Demand for proprietary differentiated
products has risen steadily since 1993 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.
1
<PAGE>
Licensed Products. Through the acquisition of Stuart Hall, Pen-Tab has
rounded out its differentiated product offering with a portfolio of licensed
products. This portfolio includes licenses with Looney Tunes, Coca-Cola(R)
brand, Nickelodeon(TM), Rugrats(R), MTV: Music Television(TM), X Games(TM),
Disney's Winnie the Pooh, Hallmark and Winners(R) Collection.
Partnering reduces inventory risk. The Company's creative department has
strong design capabilities and together with senior sales and marketing
personnel has been successful in developing these partnering relationships with
major customers. Senior sales management personally handle the Company's
largest accounts allowing the Company to design products in concert with its
major customers, tailoring high-quality, upscale products to meet a mutual
vision. The Company's differentiated school-related products are only mass-
produced once they have been pre-sponsored by a major customer.
Brand name recognition. Through the manufacturing of high-quality products
for over 60 years, the Company 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. This allows the Company to achieve higher margins than would be
achievable with core products. Several trademarks, sub-brands and proprietary
styles, including Pen-Tab(R), Pen-Tab Pro(R), Stuart Hall, Attitude(R), Tough
Tracks(R), Executive(R) and Expert(R), have been developed to service targeted
market sectors.
Modern, efficient and strategically located facilities. The Company has
invested 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 one of the
lowest manufacturing cost environments in the school, home and office products
industry. Moreover, the company has large plants strategically located across
the United States (East Coast--Front Royal, VA; Midwest--Kansas City, MO; West
Coast--City of Industry, CA) to serve the largest national retailers and
distributors in the United States. Its locations offer additional expansion
capacity and ready access to road and rail transportation.
Long-standing customer base. The Company 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 its resources 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, contract stationers and grocery and
drug store chains.
Leading edge information systems. The Company has recently invested in a new
state-of-the-art Enterprise Resource Planning software system to manage the
manufacturing, accounting, distribution, inventory, sales and billing systems.
The system integrates all of the Company's locations to provide timely
information for management. The Company conducts business using electronic data
interchange programs with most of its larger customers.
Experienced management team. Between them, Alan Hodes, Chief Executive
Officer of the Company, and Michael Greenberg, Executive Vice President of the
Company, have over 59 years with the Company. The Company has supplemented its
senior management ranks with a strong team of new sales, marketing, creative,
and finance professionals within the past five years.
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 clubs, national office products
superstores, national contract stationers and grocery and drug store chains.
Anticipating
2
<PAGE>
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 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 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, office product wholesalers and
grocery and drug store chains. In the future, the Company intends to strengthen
its position in the contract stationer market. The Company has a strong
relationship with B.T. Office Products International, Inc., one of the nation's
largest contract stationers.
Continued 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 in the worldwide market.
Products and Services
The Company designs, manufactures and markets school, home and office-
related products, custom binders and other related packaging materials. The
Company's core products include binders, pads, filler paper, wirebound
notebooks, and envelopes. The Company 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, the Company 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 34 percent of the Company's 1998 sales are derived from
differentiated products, which have been developed over the last five years.
School-related products (60.9% of 1998 net sales). The Company produces
tablets, spiral and coilless notebooks, filler paper and binders for the school
market. The Company'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.
The Company is the recognized market leader for higher quality, upscale,
creatively designed school products largely for the teenage market. The
Company's marketing and design departments have carefully researched market
demands to 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 Ball(R) and Pen-
Tab Online(R) product lines. Durable nylon covers and colorful designs have
3
<PAGE>
been incorporated into core products to differentiate its line. The value-added
products sell at retail price points for up to $20. Whereas certain basic
school supplies often work as a loss leader for retailers, the Company's
differentiated products give a mass merchandiser a fashion-forward image and an
attractive profit margin.
Through the acquisition of Stuart Hall, the Company is now a leading
manufacturer and marketer of licensed school products. Stuart Hall's licensed
portfolio includes Looney Tunes, Coca-Cola(R) brand, Nickelodeon(TM),
Rugrats(R), MTV: Music Television(TM), X Games(TM) and Disney's Winnie the
Pooh. These licenses are proprietary to the Company in its category and allow
for higher margins than non-licensed products. The Company's many licenses
appeal to segmented markets of school age children.
Leveraging its creative capabilities and experience, the Company has created
a brand name for high quality, upscale school supplies. For example, 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. The Company sells these items 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 are seasonal and peak during spring and
summer. Orders for back-to-school products are generally placed during March
through April, and shipped May through August. The Company builds a substantial
inventory of finished back-to-school products before shipment. Certain
differentiated products that are manufactured overseas are only mass-produced
with firm customer commitments to limit inventory risk.
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 (31.6% of 1998 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 Executive(R), Expert(R) and Platinum(R) brands.
The office products market represents significant growth potential for the
Company. Office products distribution is shifting to the Company's existing
core customer base of mass merchandisers wholesale clubs and office supply
superstores. In addition, the Company has recently established strong
relationships with several 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.
The Company's creative department has already created several high-quality,
functionally superior designs for planners and pads in the office supply
market.
Custom packaging products (7.5% of 1998 net sales). The Company, through its
subsidiary Vinylweld L.L.C. and under the trade name Vinylweld, is a 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.
4
<PAGE>
The Company 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.
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, major contract stationers and grocery and drug
store chains. The Company's aggregate net sales to two customers accounted for
approximately 16.9% and 13.3%, respectively of the Company's net sales for
fiscal 1998.
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-oriented companies, which purchase a more
profitable product mix.
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 the Company, that has 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 consolidate their supplier
bases, the Company's ability to meet their special requirements should be an
increasingly important competitive advantage.
Senior sales management personally handles the Company's largest accounts.
The Company also employs approximately 30 manufacturer representative agencies
with over 100 agents to market its products. The Company 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 research, focus
groups and sample testing. Through over 60 years of customer presence, Pen-
Tab(R) and Stuart Hall have developed strong brand identity for quality
products. Its Pen-Tab Pro(R), Tough Tracks(R), Executive(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.
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 accounts with major, long term, high volume
customers, which 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
5
<PAGE>
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. The Company's
principal methods of competition are customer service, price, product
differentiation, quality and breadth of product line offerings. 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 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.
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. The Company presently holds several trademarks covering designs, symbols
and trade names used in connection with its products, including Pen-Tab(R),
Pen-Tab Pro(R), Executive(R), Expert(R) and Pen-Tab Paper Store(R).
Licensed Products
The Company is a party to numerous license agreements. These license
agreements permit the Company to use various licensed properties on its
products. The license agreements generally have terms of one to three years,
have minimum royalty requirements and a fixed percentage of the selling price
as a royalty due the licensor.
Employees
The Company had approximately 900 employees as of January 2, 1999.
Approximately 600 employees are represented by collective bargaining agreements
at the Missouri, Illinois and California facilities. In Missouri the employees
are represented by the United Paperworkers International Union AFL-C10, CLC
Local 765, whose contract expires August 8, 2000. 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, Mail Order, Office and Professional Employees
Local 743 Affiliated International Brotherhood, Teamsters AFL-CIO, whose
contract expires December 19, 2001. The
6
<PAGE>
Company enjoys an amicable relationship with unionized labor. The following
table provides information on the Company's employees by operating function:
Employees Categorized by Function
<TABLE>
<S> <C>
Manufacturing...................................... 820
Sales, Marketing and Creative...................... 30
Administrative..................................... 40
Executive.......................................... 10
---
Total............................................ 900
===
</TABLE>
As of January 2, 1999, the Company's manufacturing employees numbered 220 in
the Virginia facility, 200 in the California facility, 200 in the Chicago
facility and 200 in the Kansas City Facility.
Item 2. Properties
The following table summarizes the Company's facilities by location.
<TABLE>
<CAPTION>
Company Facilities
------------------------------------------------------------------------------------
Approximate Owned/ Lease
Location Square Feet Leased Product Categories Expiration
-------- ----------- ------ ------------------ ----------
<S> <C> <C> <C> <C>
Front Royal, VA......... 282,000 Owned School, Office & Home N/A
Kansas City, MO......... 491,000 Leased School, Office & Home 2005
City of Industry, CA.... 250,000 Leased School, Office & Home 2002
Chicago, IL............. 210,000 Leased Primarily Vinyl and Packaging 2009
</TABLE>
The Company's Front Royal, VA facility was financed with Industrial Revenue
Development Bonds and is pledged as collateral.
Item 3. 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 effect on
the financial condition or results of operations of the Company.
Environmental, Health and Safety Matters
The Company is subject to federal, state, and local environmental and
occupational health and safety laws and regulations. Such laws and regulations,
among other things, impose limitations on the discharge of pollutants and
establish standards for management of waste. While there can be no assurance
that the Company is at all times in complete compliance with all such
requirements, the Company believes that any such noncompliance is unlikely to
have a material adverse effect on the Company. As is the case with
manufacturers in general, if a release or threat of release of hazardous
materials occurs on or from the Company's properties or any associated offsite
disposal location, or if contamination from prior activities is discovered at
any properties owned or operated by the Company, the Company may be held liable
for response costs and damages to natural resources. There can be no assurance
that the amount of any such liability would not be material.
Item 4. Submission of Matters to a Vote of Security Holders.
None
7
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
None
Item 6. Selected Financial Data (Dollars in Thousands)
The financial statements of Pen-Tab Industries, Inc. for fiscal years 1995
and 1994 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, called Pen-Tab Industries, Inc., 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, Pen-Tab Industries, Inc. 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.
On February 4, 1997, Pen-Tab Industries, Inc., a Virginia corporation,
changed its name to Pen-Tab Holdings, Inc. On February 4, 1997 Holdings formed
a wholly owned subsidiary called Pen-Tab Industries, Inc., a Delaware
corporation. On February 4, 1997, the Company issued $75 million 10 7/8% Senior
Subordinated Notes due 2007 and Holdings effected a recapitalization pursuant
to which Holdings repurchased approximately 748 shares of Class A common stock
and 122 shares of Class B common stock from management shareholders for
approximately $47,858, 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. Holdings' shareholders concurrently approved
an amendment to Holdings' 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, 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 transaction, Holdings' shareholders approved
a stock split pursuant to which each share of Holdings' Class A Common Stock
and Class B Common Stock then outstanding was converted into 60,937.50 shares
of such common stock.
On February 3, 1998, net assets of $1,500 of the Company's Vinylweld
division were contributed to a newly formed Delaware limited liability company
called Vinylweld L.L.C. The Company sold 20% of Vinylweld L.L.C. to Vinylweld's
president for $125. The Financial statements of Pen-Tab Industries, Inc. for
fiscal year 1998 reflect the acquisition of Stuart Hall Company, Inc. and the
results of their operations from the acquisition on August 20, 1998, through
the fiscal year end of January 2, 1999.
Set forth below are selected historical financial data and other financial
data of the Company as of the dates and for the periods presented. The selected
historical financial data as of January 2, 1999, January 3, 1998, December 28,
1996, December 30, 1995, December 31, 1994 and for the fiscal years then ended
were derived from the Audited Financial Statements of the Company.
8
<PAGE>
The information contained in this table and accompanying notes should be
read in conjunction with the "Management Discussion and Analysis of Financial
Condition and Results of Operations," the Audited Consolidated Financial
Statements and the accompanying notes and schedules thereto appearing
elsewhere.
<TABLE>
<CAPTION>
Fiscal Year
--------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Net sales................. $124,082 $ 96,637 $106,869 $96,808 $90,472
Cost of goods sold........ 91,105 71,701 74,781 74,305 70,581
Gross profit.............. 32,977 24,936 32,088 22,503 19,891
Selling, general and
administrative expenses.. 22,030 16,838 16,528 13,204 13,346
Amortization of goodwill.. 578 -- -- -- --
Relocation and
reorganization expenses
(a)...................... -- 804 -- 1,906 --
Interest expense, net..... 11,413 8,194 2,346 2,883 2,410
Other (income) expense,
net...................... (28) -- (4) (55) (3)
Income (loss) before
income taxes............. (1,016) (900) 13,218 4,565 4,138
Income tax (benefit)
provision (b), (e)....... (335) 1,945 (191) (343) 825
Net income (loss)......... $ (681) $ (2,845) $ 13,409 $ 4,908 $ 3,313
Other Financial Data
Pro forma income tax
(benefit) provision (b).. $ -- $ (338) $ 4,956 $ 1,948 $ 1,783
Pro forma net income
(loss) (b)............... -- (562) 8,262 2,617 2,355
Net cash provided by (used
in)operating activities.. 43,426 (768) 13,356 10,926 5,576
Net cash (used in)
investing activities..... (134,632) (1,562) (890) (8,521) (1,331)
Net cash provided by (used
in) financing
activities............... 77,550 15,895 (13,191) (2,291) (4,163)
Adjusted EBITDA (c)....... 14,582 10,652 17,916 11,865 8,865
Adjusted EBITDA margin
(c)...................... 11.7% 11.0% 16.8% 12.3% 9.8%
Depreciation and
amortization............. 4,892 2,968 2,364 2,760 2,317
Capital expenditures...... $ 2,854 $ 1,562 $ 890 $ 9,322 $ 1,371
Ratio of earnings to fixed
charges (d).............. -- (d) -- (d) 5.8x 2.4x 2.4x
<CAPTION>
As of
--------------------------------------------------
Jan. 2 Jan. 3 Dec. 28 Dec. 30 Dec. 31
1999 1998 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets.............. $181,943 $ 63,792 $ 43,504 $43,805 $41,711
Long-term debt (including
current portion)......... 132,460 82,754 24,210 28,000 26,890
Stockholders' equity
(deficit)................ $ 10,517 $(28,005) $ 15,052 $11,044 $ 8,770
</TABLE>
- --------
(a) 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 of $1,906 associated therewith are
reported as relocation expense in the statement of operations and retained
earnings. During fiscal 1997, the Company reorganized its sales and
marketing functions. The non-recurring charges of $804 for recruitment and
acquisition costs of new sales and marketing executives as well as the
severance costs of terminated sales employees are reported as
reorganization expenses in the statement of operations and retained
earnings.
(b) A portion of the Company was taxed as a "C" corporation under the Internal
Revenue Code during fiscal 1994, and accordingly was subject to federal and
state income taxes. For all fiscal years thereafter until the period ended
February 3, 1997, the entire company 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
shareholders based on their respective ownership interests. Accordingly, no
provision for income taxes was required for such periods, except for state
income taxes.
(c) Adjusted EBITDA is defined as net income before interest, income taxes,
depreciation and amortization and certain non-recurring expenses (see (a)
above). Adjusted EBITDA is presented because it is a widely
9
<PAGE>
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 (loss) 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. Adjusted EBITDA amounts for fiscal 1997 has been adjusted for
reorganization expenses of $804, related to the recruitment and acquisition
costs of new sales and marketing executives as well as the severance costs
of terminated sales employees and fiscal 1995 has been adjusted for non-
depreciation relocation expenses of $1,657, related to the relocation of
the Company's headquarters and east coast manufacturing facilities from New
York to Virginia. Adjusted EBITDA margin is calculated as the ratio of
Adjusted EBITDA to net sales for the period. Funds depicted by Adjusted
EBITDA are not available for management's discretionary use due to
functional requirements to conserve funds primarily for capital replacement
and expansion, and debt service requirements.
(d) 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.
Earnings before fixed charges for the year ended January 2, 1999 and
January 3, 1998 were insufficient to cover fixed charges by $1,016 and
$900, respectively.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------
1998 1997 1996 1995 1994
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes... $(1,016) $ (900) $13,218 $4,565 $4,138
Add back Fixed Charges;
Interest Expense................... 11,413 8,194 2,346 2,883 2,410
Operating Lease Expense 1/3........ 531 400 400 375 540
------- ------ ------- ------ ------
Earnings before Fixed Charges....... 10,928 7,694 15,964 7,823 7,088
Fixed Charges....................... 11,944 8,594 2,746 3,258 2,950
Ratio of Earnings to Fixed Charges -- -- 5.8x 2.4x 2.4x
</TABLE>
(e) During fiscal 1997, the Company recorded a cumulative deferred tax
liability of $2,316 upon termination of the Company's "S" corporation
status.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The following discussion should be read in conjunction with the "Selected
Financial Data", the Audited Financial Statements and the accompanying notes
and schedules thereto appearing elsewhere herein.
Stuart Hall Acquisition. On August 20, 1998 Pen-Tab acquired all of the
capital stock of Stuart Hall Company, Inc., a wholly-owned subsidiary of
Newell Co. The net purchase price was approximately $131.9 million after post-
closing adjustments and expenses, of which $39.2 was generated by an equity
contribution from Pen-Tab Holdings, Inc., Pen-Tab's parent company and the
remainder was financed with drawings on a bank Credit Facility (as hereinafter
defined). Stuart Hall's results of operations since the acquisition date are
included in the Company's results of operations. The acquisition was accounted
for as a purchase.
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. A significant portion 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
10
<PAGE>
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.
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 1993, 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 that
were not all passed on to customers. 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.
Results of Operations
The following table sets forth the fiscal years 1994 through 1998, certain
income and expense items of the Company as a percentage of net sales.
<TABLE>
<CAPTION>
Fiscal Year
---------------------------------
1998 1997 1996 1995 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold......................... 73.4% 74.2% 70.0% 76.8% 78.0%
----- ----- ----- ----- -----
Gross profit............................... 26.6% 25.8% 30.0% 23.2% 22.0%
Selling, general, and administrative
expenses.................................. 17.8% 17.4% 15.5% 13.6% 22.0%
Amortization of goodwill................... 0.5% -- -- -- --
Relocation and reorganization expenses..... -- 0.8% -- 2.0% --
----- ----- ----- ----- -----
Income from operations..................... 8.3% 7.6% 14.5% 7.6% 7.2%
===== ===== ===== ===== =====
</TABLE>
Fiscal 1998 Compared to Fiscal 1997
Net sales for the year ended January 2, 1999 increased by $27.4 million, or
28.4%, to $124.1 million from $96.6 million for the year ended January 3, 1998.
The Company's acquisition of Stuart Hall contributed $11.8 million or 12.2% of
the increase. For the Pen-Tab segment, which includes Stuart Hall,
differentiated product and core product sales increased by $10.7 million and
$16.0 million, respectively, for the year ended January 2, 1999 as compared to
the year ended January 3, 1998. The Vinylweld segment had sales increases of
$0.7 million.
Gross profit for the year ended January 2, 1999 increased by $8.0 million or
32.2% to $33.0 million from $24.9 million for the year ended January 3, 1998.
The gross profit percentage for year ended January 2, 1999 was 26.6% compared
to 25.8% for the year ended January 3, 1998. The 0.8% increase in the gross
profit percentage is principally related to (i) the growth in high margin
differentiated product sales which increased to 34.6% of net sales for the year
ended January 2, 1999 from 33.4% for the year ended January 3, 1998, and (ii)
sales volume increase in 1998 caused an increase in gross margin due to the
increased utilization of fixed factory overhead.
SG&A expenses for the year ended January 2, 1999 increased $5.2 million or
30.8% to $22.0 million from $16.8 million for the year ended January 3, 1998.
As a percentage of net sales, SG&A expenses increased to 17.8% for the year
ended January 2, 1999 from 17.4% for the year ended January 3, 1998. This
increase is principally the result of (i) shipping expenses (primarily freight
out) increased to 8.2% of net sales for the year ended January 2, 1999 from
6.8% of net sales for the year ended January 3, 1998. The increase was the
result of an increase in direct-to-store customers. Partially offset by (ii) a
reduction in 1998 of television and print advertising of $1.2 million or 1.0%.
11
<PAGE>
Interest expense, net for the year ended January 3, 1999 increased $3.2
million to $11.4 million from $8.2 million for the year ended January 2, 1998.
The increase is principally due to the interest on the debt incurred to acquire
Stuart Hall on August 20, 1998.
Fiscal 1997 Compared to Fiscal 1996
Net sales for the year ended January 3, 1998 decreased by $10.3 million, or
9.6%, to $96.6 million from $106.9 million for the year ended December 28,
1996. For the Pen-Tab segment differentiated product and core product sales
decreased $0.2 million and $8.2 million, respectively, for the year ended
January 3, 1998 as compared to the year ended December 28, 1996. Pen-Tab
segment pounds / units shipped increased approximately 4.8% for the year ended
January 3, 1998 compared to the year ended December 28, 1996, however revenues
are down $8.4 million or 8.7%. This results from material (paper and paper
related products) price decreases passed on to the customer in lower unit
selling prices during and subsequent to the year ended December 28, 1996 and
from changes in product mix. The remaining $1.9 million decrease in net sales
was caused by sales volume decreases in the Vinylweld segment.
Gross profit for the year ended January 3, 1998 decreased by $7.2 million,
or 22.3% to $24.9 million from $32.1 million for the year ended December 28,
1996. The gross profit percentage for the year ended January 3, 1998 was 25.8%
compared to 30.0% for the year ended December 28, 1996. The decrease in gross
profit margin is principally related to (i) a LIFO adjustment increasing gross
profit for the year ended December 28, 1996 by $3.6 million or 3.4% due to
significant decreases in the cost of paper versus a LIFO adjustment increasing
gross profit for the year ended January 3, 1998 by $0.3 million or 0.3% (ii)
significant and unusual paper price fluctuations caused the Company to
experience inventory losses of $3.1 million or 2.9% in the year ended December
28, 1996 due to selling higher priced inventory at the then current lower
selling prices , (iii) sales price decreases in 1997 causing a decrease in
gross margin due to the fixed components of factory overhead being spread over
less sales dollars amounting to approximately 0.6% and (iv) lower margins on
core products due to competitive market pricing pressures.
SG&A expenses for the year ended January 3, 1998 increased $0.3 million, or
1.9% to $16.8 million from $16.5 million for the year ended December 28, 1996.
As a percentage of net sales, SG&A expenses increased to 17.4% for the year
ended January 3, 1998 from 15.5% for the year ended December 28, 1996. This
increase is the result of (i) selling expenses being a higher percentage of
sales in 1997, 7.5%, as compared to 6.2% in 1996, principally due to the
following: increases in sales and marketing salaries and related expenses of
$0.3 million, commission expense being 1.3% of sales in 1997 versus 1.1% of
sales in 1996, due to changes in product mix and account mix, advertising
expense being 2.8% of sales in 1997 compared to 2.7% of sales in 1996 and (ii)
shipping expenses (principally freight out) being a higher percentage of sales,
6.8% in 1997 versus 6.1% in 1996, due to lower product selling prices during
1997.
Interest expense, net for the year ended January 3, 1998 increased $6.1
million to $8.4 million from $2.3 million for the year ended December 28, 1996.
The increase is principally due to the interest expense on the $75 million of
senior subordinated notes issued during February 1997.
Income tax provision for the year ended January 3, 1998 increased $2.1
million to $1.9 million from $(0.2) million for the year ended December 28,
1996. This increase includes a tax charge of $2.3 million to record a
cumulative deferred tax liability upon the termination of the Company's "S"
corporation election offset by $0.6 million deferred tax asset for a federal
net operating loss. The Company was taxed as an "S" corporation for federal and
state taxation purposes during 1996.
Liquidity and Capital Resources
Net cash provided by operating activities for the year ended January 2, 1999
was $43.4 million as compared to net cash used of $0.8 million for the year
ended January 3, 1998. The increase was primarily attributable to the
acquisition of Stuart Hall. The account receivable of Stuart Hall at the date
of acquisition
12
<PAGE>
was approximately $29 million, reflecting the seasonal back to school spike. By
year end the accounts receivable balance related to Stuart Hall was
approximately $5 million. In addition, an $18.5 million working capital
purchase price adjustment related to the purchase of Stuart Hall remains unpaid
at year end as it is in arbitration.
Net cash provided by financing activities for the year ended January 2, 1999
was $77.6 million as compared to net cash provided by financing activities of
$15.9 million for the year ended January 3, 1998. The increase is primarily
attributable to a $39.2 million equity contribution from Pen-Tab Holdings and
the proceeds of long-term debt used to acquire Stuart Hall.
Net cash used in operating activities for the year ended January 3, 1998 was
$0.8 million as compared to net cash provided by operating activities of $13.4
million for the year ended December 28, 1996. The decrease was primarily due to
lower income earned during 1997 and changes in the Company's working capital
accounts, principally inventory.
Net cash provided by financing activities for the year ended January 3, 1998
was $15.9 million as compared to net cash used in financing activities of $13.2
million for the year ended December 28, 1996. The increase consisted of $72.6
million relating to the net proceeds of the issuance of senior subordinated
notes, offset by an increase in dividend distributions of $30.8 million and a
$12.7 million reduction in long-term debt.
Capital expenditures in the fiscal years 1998, 1997 and 1996 were $2.9
million, $1.6 million, and $0.9 million, respectively. The Company expects that
capital expenditure requirements will be approximately $4.0 million for 1999.
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 cash generated from
operating activities.
In August 1998, in conjunction with the acquisition of Stuart Hall, the
Company entered into a new Credit Facility ("Credit Facility"). The information
below is a summary of the material terms thereof qualified by reference to the
complete text of the documents. The Credit Facility has two parts, a $100
million revolver and a $35 million term loan. Borrowings under the Credit
Facility are available to acquire the capital stock of Stuart Hall Company,
Inc., for working capital and general corporate purposes, including letters of
credit. The $35 million term loan was fully drawn on at August 20, 1998 in
conjunction with the acquisition of Stuart Hall. The Credit Facility is secured
by first priority liens on substantially all of the Company's assets. The
Credit Facility expires on August 20, 2001, unless extended. The interest rate
per annum applicable to the Credit Facility is the prime rate, as announced by
the Bank plus 1.0% or, at the Company's option, the Eurodollar rate plus 2.0%.
The Company is required to pay a commitment fee of 0.5% on the unused portion
of the $100 million revolver. The Credit Facility permits the Company to prepay
loans and to permanently reduce credit commitments or letters of credit, in
whole or in part, at any time in certain minimum amounts.
The availability of the Credit Facility is subject to various conditions
precedent. Advances are made under the revolver portion of the Credit Facility
up to an aggregate $100 million based on a borrowing base comprised of eligible
accounts receivable and inventory at the following advance rates: 85% of the
value of eligible accounts receivable, and 60% of the value of eligible
inventory. The Credit Facility 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.
The Company's average working capital borrowings under its credit
agreements, in effect at the time, for the fiscal years 1998, 1997, and 1996
were $7.6 million, $2.5 million, and $24.9 million, respectively. The Company's
maximum working capital borrowings outstanding were $35.3 million, $10.9
million, and $39.4 million, respectively for the same fiscal years. At January
2, 1999 $5 million was outstanding on the revolver portion of the Credit
Facility.
13
<PAGE>
Management believes that based on current levels of operations and
anticipated internal growth, cash flow from operations, together with other
available sources of funds including the availability of seasonal borrowings
under the Credit Facility, will be adequate for the foreseeable future to make
required payments of principal and interest on the Company's indebtedness, to
fund anticipated capital expenditures and working capital requirements. The
ability of the Company to meet its debt service obligations and reduce its
total debt will be dependent, however, upon the future performance of the
Company which, in turn, will be subject to general economic conditions and to
financial, business and other factors, including factors beyond the Company's
control. A portion of the debt of the Company bears interest at floating rates;
therefore, its financial condition is and will continue to be affected by
changes in prevailing interest rates.
During November 1997, the Company entered into a swap agreement, which
expires February, 2002, to swap its fixed rate of payment on the $75 million 10
7/8% Senior Subordinated Notes for a floating rate payment. The floating rate
is based upon a basket of LIBORS of three countries plus a spread, and is
capped at 12.5%. The interest rate resets every six months and the Company's
effective interest rate under the swap agreement at January 2, 1999 was 10.5%.
The Company can terminate the transaction at any time, at the then current fair
market value of the swap instrument. At January 2, 1999, the agreement could
have been terminated at a gain of $747,000.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended January 2, 1999.
Year 2000 compliance.
Until recently, computer programs were generally written using two digits
rather than four to define the applicable year. Accordingly, such programs may
be unable to distinguish between the year 1900 and the year 2000. This could
result in system failures or data corruption for the Company, its customers or
suppliers, which could cause disruptions of operations. The Company is
currently engaged in a company-wide effort to address the year 2000
compatibility issues. The project is focused on three main areas: information
technology (IT) systems; non-IT systems imbedded in equipment; and the
company's business relationships with third parties, such as suppliers,
customers, and service providers. The thrust of the project is to address those
systems and relationships which the Company judges to be material to their
operations. Based on the Company's current project status, management feels it
is unlikely there will be any disruptions in manufacturing or distribution of
products to customers, or in their daily business processes. The Company is
expecting to fund all year 2000 project costs through its operating cash flow.
The Company has recently purchased a new certified Year 2000 compliant
software package to upgrade it's existing IT systems. The implementation of the
recently purchased software is expected to be complete by June 30, 1999. The
purchase of the new software was purely for the purpose of enhancing the
Company's existing IT systems; however, a side benefit of the software is its
year 2000 compliance. The cost associated with the acquisition of the new IT
system are being capitalized in accordance with SOP 98-1 "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use". The cost of
the year 2000 compliance project related to IT systems is expected to be $0.2
million of which $0.1 million has been expended.
The year 2000 compliance issue related to non-IT systems imbedded in
equipment is currently being evaluated by a company wide committee representing
all functional areas. The cost to remedy this issue is not expected to be
material, and is expected to be complete by September 30, 1999.
The Company has requested documentation from all significant customers,
suppliers, and service providers that their organizations have addressed the
year 2000 compliance issues and that their companies are ready. The cost to
ensure all significant customers, suppliers, and service providers are
compliant is not expected to be material, and will be complete by September 30,
1999.
14
<PAGE>
The Company currently is developing contingency plans. The Company
anticipates that its internal systems will by Year 2000 compliant by September
30, 1999. The Year 2000 readiness of 3rd parties with which the Company has a
material relationship and their products and services are being assessed.
While the Company cannot warrant that all business systems of its business
partners, external agents, service providers, or government agencies will be
timely with year 2000 compliance, the Company expects no business interruptions
due to non-compliance by any particular entity. The Company believes that year
2000 issues will not materially affect future financial results or operating
performances.
Disclosures Regarding Accounting Standards Issued But Not Yet Adopted
The Financial Accounting Standards Board has issued various new statements
including Statements No. 133. Statement No. 133 (Accounting for Derivative
Instruments and Hedging Activities) is not effective until fiscal year 2000 and
the Company did not adopt early. Adoption of this standard will not materially
impact the Company's financial position, results of operations or cash flows,
and any effect, while not yet determined by the Company, will be limited to the
presentation of its disclosures.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.
The Company's market risk is impacted by changes in interest rates and
certain commodity prices, namely paper. The Company does not currently hold or
issue derivative instruments for trading or hedging purposes related to
commodity price fluctuations.
The Company's primary market risk is commodity price exposure. Based upon
past experience, the Company believes it can effectively pass through to its
customers commodity price fluctuations thus assisting the Company in mitigating
exposure related to commodity price fluctuations. In addition, the Company has
market risk related to interest rate exposure on its Credit Facility and swap
agreement. Interest rate swaps may be used to adjust interest rate exposure
when appropriate.
Based on the Company's overall commodity price and interest rate exposure at
January 2, 1999, management believes that a short-term change in any of the
exposures will not have a material effect on the consolidated financial
statements of the Company.
Item 8. Financial Statements and Supplementary Data.
<TABLE>
<CAPTION>
Financial Statements of Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors.................... F1
<S> <C>
Consolidated Balance Sheets.......................................... F2
Consolidated Statements of Operations................................ F4
Consolidated Statements of Stockholder's Equity...................... F5
Consolidated Statements of Cash Flows................................ F6
Notes to Consolidated Financial Statements........................... F7
Financial Statements of Acquired Business--Stuart Hall Company, Inc.
Report of Arthur Andersen LLP, Independent Auditors.................. F24
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995... F25
Consolidated Statements of Income for the three years in the period
ending
December 31, 1997................................................... F26
Consolidated Statements of Stockholder's Equity for the three years
in the period ending December 31, 1997.............................. F27
Consolidated Statements of Cash Flows for the three years in the
period ending December 31, 1997..................................... F28
Notes to Consolidated Financial Statements........................... F29
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
The Company has not filed a form 8-K reporting a change of independent
auditors or any disagreement with the independent auditors.
15
<PAGE>
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names, ages as of December 1998, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Alan Hodes....................... 55 Chief Executive Officer and Director
Dan Gallo........................ 46 President
Michael Greenberg................ 58 Executive Vice President
William Leary.................... 39 Vice President, Chief Financial and Administrative Officer
Deborah Hodes.................... 46 Senior Vice President/Creative Director and Director
Thomas McWilliams................ 55 Director
David Howe....................... 34 Director
James Stevens.................... 62 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.
Dan Gallo joined the Company on September 1, 1997. Mr. Gallo has over 20
years of experience in the Office Products Industry. He earned his Business
Administration and Marketing Degree at John Carroll University. Prior to
joining the Company, Mr. Gallo was employed as Vice President of Sales at
Sanford Corporation a division of Newell Co. where he worked for 19 years.
During the course of his employment with Sanford, Mr. Gallo held several sales
related positions including Regional Sales Manager, National Account Manager
and National Field Sales Manager for both the commercial and retail markets. He
is credited with pioneering Sanford into the retail marketplace where they
currently hold a leadership position.
Michael Greenberg has been Executive Vice President since 1971. Mr.
Greenberg was Vice President of Vinylweld, Inc. the predecessor of the
Company's packaging business, when it was acquired by the Company. 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, LLP 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.
Deborah Hodes has been Senior Vice President/Creative Director of the
Company since 1992. Ms. Hodes 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.
16
<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.
Item 11. Executive Compensation
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 Chief Executive Officer and each officer whose compensation exceeded
$100,000 for fiscal 1998. The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual
Compensation
---------------
Salary Bonus
Name and Principal Position Fiscal Year ($) ($)
--------------------------- ----------- ------- -------
<S> <C> <C> <C>
Alan Hodes 1998 304,148 --
Chief Executive Officer 1997 300,000 --
1996 300,000 --
Dan Gallo 1998 220,000 50,000
President 1997 220,000 118,000
Michael Greenberg 1998 231,964 --
Executive Vice President 1997 228,800 --
1996 228,800 60,000
William Leary 1998 128,700 50,000
Vice President, Chief Financial and 1997 117,000 50,000
Administrative Officer 1996 110,000 95,000
Deborah Hodes 1998 113,300 50,000
Senior Vice President, Creative Director 1997 103,000 50,000
</TABLE>
Employment Agreements
Currently, Pen-Tab Holdings, Inc. has employment agreements with Messrs.
Hodes and Greenberg. The employment agreements provides 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
17
<PAGE>
(iii) certain fringe benefits. Each employment agreement provides that the
executive may be terminated by the Company only with cause, and provides that
the executive will not compete with the Holdings or its subsidiaries during the
period of employment and for the three years thereafter. Each executive is
entitled to receive a severance payment in the event of a resignation caused by
the relocation of the office at which the executive is employed.
Pension 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.
The Company also contributes to union sponsored multi-employer defined
contribution pension plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
All of the Company's issued and outstanding capital stock is owned by
Holdings.
Item 13. Certain Relationships and Related Transactions
None.
18
<PAGE>
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) The following documents are filed as part of this form 10-K:
(1) Financial Statements
Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholder's Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Acquired Business--Stuart Hall Company, Inc.
Report of Arthur Andersen LLP, Independent Auditors
Consolidated Balance Sheets as of December 31, 1997, 1996 and
1995
Consolidated Statements of Income for the three years in the
period ending December 31, 1997
Consolidated Statements of Cash Flows for the three years in the
period ending December 31, 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
(3) Exhibits: the exhibits listed on the accompanying exhibit index are
filed as part of this form 10-K.
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 First Supplemental Indenture, dated as of May 7, 1997, between Pen-Tab
Industries, Inc. and United States Trust Company of New York.**
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 First Amendment to Second Amended and Restated Loan and Security
Agreement dated as of February 4, 1997.***
10.7 Second Amendment and Waiver to Second Amended and Restated Loan and
Security Agreement dated as of June 9, 1997.***
10.8 Third Amendment to Second Amended and Restated Loan and Security
Agreement dated as of February 23, 1998.***
10.11 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.**
10.12 Registration Rights Agreement dated as of February 4, 1997 by and
among Pen-Tab Industries, Inc., Citicorp Venture Capital, Ltd., Alan
Hodes, Michael Greenberg.**
10.13 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Alan Hodes.**
10.14 Pen-Tab Holdings, Inc. 1997 Stock Option Plan and Form of Agreement
Evidencing a Grant of a Nonqualified Stock Option under 1997 Stock
Option Plan.**
10.15 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc. and Michael Greenberg.**
10.16 First Amendment to Second Amended and Restated Loan and Security
Agreement, dated as of February 4, 1997 by and among Pen-Tab
Industries, Inc., Pen-Tab Holdings, Inc. (formerly known as Pen-Tab
Industries, Inc.) and Bank of America Illinois.**
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
10.17 Stock Purchase Agreement between Newell Co. and Pen-Tab Holdings, Inc.
dated June 24, 1998.*
10.18 Secured Credit Agreement dated as of August 20, 1998 among Pen-Tab
Industries, Inc., Pen-Tab Holdings, Inc. and Bank of America National
Trust and Savings Association, as Agent and Letter of Credit Issuing
Bank, and The Other Financial Institutions Party Hereto.*
21.1 Subsidiaries of Pen-Tab Industries, Inc.*
25.1 Statement of Eligibility of Trustee on Form T-1.**
27.1 Financial Data Schedule.*
99 Pen-Tab Safe Harbor Statement.*
</TABLE>
- --------
* Filed herewith.
** Incorporated by reference
*** To be filed by amendment
(b) Reports of form 8-K
The Company filed a Current Report on Form 8-K during the year ended
January 2, 1999 relating to the acquisition of Stuart Hall Company, Inc. on
August 20, 1998. The final Form 8-K was filed on December 11, 1998.**
21
<PAGE>
Signature
Pursuant to the requirements of Section 13 on 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: April 1, 1999
Pen-Tab Industries, Inc.
(Registrant)
By: /s/ William Leary
-----------------------------------
William Leary
Vice President, Chief Financial and
Administrative Officer
(principal financial officer
and accounting officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following person on behalf of the Registrant and
in the capacity and on the date indicated.
<TABLE>
<S> <C> <C>
Chief Executive Officer April 1, 1999
___________________________________________ and Director
Alan Hodes
Chief Financial Officer April 1, 1999
___________________________________________
William Leary
Senior Vice President April 1, 1999
___________________________________________ and Director
Deborah Hodes
Director April 1, 1999
___________________________________________
Thomas McWilliams
Director April 1, 1999
___________________________________________
David Howe
Director April 1, 1999
___________________________________________
James Stevens
</TABLE>
22
<PAGE>
Schedule II--Valuation and Qualifying Accounts Pen-Tab Industries, Inc.
<TABLE>
<CAPTION>
Balance at Balance at
Beginning Bad Debts Charge-off End of
Description of period Expense Deductions period
----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
for the years ended:
January 2, 1999................ $ 186 $ 286 $ (166) $ 306
January 3, 1998................ $ 76 $ 144 $ (34) $ 186
December 28, 1996.............. $ 75 $ 31 $ (30) $ 76
<CAPTION>
Balance at Balance at
Beginning Rebates and Charge-off End of
Description of period Credits Deductions period
----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Reserve for volume rebates and
credits for the years ended:
January 2, 1999................ $ 217 $3,041 $(1,829) $1,429
January 3, 1998................ $1,299 -- $(1,082) $ 217
December 28, 1996.............. $ 527 $ 963 $ (191) $1,299
<CAPTION>
Balance at Balance at
Beginning End of
Description of period Additions Subtractions period
----------- ---------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Reserve for lower of cost or
market inventory adjustments
for the years ended:
January 2, 1999................ $ -- $2,036 $ -- $2,036
January 3, 1998................ $ -- $ -- $ -- $ --
December 28, 1996.............. $ -- $ -- $ -- $ --
</TABLE>
23
<PAGE>
Index to Financial Statements and Schedules
<TABLE>
<CAPTION>
Page
----
<S> <C>
Financial Statements of Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors........................ F-1
Consolidated Balance Sheets as of January 2, 1999 and January 3, 1998.... F-2
Consolidated Statements of Operations for the three years in the period
ended January 2, 1999................................................... F-3
Consolidated Statements of Stockholder's Equity for the three years in
the period ended
January 2, 1999......................................................... F-4
Consolidated Statements of Cash Flows for the three years in the period
ended January 2, 1999................................................... F-5
Notes to Consolidated Financial Statements............................... F-6
</TABLE>
The following consolidated financial statement schedule is included in item
14(d):
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
<TABLE>
<S> <C>
Financial Statements of Acquired Business--Stuart Hall Company, Inc.
Report of Arthur Andersen LLP, Independent Auditors...................... F-17
Consolidated Balance Sheets as of December 31, 1997, 1996 and 1995....... F-18
Consolidated Statements of Income for the three years in the period
ending December 31, 1997................................................ F-19
Consolidated Statements of Stockholder's Equity for the three years in
the period ending
December 31, 1997....................................................... F-20
Consolidated Statements of Cash Flows for the three years in the period
Ending December 31, 1997................................................ F-21
Notes to Consolidated Financial Statements............................... F-22
</TABLE>
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
Board of Directors
Pen-Tab Industries, Inc.
We have audited the accompanying consolidated balance sheets of Pen-Tab
Industries, Inc. as of January 2, 1999 and January 3, 1998, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended January 2, 1999. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Pen-Tab Industries, Inc. at January 2, 1999 and January 3, 1998, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended January 2, 1999, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
March 26, 1999
Vienna, Virginia
F-1
<PAGE>
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
January January 3,
2, 1999 1998
-------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 20 $ 13,676
Accounts receivable (less allowances for discounts,
Credits and doubtful accounts of $2,325 & $1,375)...... 15,770 8,321
Inventories, net........................................ 41,801 21,787
Prepaid expenses and other current assets............... 611 993
Deferred income taxes................................... 1,384 --
-------- --------
Total current assets.................................. 59,586 44,777
Property, plant and equipment, at cost:
Land and buildings...................................... 16,206 6,944
Machinery and equipment................................. 42,746 1,490
Furniture and fixtures.................................. 1,332 170
Leasehold improvements.................................. 1,476 19,709
-------- --------
61,760 28,313
Less: accumulated depreciation and amortization........... 16,222 12,538
-------- --------
45,538 15,775
Intangibles:
Goodwill, net........................................... 72,480 374
Debt issuance costs, net................................ 4,339 2,866
-------- --------
Total assets.......................................... $181,943 $ 63,792
======== ========
Liabilities and stockholder's equity
Current liabilities:
Accounts payable........................................ $ 5,804 $ 2 ,671
Accrued expenses and other current liabilities.......... 8,224 1,023
Due to Newell Co........................................ 18,546 --
Accrued interest on subordinated notes.................. 3,324 3,330
Deferred income taxes................................... -- 140
Current portion of long-term debt....................... 4,886 400
Current portion of capitalized lease obligation......... 924 140
-------- --------
Total current liabilities............................. 41,708 7,704
Long-term debt............................................ 119,339 82,100
Capitalized lease obligation.............................. 7,311 114
Deferred income taxes..................................... 3,068 1,879
Stockholder's equity (deficit):
Common Stock $.01 par value, 1,000 shares Authorized;
100 shares issued at January 2, 1999 and January 3,
1998................................................... -- --
Additional capital...................................... 39,209 --
Retained deficit........................................ (28,692) (28,005)
-------- --------
Total stockholder's equity (deficit).................. 10,517 (28,005)
-------- --------
Total liabilities and stockholder's equity (deficit).. $181,943 $ 63,792
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-2
<PAGE>
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year
---------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Net sales.......................................... $124,082 $96,637 $106,869
Cost of goods sold................................. 91,105 71,701 74,781
-------- ------- --------
Gross profit....................................... 32,977 24,936 32,088
Expenses:
Selling, general and administrative.............. 22,030 16,838 16,528
Amortization of goodwill......................... 578 -- --
Other:
Interest income................................ (114) (228) --
Interest expense............................... 11,527 8,422 2,346
Reorganization expenses........................ -- 804 --
Other income--net.............................. (28) -- (4)
-------- ------- --------
Total expenses............................... 33,993 25,836 18,870
-------- ------- --------
Income (loss) before income taxes.................. (1,016) (900) 13,218
Income tax (benefit) provision..................... (335) 1,945 (191)
-------- ------- --------
Net income (loss).................................. $ (681) $(2,845) $ 13,409
======== ======= ========
Unaudited Pro Forma Data:
Historical income (loss) before income taxes....... $ -- $ (900) $ 13,218
Pro forma tax (benefit) provision.................. -- (338) 4,956
-------- ------- --------
Pro forma net income (loss)........................ $ -- $ (562) $ 8,262
======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
<TABLE>
<CAPTION>
Retained
Common Additional Treasury Earnings
Stock Capital Stock (Deficit) Total
------ ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
Balance December 30,
1995..................... $ -- $ 370 $ (665) $ 11,339 $11,044
Net income.............. -- -- -- 13,409 13,409
Dividends............... -- -- -- (9,401) (9,401)
Cancellation of treasury
stock.................. -- (370) 665 (295) --
------ ------- ------- -------- -------
Balance December 28,
1996..................... -- -- -- 15,052 15,502
Net loss................ -- -- -- (2,845) (2,845)
Dividends............... -- -- -- (40,212) (40,212)
------ ------- ------- -------- -------
Balance January 3, 1998... -- -- -- (28,005) (28,005)
Net loss................ -- -- -- (681) (681)
Dividends............... -- -- -- (6) (6)
Equity contributions.... -- 39,209 -- -- 39,209
------ ------- ------- -------- -------
Balance January 2, 1999... $ -- $39,209 $ -- $(28,692) $10,517
====== ======= ======= ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PEN-TAB INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Operating activities
Net income (loss)................................ $ (681) $ (2,845) $ 13,409
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
<CAPTION>
Depreciation and amortization.................. 3,607 2,554 2,352
<S> <C> <C> <C>
Amortization of goodwill....................... 578 -- --
Amortization of debt issuance costs............ 707 414 12
Deferred income taxes.......................... (335) 1,975 (286)
Provision for losses on accounts receivable.... 286 144 31
Changes in operating assets and liabilities:
Accounts receivable.......................... 19,417 2,232 (1,559)
Inventories.................................. (2,386) (7,049) (78)
Prepaid expenses, other current assets and
other assets................................ 461 (507) (292)
Accounts payable............................. 388 (103) 1,026
Due to Newell Co............................. 18,546 -- --
Accrued expenses and other liabilities....... 2,844 (913) (1,259)
Accrued interest on subordinated notes....... (6) 3,330 --
--------- -------- --------
Net cash provided by (used in) operating
activities...................................... 43,426 (768) 13,356
Investing activities
Sale of minority interest in Vinylweld LLC....... 125 -- --
Purchase of property, plant and equipment........ (2,854) (1,562) (890)
Purchase of Stuart Hall, net of cash acquired.... (131,903) -- --
--------- -------- --------
Net cash used in investing activities............ (134,632) (1,562) (890)
Financing activities
Proceeds from revolver borrowings................ 145,058 18,688 20,586
Repayments of revolver borrowings................ (140,058) (35,144) (24,376)
Proceeds from long-term debt..................... 35,000 -- --
Principal payments on long-term debt............. (1,150) -- --
Principal payments on capitalized lease
obligations..................................... (503) -- --
Proceeds from issuance of senior subordinated
notes........................................... -- 72,563 --
Dividends........................................ (6) (40,212) (9,401)
Equity contribution from Holdings................ 39,209 -- --
--------- -------- --------
Net cash provided by (used in) financing
activities...................................... 77,550 15,895 (13,191)
(Decrease) increase in cash and cash
equivalents..................................... (13,656) 13,565 (725)
Cash and cash equivalents at beginning of year... 13,676 111 836
--------- -------- --------
Cash and cash equivalents at end of year......... $ 20 $ 13,676 $ 111
========= ======== ========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest....................................... $ 10,028 $ 5,109 $ 2,346
========= ======== ========
Income taxes................................... $ -- $ 512 $ 123
========= ======== ========
Non-cash transaction:
Services purchased related to the debt offering
and paid for
by a reduction of proceeds received........... $ -- $ 2,437 $ --
========= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Recapitalization, Basis of Presentation of Financial Statements and
Description of Business
On July 1, 1996, 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, were merged into a
new Virginia corporation called Pen-Tab Industries, Inc. There was 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, Pen-Tab Industries, Inc. 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.
On February 4, 1997, Pen-Tab Industries, Inc., a Virginia corporation,
changed its name to Pen-Tab Holdings, Inc. ("Holdings"). On February 4, 1997
Holdings formed a wholly owned subsidiary called Pen-Tab Industries, Inc. (the
"Company"), a Delaware corporation. On February 4, 1997, the Company issued $75
million 10 7/8% Senior Subordinated Notes due 2007 and Holdings effected a
recapitalization pursuant to which Holdings repurchased approximately 748
shares of Class A common stock and 122 shares of Class B common stock from
management shareholders for approximately $47,858, 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. Holdings'
shareholders concurrently approved an amendment to Holdings' 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, Holdings' shareholders approved a stock split pursuant to which
each share of Holdings' Class A Common Stock and Class B Common Stock then
outstanding was converted into 60,937.50 shares of such common stock.
On February 3, 1998, net assets of $1,500 of the Company's Vinylweld
division were contributed to a newly formed Delaware limited liability company
called Vinylweld L.L.C. The Company sold 20% of Vinylweld L.L.C. to Vinylweld's
president for $125. At January 2, 1999 the minority interest related to
Vinylweld was in a negative equity position, hence the net loss related to
Vinylweld's operations were not allocated to the minority interest.
On August 20, 1998, the Company acquired all of the capital stock of Stuart
Hall Company, Inc. ("Stuart Hall"). See Note 3 for details.
The Company, a wholly-owned subsidiary of Holdings, is a leading
manufacturer of school, home and office supply products. 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 Vinylweld L.L.C., is a leading
designer and manufacturer of vinyl packaging products. Sales are made on open
account and the Company generally does not require collateral.
2. Summary of Significant Accounting Policies
Method of Accounting
The accompanying consolidated financial statements are prepared on the
accrual basis of accounting in accordance with generally accepted accounting
principles. The 1996 and 1998 fiscal years refer to the fifty-two week periods
ended December 28, 1996 and January 2, 1999, respectively, and the 1997 fiscal
year refers to the fifty-three week period ended January 3, 1998.
F-6
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Principles of consolidation
The consolidated financial statements include the accounts of the company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated.
Revenue Recognition
Sales are recognized upon product shipment (FOB shipping point). All risks
and rewards of ownership pass to the customer upon shipment. Damaged or
defective products may be returned to the Company for replacement or credit.
The Company may offer certain volume rebates, co-op advertising and other
discounts and allowances. The effects of these discounts and allowances are
estimated and recorded at the time of shipment. Volume rebates are estimated
and recorded based on sales activity.
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.
Inventories
Inventories are stated at the lower of cost or market and are valued using
the last-in, first-out (LIFO) method.
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 and assets held under capital leases are
amortized by the straight-line method over the shorter of the estimated useful
lives or the lease term. The principal estimated useful lives are: buildings 15
to 40 years; machinery and equipment 3 to 10 years; furniture and fixtures 3 to
5 years; leasehold improvements and assets held under capital leases 3 to 10
years.
Impairment of Long-Lived Assets
Each year, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of." The
Company made no adjustments to the carrying values of the assets during the
years ended January 2, 1999 and January 3, 1998.
Goodwill
The excess of the purchase cost over the fair value of assets acquired is
being amortized over 40 years. The Company evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the undiscounted future
cash flows over the remaining useful life to determine whether goodwill is
recoverable. The Company believes that no material impairment of goodwill
existed at January 2, 1999. The related accumulated amortization expense at
January 2, 1999 and January 3, 1998 was $578 and zero, respectively.
F-7
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Amortization of Debt Issue Costs
Debt issue costs are stated at cost and amortized to interest expense.
Amortization of debt issue costs is computed on the effective interest method
over the maturity of the applicable debt, which range from three years for the
Credit Facility, ten years for the Senior Subordinated Notes and twenty years
for the Industrial Development Revenue Bonds. The Company complies with
Statements of Financial Standards (FAS 121) "Accounting for the Impairment of
Long-Lived Assets" as related to its debt issue costs and other intangibles.
The related accumulated amortization expense at January 2, 1999 and January 3,
1998 was $1,140 and $433, respectively.
Advertising Costs
The Company expenses the costs of advertising as incurred. Such costs
amounted to approximately $1,596, $2,658, and $2,934 for fiscal 1998, 1997, and
1996, respectively.
Income Taxes
The Company accounts for income taxes and the related assets and liabilities
in accordance with FAS 109, "Accounting for 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 are 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 8.
Fair Value of Financial Instruments
The Company considers the recorded value of its cash, cash equivalents,
accounts receivable and accounts payable to approximate the fair value of the
respective assets and liabilities at January 2, 1999 and January 3, 1998.
The fair value of the $75 million Senior Subordinated Notes based on a
quoted market price is 84% of the face value or $63 million at January 2, 1999.
The fair value of the swap agreement at January 2, 1999 was $747. The fair
value was determined based upon prevailing interest rates at January 2, 1999.
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.
Derivative Financial Instruments
The Company utilizes derivative financial instruments principally to hedge
interest rates through an interest rate swap agreement. The Company actively
evaluates the credit worthiness of the financial institutions that are
counterparts to derivative financial instruments, and it does not expect any
counterparts to fail to meet their obligation. Premiums paid on the interest
swap agreement are amortized as interest expense over the term of the
agreement. Amounts received or paid under the swap agreement are recorded as a
reduction of or increase in interest expense, respectively.
F-8
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Risk and Uncertainties
The Company is potentially subjected to concentrations of credit risk with
trade accounts receivable. Because the Company has a large and diverse customer
base, there was no material concentration of credit risk related to trade
accounts receivable at January 2, 1999.
Recently Issued Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS
No. 133), which requires that all derivatives be recognized as either assets or
liabilities in the statement of financial position and that those instruments
shall be measured at fair value. SFAS No. 133 also prescribes the accounting
treatment for changes in the fair value of derivatives which depends on the
intended use of the derivative and the resulting designation. Designations
include hedges of the exposure to changes in the fair value of a recognized
asset or liability, hedges of the exposure to variable cash flows of a
forecasted transaction, hedges of the exposure to foreign currency
translations, and derivatives not designated as hedging instruments. SFAS No.
133 is effective for fiscal years beginning after June 15, 1999. The Company
expects to adopt SFAS No. 133 in the first quarter of the year 2000. The
financial statement impact of adopting SFAS No. 133 has not yet been
determined.
During 1998, the Company adopted Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income", which had no effect since the
Company had no components of comprehensive income.
Reclassification
Certain amounts included in prior years' financial statements have been
reclassified to conform to the current year format.
3. Acquisition of Stuart Hall
On August 20, 1998, Pen-Tab acquired all of the outstanding stock of Stuart
Hall, a wholly-owned subsidiary of Newell Co. for $107 million in cash, subject
to adjustment based on the closing date balance sheet. Such adjustment is
estimated to be approximately $17.9 million (See Note 13). The purchase price
of the acquisition was funded by an equity contribution of $39.2 million from
Holdings and with borrowings under the Company's Credit Facility (see Note 7--
Long-Term Debt). The transaction was accounted for using the purchase method.
The purchase price was allocated to the assets and liabilities acquired based
on their estimated fair values. In conjunction with the acquisition, the
Company recorded goodwill of approximately $73 million. The operations of
Stuart Hall are included in the consolidated financial statements of the
Company beginning August 20, 1998 (date of acquisition).
The following unaudited pro forma results of operations assumes that the
acquisition of Stuart Hall had occurred at the beginning of fiscal 1998 and
1997, respectively. These pro forma results give effect to certain adjustments,
including depreciation of property, plant and equipment, amortization of
goodwill and interest expense resulting from the acquisition and related
financing. The pro forma results have been prepared for comparative purposes
only and do not purport to indicate the results of operations that would
actually have occurred had the combination been in effect on the date indicated
or which may occur in the future.
<TABLE>
<CAPTION>
For the Year Ended
------------------------- ---
Jan. 2, 1999 Jan. 3, 1998
------------ ------------
<S> <C> <C> <C>
Pro forma net sales unaudited................ $193,175 $187,570
======== ========
Pro forma net income unaudited............... $ 5,098 $ 3,367
======== ========
</TABLE>
F-9
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
4. Unaudited Pro Forma Data
As described further in Note 8, the Company was taxed as an "S" corporation
during fiscal 1996. Upon completion of the recapitalization described in Note
1, Pen-Tab Industries, Inc. terminated its "S" corporation status. The pro
forma related statement of income and retained earnings for fiscal 1997 and
1996 reflect adjustments to the Company's income tax provision, as if the
Company had been taxed as a "C" corporation for the respective periods.
5. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
January 2, 1999 January 3, 1998
--------------- ---------------
<S> <C> <C>
Raw materials................................... $17,242 $ 8,993
Work-in-process................................. 715 372
Finished goods.................................. 23,844 13,129
LIFO reserve, net............................... -- (707)
------- -------
$41,801 $21,787
======= =======
</TABLE>
Due to the decline in certain commodity grade paper prices, the inventory at
January 2, 1999 has been written down by approximately $2,036 to reflect the
inventory at the lower of cost or market.
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 lower in 1998, 1997 and 1996 by approximately $707, $257
and $3,620, respectively. The Company reports its inventory under the LIFO
method in order to better match its income and expenses. There were no
liquidations of LIFO inventories for the fiscal year ended January 2, 1999.
6. Dividends
Dividends for fiscal years 1998, 1997 and 1996 of $6, $40,212 and $9,401,
respectively, were paid to the stockholders' of the Company. The dividends for
the fiscal year 1997 included $5,695 paid to the stockholders' of the Company
in the period to February 3, 1997 and $34,517 paid by the Company to Holdings.
7. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
January
2, January 3,
1999 1998
--------- ----------
<S> <C> <C>
Credit Facility:
Revolver............................................ $ 5,000 $ --
Term Loan........................................... 34,250 --
Senior Subordinated Notes............................. 75,000 75,000
Industrial development revenue bonds.................. 7,100 7,500
Equipment notes payable............................... 2,875 --
Capital lease obligations (see Note 9)................ 8,235 254
--------- -------
132,460 82,754
Less: current portion................................. 5,810 540
--------- -------
$ 126,650 $82,214
========= =======
</TABLE>
F-10
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The Company had a Credit Agreement with Bank of America ("The Credit
Agreement") which provided for advances based upon a borrowing base comprised
of specified percentages of eligible accounts receivable, inventory, and
property, plant and equipment, up to an aggregate maximum of $35,000. The
interest rate per annum applicable to the Credit Agreement was the prime rate,
as announced by the Bank plus a margin from 0.0% to 0.7% or at the Company's
option, the Eurodollar rate plus a margin from 1.0% to 2.2% (based on the
Company's ratio of EBITDA minus capital expenditure to interest expense). Under
the terms of the Credit Agreement, the Company was required to maintain certain
financial ratios relating to cash flow and working capital, reduce the
principal balance of any loans outstanding to zero for a period of sixty days
beginning September 30 of each fiscal year and restrict the amount of dividends
that can be paid during the year. Except as noted below, all assets of the
Company were pledged as collateral for balances owing under this Credit
Agreement. The weighted average borrowing rate was 7.5%, 7.5% and 6.9% for
fiscal year 1998, 1997 and 1996, respectively.
In conjunction with the acquisition of Stuart Hall on August 20, 1998, the
Company repaid the outstanding obligations on the Credit Agreement and entered
into a new $135 million Credit Facility ("Credit Facility") with Bank of
America which expires on August 20, 2001. The Credit Facility includes a $100
million revolver and a $35 million term loan. The $35 million term loan has
aggregate maturities as follows: 1999 $3,500; 2000 $5,500; 2001 $25,250. The
Company paid $750 of principal during 1998. The $100 million revolver portion
of the Credit Facility provides for advances based upon a borrowing base
comprised of specified percentages of eligible accounts receivable and
inventory. The interest rate per annum applicable to the Credit Facility is the
prime rate, as announced by the Bank plus 1% or at the Company's option, the
Eurodollar rate plus 2%. The Company is required to pay a commitment fee of
0.5% on the unused portion of the $100 million revolver. Under the terms of the
Credit Facility, the Company is required to maintain certain financial ratios
relating to cash flow, annually reduce the principal balance of the revolver to
$25 million for thirty consecutive days during the period between September 30
and November 15 of each fiscal year and restrict the amount of dividends that
can be paid during the year. Except as noted below, all assets of the company
are pledged as collateral for balances owing under the Credit Facility. The
weighted average borrowing rate was 7.5% for fiscal year 1998.
The 10 7/8% Senior Subordinated Notes are due in 2007. The Indenture
contains certain covenants that, among other things, limits the ability of the
Company to incur additional indebtedness. During November 1997, the Company
entered into a swap agreement, which expires February, 2002, to swap its fixed
rate of payment on the $75,000 10 7/8% Senior Subordinated Notes for a floating
rate payment. The floating rate is based upon a basket of the LIBORS of three
countries plus a spread, and is capped at 12.5%. The interest rate resets every
six months and at January 2, 1999, the Company's effective interest rate under
the swap agreement was 10.5%. The Company can terminate the transaction at any
time, at the then current fair market value of the swap instrument. A 1.0%
change in the effective interest rate would result in a $0.7 million change in
interest expense.
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 (4.05%
as of January 2, 1999 plus a bank of letter of credit fee of 1.5%). The
industrial development revenue bonds are subject to a mandatory sinking fund
redemption which commenced 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-Tab's 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.
F-11
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The Company has a series of equipment notes payable with CIT Group/Equipment
Financing Inc. The notes bear interest at various fixed amounts from 8.95% to
10.85% and mature at various dates through 2001. The aggregate maturities are
as follows: 1999 $986; 2000 $986; 2001 $903.
8. Income Taxes
The Company elected to be treated as an "S" corporation for federal income
tax purposes for 1996 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 1996, except for certain state income taxes. Effective February 4,
1997, in conjunction with the Recapitalization described in Note 1, the Company
terminated its "S" corporation election.
The significant components of these amounts as shown on the Balance Sheet
are as follows:
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Current
Deferred Tax Assets
Allowance for bad debts................................... $ 110 $ 68
Inventory capitalization.................................. 186 95
Unused net operating loss................................. 314 232
LIFO reserve.............................................. 774 --
------- ------
1,384 395
Deferred Tax Liability
LIFO reserve.............................................. -- 535
------- ------
Net Current Deferred Tax (Asset) Liability.................. $(1,384) $ 140
======= ======
Non-current
Deferred Tax Liability
Property, plant and equipment............................. $ 1,897 $1,879
Goodwill.................................................. 1,171 --
------- ------
Net Non-Current Deferred Tax Liability...................... $ 3,068 $1,879
======= ======
Total Net Deferred Tax Liability............................ $ 1,684 $2,019
======= ======
</TABLE>
The components of income tax (benefit) provision from continuing operations
are:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -----
<S> <C> <C> <C>
Current
Federal............................................. $ -- $ -- $ 95
State............................................... -- (30) --
----- ------ -----
-- (30) 95
Deferred
Federal............................................. (304) 1,691 --
State............................................... (31) 284 (286)
----- ------ -----
(335) 1,975 (286)
----- ------ -----
Income tax (benefit) provision........................ $(335) $1,945 $(191)
===== ====== =====
</TABLE>
F-12
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
The differences between the (benefit) provision for income taxes and income
taxes computed at the statutory U.S. federal income tax rates are explained as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----- ------ -------
<S> <C> <C> <C>
Income tax (benefit) provision computed at the
statutory U.S. federal income tax rates.......... $(345) $ (306) $ 4,494
State income taxes, net of federal benefit........ (40) (36) 99
Change in entity status........................... -- 2,343 --
(Income) loss taxed at shareholders level......... -- 108 (4,494)
Other, including permanent differences............ 50 (164) (290)
----- ------ -------
(Benefit) provision for income taxes.............. $(335) $1,945 $ (191)
===== ====== =======
</TABLE>
No valuation allowance has been recorded as of January 2, 1999 related to
the deferred tax assets. The Company believes it is more likely than not that
the Company's deferred tax assets will be realized. The Company has available
for federal income tax purposes a $826 net operating loss, which expires
substantially in 2012.
During fiscal 1997, the Company was taxed as an "S" corporation for the
period ended February 3, 1997 and as a "C" corporation for the period
thereafter. The Company recorded a cumulative deferred tax liability of $2,343
upon termination of the Company's "S" corporation election.
9. Leases and Commitments
The Company leases certain office, manufacturing and warehouse facilities in
California and Chicago under operating leases which expire in May 2002 and
December 2009, respectively. The Company also leases certain office,
manufacturing and warehouse facilities in Kansas City under long term capital
leases that expire in December 2005, and are included in property, plant and
equipment as buildings. The assets held under capital leases are as follows:
<TABLE>
<CAPTION>
1998 1997
------ ----
<S> <C> <C>
Buildings.................................................... $8,783 $--
Less: Accumulated amortization............................... 304 --
------ ----
Total...................................................... $8,479 $--
====== ====
</TABLE>
Future minimum lease payments under non-cancelable operating and capital
leases are as follows, as of January 2, 1999:
<TABLE>
<CAPTION>
Fiscal year Operating Capital
----------- --------- -------
<S> <C> <C>
1999................................................... $1,464 $ 1,726
2000................................................... 1,466 1,582
2001................................................... 1,375 1,582
2002................................................... 726 1,582
2003................................................... 633 1,582
Thereafter............................................. 1,454 3,438
------ -------
Total.................................................. $7,118 $11,492
======
Imputed interest....................................... (3,257)
-------
Present value.......................................... $ 8,235
=======
</TABLE>
F-13
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Rent expense was approximately $1,353, $1,197 and $1,148 in fiscal 1998,
1997 and 1996, respectively. Amortization of the capital lease assets are
included in depreciation expense.
At January 2, 1999 and January 3, 1998, the Company had standby letters of
credit outstanding in the amounts of $197 and $457 issued by a bank on behalf
of Pen-Tab in connection with a license contract and a worker's compensation
insurance program, respectively. See also Note 7.
10. Reorganization Expenses
During fiscal 1997, the Company reorganized its sales and marketing
functions. The non-recurring charges of $804 for recruitment and acquisition
costs of new sales and marketing executives as well as the severance costs of
terminated sales employees are reported as reorganization expenses in the
statements of income and retained earnings.
11. Concentration of Risk
During fiscal 1998, 1997 and 1996 the Company had two customers each in
excess of 10% of revenues as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Customer A............................................... 16.9% 21.7% 22.3%
Customer B............................................... 13.3% 17.4% 15.8%
---- ---- ----
Total.................................................. 30.2% 39.1% 38.1%
==== ==== ====
</TABLE>
Employees covered under collective bargaining agreements represent
approximately 67% of the Company's work force. Collective bargaining agreements
covering approximately 22% of the Company's work force have expiration dates
within one year.
12. 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. The Company matches employee contributions at a rate of 50% of
the employee's annual contributions up to 2.5% of the employee's annual
compensation. Total expense under the plan amounted to $220, $136 and $42 in
fiscal 1998, 1997 and 1996, respectively.
The Company also contributes to union sponsored multi-employer defined
contribution pension plans. All union employees meeting certain employment
requirements are covered. Total expense under the union sponsored plans
amounted to $87, $24, and $21 in fiscal 1998, 1997 and 1996, respectively.
13. Contingencies
As described in Note 3, the Company's acquisition of Stuart Hall is subject
to a purchase price adjustment based on the closing date balance sheet. The
Company and the seller, Newell Co., are disputing the closing date balance
sheet amounts. The Company has recorded a liability at January 2, 1999 of $17.9
million, representing the amount which the Company believes is owed to Newell
Co. Newell Co. believes the amount due them is $24.8 million, $6.9 million
higher than what the Company has recorded. The matter will likely
F-14
<PAGE>
PEN-TAB INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
proceed to formal arbitration. The Company believes that it has meritorious
defenses to its position and intends to vigorously defend its position. Any
difference will be accounted for as an adjustment to goodwill and reflected in
the amortization going forward. The Company can not estimate at this time the
amount of additional liability to be incurred if any, but does not believe that
this matter will have a material adverse effect upon the Company's financial
position or results of operations.
14. Segment Information
As described in Note 1, the Company operates in two business segments
consisting of school, home and office products, and vinyl packaging products.
The following table provides certain financial data regarding these two
segments.
<TABLE>
<CAPTION>
School,
Home
And Vinyl
Office Packaging
Products Products Total
-------- --------- --------
<S> <C> <C> <C>
1998
Net sales..................................... $114,791 $ 9,291 $124,082
Operating earnings (loss)..................... 10,517 (148) 10,369
Interest expense, net......................... 11,413 -- 11,413
Identifiable assets........................... 178,608 3,335 181,943
Depreciation and amortization................. 4,692 200 4,892
Capital expenditures.......................... 2,175 679 2,854
1997
Net sales..................................... $ 88,014 $ 8,623 $ 96,637
Operating earnings............................ 6,905 389 7,294
Interest expense, net......................... 8,194 -- 8,194
Identifiable assets........................... 61,578 2,214 63,792
Depreciation and amortization................. 2,770 198 2,968
Capital expenditures.......................... 1,498 64 1,562
1998
Net sales..................................... $ 96,402 $10,467 $106,869
Operating earnings............................ 13,981 1,579 15,560
Interest expense, net......................... 2,346 -- 2,346
Identifiable assets........................... 40,981 2,523 43,504
Depreciation and amortization................. 2,146 218 2,364
Capital expenditures.......................... 794 96 890
</TABLE>
For the purposes of the segment information provided, in accordance with
Statement of Financial Accounting Standard No. 131, "Disclosures about segments
of an Enterprise and Related Information", operating earnings are defined as
net sales less related cost of goods sold, selling, general and administration
expenses, amortization of goodwill and reorganization expenses. Inter-segment
sales are immaterial.
F-15
<PAGE>
STUART HALL COMPANY, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
As of December 31, 1997, 1996 and 1995
F-16
<PAGE>
ARTHUR ANDERSEN LLP [ARTHUR ANDERSEN COMPANY LOGO]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Stuart Hall Company, Inc.:
We have audited the accompanying consolidated balance sheets of Stuart Hall
Company, Inc. (a Missouri corporation and wholly owned subsidiary of Newell
Co.) as of December 31, 1997, 1996 and 1995, and the related consolidated
statements of income, stockholder's equity and cash flows for each of the three
years in the period ended December 31, 1997. 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 consolidated financial position of Stuart Hall
Company, Inc. as of December 31, 1997, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
May 22, 1998.
F-17
<PAGE>
STUART HALL COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
As of December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................. $ 1 $ 1 $ 1
Accounts receivable, net......................... 8,775 7,855 8,417
Receivable from parent........................... 37 -- --
Inventories, net................................. 20,056 18,179 29,352
Deferred income taxes............................ 3,980 3,340 3,348
Prepaid expenses and other....................... 2,018 2,095 1,146
-------- -------- --------
Total current assets........................... 34,867 31,470 42,264
OTHER ASSETS..................................... 45 52 61
PROPERTY, PLANT AND EQUIPMENT, NET............... 24,310 26,152 29,363
TRADE NAMES AND GOODWILL, NET.................... 49,287 50,714 52,309
Total assets................................... $108,509 $108,388 $123,997
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable................................. $ 2,124 $ 2,111 $ 2,217
Accrued compensation............................. 754 919 1,401
Other accrued liabilities........................ 3,213 2,676 3,636
Taxes payable to parent.......................... 3,095 4,046 5,131
Other payable to parent.......................... -- 1,649 18,822
Current portion of long-term debt................ 986 986 986
Current portion of capitalized obligation........ 914 848 787
-------- -------- --------
TOTAL CURRENT LIABILITIES........................ 11,086 13,235 32,980
LONG-TERM DEBT................................... 2,875 3,861 4,847
CAPITALIZED LEASE OBLIGATION..................... 9,303 10,217 11,065
DEFERRED INCOME TAXES............................ 2,440 2,143 1,688
STOCKHOLDER'S EQUITY:
Common Stock--1,000 authorized and outstanding
shares
at $.01 par value............................... 1 1 1
Additional paid in capital....................... 75,576 75,576 75,576
Retained earnings................................ 7,246 3,358 (2,157)
Cumulative translation adjustment................ (18) (3) (3)
-------- -------- --------
Total stockholder's equity....................... 82,805 78,932 73,417
-------- -------- --------
Total liabilities and stockholder's equity....... $108,509 $108,388 $123,997
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
STUART HALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
NET SALES.............................................. $87,183 $85,653 $98,222
COST OF PRODUCTS SOLD.................................. 65,732 60,029 68,386
------- ------- -------
Gross income......................................... 21,451 25,624 29,836
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 11,922 12,550 12,686
------- ------- -------
Operating income..................................... 9,529 13,074 17,150
NONOPERATING EXPENSE:
Interest expense..................................... 1,252 1,330 1,503
Other, net........................................... 1,206 1,941 2,038
------- ------- -------
Income before income taxes........................... 7,071 9,803 13,609
INCOME TAXES........................................... 3,183 4,288 5,645
------- ------- -------
Net income........................................... $ 3,888 $ 5,515 $ 7,964
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
STUART HALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(In thousands)
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Additional Cumulative
Common Paid-In Retained Translation
Stock Capital Earnings Adjustment Total
------ ---------- -------- ----------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.... $ 1 $75,576 $(10,121) $ (1) $65,455
Net income.................. -- -- 7,964 -- 7,964
Foreign currency
translation................ -- -- -- (2) (2)
---- ------- -------- ---- -------
BALANCE, December 31, 1995.... 1 75,576 (2,157) (3) 73,417
Net income.................. -- -- 5,515 -- 5,515
Foreign currency
translation................ -- -- -- -- --
---- ------- -------- ---- -------
BALANCE, December 31, 1996.... 1 75,576 3,358 (3) 78,932
Net income.................. -- -- 3,888 -- 3,888
Foreign currency
translation................ -- -- -- (15) (15)
---- ------- -------- ---- -------
BALANCE, December 31, 1997.... $ 1 $75,576 $ 7,246 $(18) $82,805
==== ======= ======== ==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
STUART HALL COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income...................................... $ 3,888 $ 5,515 $ 7,96?
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization................. 4,833 5,016 4,048
Deferred income taxes......................... (343) 463 1,216
Loss on sale of equipment..................... 16 43 102
Changes in current accounts--
Accounts receivable........................... (920) 562 (553)
Receivable from/payable to parent, net........ (2,637) (18,258) (7,973)
Inventories................................... (1,877) 11,173 3,806
Prepaid expenses and other.................... 77 (949) (285)
Accounts payable.............................. 13 (106) (299)
Accrued expenses and other.................... 357 (1,277) (4,387)
------- -------- -------
Net cash provided by operating activities... 3,407 2,182 3,639
------- -------- -------
INVESTING ACTIVITIES:
Expenditures for property, plant and equipment.. (1,693) (1,039) (3,748)
Proceeds from disposals of property, plant and
equipment...................................... 120 630 1,834
------- -------- -------
Net cash used in investing activities....... (1,573) (409) (1,914)
------- -------- -------
FINANCING ACTIVITIES:
Payments of long-term debt...................... (986) (986) (986)
Settlement of capital lease obligation.......... (848) (787) (739)
------- -------- -------
Net cash used in financing activities....... (1,834) (l,773) (1,725)
------- -------- -------
Net change in cash.......................... -- -- --
CASH, beginning of year........................... 1 1 1
------- -------- -------
CASH, end of year................................. $ 1 $ l $ 1
------- -------- -------
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the year for--
Income taxes.................................. $ 4,478 $ 4,908 $ 3,480
Interest...................................... 1,055 1,205 1,351
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 AND 1995
(1) Description of the Business
Stuart Hall Company, Inc. ("Stuart Hall" or the "Company"), a wholly owned
subsidiary of Newell Co. ("Newell"), is a leading manufacturer and personal
marketer of school, office and personal communication paper products.
In 1992, all of the outstanding common stock of Stuart Hall was acquired by
Newell. The transaction was accounted for as a purchase business combination.
The excess cost over identifiable assets was recorded as goodwill on the
Company's books.
(2) Significant Accounting Policies
Principles of consolidation
The consolidated results of the Company include the accounts of its Canadian
affiliate. All intercompany accounts between the Company and its affiliate are
eliminated in consolidation
Use of estimates
The preparation of these financial statements required the use of certain
estimates by management in determining the Company's assets, liabilities,
revenue and expenses and related disclosures.
Revenue recognition
Sales of merchandise are recognized upon shipment to customers.
Allowances for doubtful accounts
Allowances for doubtful accounts totaled $149,000, $165,000 and $170,000 at
December 31, 1997, 1996 and 1995, respectively.
Inventories
Inventories are stated at the lower of cost or market value. Cost of certain
domestic inventories was determined by the "last in, first out" ("LIFO")
method. If the "first in, first out" ("FIFO") inventory valuation method had
been used exclusively, inventories would have increased by $3,746,000,
$5,954,000 and $8,374,000 at December 31, 1997, 1996, and 1995, respectively.
The components of inventories at December 31, net of the LIFO reserve, were
as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Materials and supplies.............. $ 7,040,000 $ 7,065,000 $ 9,078,000
Work in process..................... 1,083,000 203,000 577,000
Finished products................... 11,933,000 10,911,000 19,697,000
----------- ----------- -----------
$20,056,000 $18,179,000 $29,352,000
=========== =========== ===========
</TABLE>
Inventory reserves at December 31, totaled $2,729,000 in 1997, $2,453,000 in
1996, and $3,340,000 in 1995.
F-22
<PAGE>
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Property, plant and equipment
Property, plant and equipment at December 31 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Land............................. $ -- $ -- $ --
Buildings and improvements....... 16,721,000 16,651,000 16,541,000
Machinery and equipment.......... 27,189,000 28,622,000 29,875,000
Furniture and fixtures........... 1,843,000 1,842,000 1,144,000
Construction in process.......... 1,369,000 250,000 862,000
Accumulated depreciation......... (22,812,000) (21,213,000) (19,059,000)
------------ ------------ ------------
$ 24,310,000 $ 26,152,000 $ 29,363,000
============ ============ ============
</TABLE>
Replacements and improvements are capitalized. Expenditures for maintenance
and repairs are charged to expense. The components of depreciation are provided
by annual charges to income calculated to amortize on the straightline basis,
the cost of the depreciable assets over their depreciable lives. Estimated
useful lives determined by the Company are as follows:
<TABLE>
<S> <C>
Buildings and improvements....... 20-40 years
Machinery and equipment.......... 5-12 years
</TABLE>
Trade names and goodwill
The cost of trade names and goodwill are amortized over 40 years on a
straight-line basis. Total accumulated amortization of trade names and goodwill
was $7,755,000, $6,330,000 and $4,900,000 at December 31, 1997, 1996 and 1995,
respectively.
The Company periodically evaluates whether events and circumstances have
occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. If factors indicate that goodwill should be evaluated for possible
impairment, the Company would use an estimate of the undiscounted net cash flow
over the remaining life of the goodwill in measuring whether the goodwill is
recoverable.
Accrued liabilities
Other accrued liabilities at December 31 included the following:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Customer accruals....................... $1,273,000 $ 857,000 $ 766,000
Workers compensation accrual............ 577,000 377,000 636,000
Other accruals.......................... 1,363,000 1,442,000 2,234,000
---------- ---------- ----------
$3,213,000 $2,676,000 $3,636,000
========== ========== ==========
</TABLE>
Customer accruals are promotional allowances and rebates given to customers
in exchange for their selling efforts. Workers' compensation is estimated based
upon historical claim experience.
F-23
<PAGE>
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Foreign currency translation
The balance sheet accounts of the Company's Canadian affiliate are
maintained in Canadian dollars. These accounts are translated into U.S. dollars
at the rates of exchange in effect at fiscal yearend. Income and expense
accounts are translated at the average rates of exchange in effect during the
year. The related translation adjustment is made directly to a separate
component of stockholder's equity.
Accounting principles adopted
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The adoption of this statement in 1996 was not
material to the consolidated financial statements.
(3) Long-Term Debt
The Company has a series of privately placed notes with CIT Group/Equipment
Financing Inc. The notes bear interest at various fixed amounts and mature at
various dates through 2001. Following is a summary of debt outstanding at
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
9.77% note, issued December 28, 1990,
maturing
December 28, 2000........................... $ 251,000 $ 335,000 $ 418,000
9.61% note, issued February 4, 1991, maturing
February 4, 2001............................ 1,993,000 2,491,000 2,989,000
9.80% note, issued March 28, 1991, maturing
March 28, 2001.............................. 827,000 1,033,000 1,240,000
9.67% note, issued May 29, 1991, maturing May
29, 2001.................................... 620,000 775,000 930,000
10.85% note, issued July 24, 1991, maturing
July 24, 2001............................... 116,000 145,000 174,000
8.95% note, issued December 27, 1991,
maturing
December 27, 2001........................... 54,000 68,000 82,000
---------- ---------- ----------
3,861,000 4,847,000 5,833,001
Less--Current portion........................ 986,000 986,000 986,000
---------- ---------- ----------
$2,875,000 $3,861,000 $4,847,000
========== ========== ==========
</TABLE>
The notes are subject to various financial and non-financial covenants with
which the Company is in compliance at December 31, 1997.
The aggregate maturities of long-term debt outstanding at December 31, 1997,
are as follows:
<TABLE>
<CAPTION>
Minimum
Year Payments
---- ---------
<S> <C>
1998.................................... $ 986,000
1999.................................... 986,000
2000.................................... 986,000
2001.................................... 903,000
2002.................................... --
Thereafter.............................. --
---------
$3,861,00
=========
</TABLE>
F-24
<PAGE>
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
(4) Leases
The Company leases certain facilities under long-term capitalizable leases,
which are included in property, plant and equipment as buildings.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Buildings............................. $13,720,000 $13,720,000 $13,720,000
Less--Accumulated amortization........ 4,330,000 3,418,000 2,507,000
----------- ----------- -----------
Total............................... $ 9,390,000 $10,302,000 $11,213,000
=========== =========== ===========
</TABLE>
Future minimum lease payments for assets under capital leases at December 31
are as follows:
<TABLE>
<S> <C>
1998.......................................................... $ 1,649,000
1999.......................................................... 1,649,000
2000.......................................................... 1,649,000
2001.......................................................... 1,649,000
2002.......................................................... 1,649,000
Thereafter.................................................... 5,615,000
-----------
$13,860,000
===========
Total minimum lease payments.................................. $13,860,000
Less--Amount representing interest............................ 3,643,000
-----------
Present value of minimum lease payment........................ 10,217,000
Less--Current maturities...................................... 914,000
-----------
Long-term obligation.......................................... $ 9,303,000
===========
</TABLE>
At December 31, the Company has minimum rental payments through the year
2003 under noncancellable operating leases as follows:
<TABLE>
<CAPTION>
Minimum
Year Payments
---- --------
<S> <C>
1998..................................... $228,000
1999..................................... 195,000
2000..................................... 156,000
2001..................................... 122,000
2002..................................... 122,000
Thereafter............................... 31,000
--------
$854,000
========
</TABLE>
Total rental expense for all operating leases was approximately $543,000,
512,000 and $567,000 in 1997, 1996 and 1995.
(5) Retirement Plans
Salaried and hourly employees that meet certain requirements are eligible to
participate in the Newell Pension Plan for Salaried and Clerical Employees. The
pension plan is administered by Newell. Factory hourly employees that meet
certain requirements are eligible to participate in the Paper Industry Union
Management
F-25
<PAGE>
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
Pension Fund, a multiemployer plan. The plan is administered by a joint Board
of Trustees consisting of four Union representatives and four employer
representatives from participating companies. Newell pays the Company's portion
of the plans' costs and funding requirements. The Company reimburses Newell for
these costs. Total expense under these plans was $291,000, $188,000 and
$245,000 for 1997, 1996, and 1995.
The employees of the Company are also eligible to participate in the Newell
Co. LongTerm Savings and Investment Plan. The Company matches a portion of the
employees' contribution. Profit sharing expense was $89,000, $87,000 and
$87,000 for 1997, 1996 and 1995.
(6) Income Taxes
The Company accounts for income taxes as prescribed by SFAS No. 109,
"Accounting for Income Taxes." For U.S. income tax purposes, the Company's
income is included in Newell Co.'s consolidated Federal income tax return. As a
result, the Company records Federal taxes as an intercompany transaction with
Newell.
The provision for income taxes for the years ended December 31 consists of
the following (computed on the basis of the Company as a standalone entity for
U.S. Federal income tax purposes):
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal................................ $3,264,000 $3,540,000 $4,037,000
State.................................. 262,000 285,000 392,000
---------- ---------- ----------
3,526,000 3,825,000 4,429,000
Deferred................................. (343,000) 463,000 1,216,000
---------- ---------- ----------
Total................................ $3,183,000 $4,288,000 $5,645,000
========== ========== ==========
</TABLE>
The components of the net deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Deferred tax assets--
Accruals, not currently deductible for
tax purposes........................... $ 539,000 $ 556,000 $ 509,000
Inventory reserves...................... 787,000 409,000 1,390,000
Repair parts and supplies............... 1,046,000 955,000 837,000
Other................................... 1,585,000 1,362,000 736,000
---------- ---------- ----------
3,957,000 3,282,000 3,472,000
Deferred tax liabilities--
Accelerated depreciation................ 2,417,000 2,085,000 1,812,000
---------- ---------- ----------
2,417,000 2,085,000 1,812,000
---------- ---------- ----------
Net deferred tax asset (liability).... $1,540,000 $1,197,000 $1,660,000
========== ========== ==========
</TABLE>
F-26
<PAGE>
STUART HALL COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1997, 1996 and 1995
The net deferred tax asset is classified in the consolidated balance sheets
at December 31 as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Current net transferred income tax
asset................................ $3,980,000 $ 3,340,000 $ 3,348,000
Noncurrent deferred income tax
liability............................ (2,440,000) (2,143,000) (1,688,000)
---------- ----------- -----------
$1,540,000 $ 1,197,000 $ 1,660,000
========== =========== ===========
A reconciliation of the U.S. statutory tax provision to the effective income
tax provision for the years ended December 31 is as follows:
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Statutory Federal income tax.......... $2,404,000 $ 3,333,000 $ 4,627,000
Add (deduct) effect of--
State income taxes, net of federal
income
tax effect......................... 282,000 372,000 499,000
Nondeductible trade goodwill........ 532,000 533,000 545,000
Other................................. (35,000) 50,000 (26,000)
---------- ----------- -----------
Effective rate...................... $3,183,000 $ 4,288,000 $ 5,645,000
========== =========== ===========
(7) Other Nonoperating Expense
Total other nonoperating expense consists of the following expense (income)
items for the years ended December 31:
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
Trade names and goodwill
amortization......................... $1,427,000 $ 1,430,000 $ 1,460,000
Management bonuses.................... 426,000 702,000 539,000
Intercompany profit................... (153,000) (37,000) (64,000)
Loss on sale of machinery............. 16,000 43,000 102,000
Insurance proceeds.................... (550,000) -- --
Other................................. (1,000) (197,000) 1,000
---------- ----------- -----------
$1,206,000 $ 1,941,000 $ 2,038,000
========== =========== ===========
</TABLE>
(8) Significant Customer
Sales to one customer accounted or 31.3%, 32.3% and 38.3% of net sales in
1997, 1996 and 1995. At December 31, 1997, 1996 and 1995, receivables from this
customer accounted for 25.1%, 14.7% and 24.3% of the Company's net trade
accounts receivable, respectively.
(9) Transactions with Newell Co.
Newell Co. provides centralized services to the Company including treasury
management, cash management, receivables processing, payables processing,
computer information services and payroll processing. Newell Co. allocated
$500,000 for these services to the Company annually. The management of Newell
Co. believes the allocations are reasonable, but they are not necessarily
indicative of the costs that would have been incurred had Stuart Hall been a
Standalone company.
F-27
<PAGE>
EXHIBIT 10.17
- --------------------------------------------------------------------------------
STOCK PURCHASE AGREEMENT
between
NEWELL CO.
and
PEN-TAB HOLDINGS, INC.
Dated as of June 24, 1998
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I PURCHASE AND SALE OF STOCK .................................... 1
1.1 Stock Purchase ........................................ 1
1.2 Purchase Price ............................................ 1
1.3 Adjustment to Purchase Price .............................. 1
(a) Purchase Price Adjustment ........................ 1
(b) Closing Statement of Net Working Capital ......... 2
(c) Buyer's Review of Preliminary Closing Statement .. 2
(d) Seller's Response to Buyer's Letter .............. 2
(e) Meeting to Resolve Proposed Adjustments .......... 3
(f) Arbitration of Disputed Purchase Price Adjustments 3
(g) Notices Relating to the Closing Statement ........ 4
(h) Payment and Interest ............................. 4
1.4 Intercompany Obligations .................................. 4
ARTICLE 11 CLOSING ................................................... 5
2.1 Time and Place ............................................ 5
2.2 Deliveries by Seller ...................................... 5
2.3 Deliveries by Buyer ....................................... 5
ARTICLE III REPRESENTATIONS AND WARRANTIES ............................ 5
3.1 Representations and Warranties of Seller .................. 5
(a) Due Organization of Stuart Hall .................. 6
(b) Due Organization and Power of Seller ............. 6
(c) Authorization and Validity of Agreements ......... 6
(d) Subsidiaries ..................................... 6
(e) Capitalization of Stuart Hall .................... 6
(f) No Conflict ...................................... 7
(g) Financial Statements ............................. 7
(h) Tax Matters ...................................... 7
(i) Title to Personal Properties; Liens and Encumbrances;
No Other Interests ............................... 9
(j) Business Contracts ............................... 10
(k) Legal Proceedings ................................ 10
(1) Government Licenses, Permits and Related Approvals 10
(m) Conduct of Business in Compliance with Regulatory
Requirements ..................................... 10
(n) Labor Matters .................................... 10
(o) Intellectual Property ............................ 11
(p) Employee Benefit Plans ........................... 11
(q) Undisclosed Liabilities .......................... 12
(r) Environmental Matters ............................ 12
(s) Absence of Changes ............................... 14
(t) Leased Real Property ............................. 14
(u) Insurance ........................................ 15
(v) Company Transactions ............................. 15
(w) Sufficiency of Assets ............................ 15
(x) Transactions with Affiliates ..................... 15
(y) No Other Representations or Warranties ........... 15
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
3.2 Representations and Warranties of Buyer ................... 15
(a) Due Organization and Power ....................... 15
(b) Authorization and Validity of Agreements ......... 15
(c) No Conflict ...................................... 16
(d) Brokers, Finders. etc ............................ 16
(e) Commitment Letters ............................... 16
3.3 Supplements to Schedules .................................. 16
ARTICLE IV PRE-CLOSING COVENANTS ..................................... 16
4.1 Access to Information Concerning Properties and Records;
Confidentiality.......................................... . 16
4.2 Conduct of the Business Prior to the Closing Date ......... 17
(a) Ordinary Course .................................. 17
(b) Changes in Compensation .......................... 17
(c) Assets ........................................... 17
(d) Capital Stock .................................... 17
(e) Dividends ........................................ 17
(f) Capital Expenditures ............................. 17
(g) Liens ............................................ 18
(h) Accounting Practices ............................. 18
(i) Constituent Documents ............................ 18
(j) Taxes ............................................ 18
(k) Other ............................................ 18
4.3 Preservation of Business .................................. 18
4.4 Authorizations ............................................ 18
4.5 Cash Management ........................................... 18
4.6 Intercompany Services and Products ........................ 18
4.7 Further Actions ........................................... 19
4.8 Exclusivity ............................................... 19
4.9 Buyer's Financing ......................................... 19
4.10 Customer Confirmation ..................................... 20
4.11 Release From Lease ........................................ 20
4.12 Commitment Letters ........................................ 20
4.13 Miscellaneous ............................................. 20
ARTICLE V CONDITIONS PRECEDENT ...................................... 21
5.1 Conditions Precedent to Obligations of Parties ............ 21
(a) Antitrust Laws .................................... 21
(b) No Injunction ..................................... 21
(c) Governmental Authority Consents ................... 21
(d) Third Party Consents .............................. 21
(e) Financing ......................................... 21
5.2 Conditions Precedent to Obligation of Buyer ............... 22
(a) Accuracy of Representations and Warranties ........ 22
(b) Performance of Agreements ......................... 22
(c) Certificates ...................................... 22
(d) Ancillary Agreements .............................. 22
(e) Release of Liens .................................. 22
(f) Proceedings ....................................... 22
(g) Transactions with Affiliates ...................... 23
(h) Additional Matters ................................ 23
(I) Material Adverse Change ........................... 23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
5.3 Conditions Precedent to the Obligation of Seller .......... 23
(a) Accuracy of Representations and Warranties ........ 23
(b) Performance of Agreements ......................... 23
(c) Certificates ...................................... 23
(d) Payment of 33% of Stay Bonuses .................... 23
ARTICLE VI PROVISIONS AS TO TAX MATTERS .............................. 24
6.1 Certain Tax Matters ....................................... 24
(a) Preparation and Filing of Tax Returns ............. 24
(b) Payment of Taxes .................................. 24
(c) Carryforwards and Carrybacks ...................... 24
(d) Refunds ........................................... 24
6.2 Tax Indemnification ....................................... 25
(a) Seller Indemnification ............................ 25
(b) Buyer Indemnification ............................. 25
(c) Determining Liability for Taxes ................... 25
(d) Indemnification for Post-Closing Transactions ..... 25
6.3 Contest Provisions ........................................ 25
6.4 Section 338 Elections and Forms ........................... 25
6.5 Audits .................................................... 26
6.6 Cooperation ............................................... 26
ARTICLE VII LABOR MATTERS, EMPLOYEE RELATIONS AND BENEFITS ............ 26
7.1 Offers of Employment ...................................... 26
7.2 Participating in Buyer's Retirement Plans ................. 27
7.3 Health and Welfare Plans .................................. 27
7.4 No Rights or Remedies ..................................... 27
7.5 Indemnification ........................................... 27
ARTICLE VIII SURVIVAL AND INDEMNIFICATION .............................. 27
8.1 Survival .................................................. 27
8.2 Indemnification Provisions for the Benefit of Buyer ....... 28
8.3 Indemnification Provisions for the Benefit of Seller ...... 28
8.4 Matters Involving Third Parties ........................... 28
8.5 Adjustments ............................................... 29
8.6 Exclusive Remedy .......................................... 29
8.7 Payment and Interest ...................................... 29
ARTICLE IX OTHER POST-CLOSING COVENANTS .............................. 30
9.1 Post-Closing Accounting Cooperation ....................... 30
9.2 Transfer Taxes ............................................ 30
9.3 Further Actions ........................................... 30
9.4 Subsequent Access ......................................... 30
9.5 Payment of Remainder of Stay Bonuses ...................... 30
9.6 Confidentiality ........................................... 30
(a) By Seller ........................................ 30
(b) By Buyer ......................................... 30
(c) Exceptions ....................................... 30
9.7 Buyer's Financing ......................................... 31
9.8 Nonsolicitation ........................................... 31
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE X MISCELLANEOUS ................................................ 31
10.1 Termination .................................................. 31
(a) General ............................................... 31
(b) Procedure Upon Termination ............................ 32
(c) Survival of Certain Provisions ........................ 32
10.2 Fees and Expenses ............................................ 32
10.3 Notices ...................................................... 32
10.4 Entire Agreement ............................................. 33
10.5 Binding Effect; Benefit ...................................... 33
10.6 Assignability ................................................ 33
10.7 Amendment and Modification; Waiver ........................... 34
10.8 Public Announcements ......................................... 34
10.9 Interpretation ............................................... 34
10.10 Counterparts ................................................. 35
10.11 Applicable Law ............................................... 35
10.12 Severability of Provisions ................................... 35
10.13 Time is of the Essence ....................................... 35
10.11 Applicable Law ............................................... 35
10.12 Severability of Provisions ................................... 35
10.13 Time is of the Essence ....................................... 35
</TABLE>
<PAGE>
SCHEDULES
---------
Schedule 1.3(a)(i)(A) Excluded Liabilities
Schedule 1.3(a)(i)(B) Exceptions to GAAP
Schedule 1.3(a)(ii) Peg Statement
Schedule 3.1(e)(i) Capitalization of Stuart Hall
Schedule 3.1(e)(ii) Stock Options
Schedule 3.1(f)(i) Seller's Knowledge
Schedule 3.1(f)(ii) No Conflict (Seller)
Schedule 3.1(f)(iv) Consents
Schedule 3.1(g)(i) Financial Statements
Schedule 3.1(g)(i)(ii) 1998 Monthly Unaudited Financial Statements
Schedule 3.1(g)(iii) Financial Matters
Schedule 3.1(h)(v) Tax Matters; Filing Extensions
Schedule 3.1(h)(vi) Tax Matters; Waivers or Extensions to Statute
of Limitations
Schedule 3.1(h)(vii) Tax Matters; Deficiency or Claim
Schedule 3.1(h)(viii) Tax Matters; Audits
Schedule 3.1(i) Permitted Liens
Schedule 3.1(j)(i) Contracts
Schedule 3.1(j)(ii) Contracts - Exceptions
Schedule 3.1(k) Legal Proceedings
Schedule 3.1(1) Government Licenses
Schedule 3.1(n) Labor Matters
Schedule 3.1(o)(i) Intellectual Property
Schedule 3.1(o)(ii) Intellectual Property - Exceptions
Schedule 3.1(p) Employee Benefits Matters
Schedule 3.1(r)(i) Environmental Matters; Required Environmental
Permits
Schedule 3.1(r)(ii) Environmental Matters; Laws
Schedule 3.1(s)(i) Absence of Changes
Schedule 3.1(s)(ii) Hiring of Key Employees
Schedule 3.1(t)(ii)(A) Leases
Schedule 3.1(t)(ii)(B) Landlord Consents
Schedule 3.1(t)(iii) Subleases
Schedule 3.1(y) Transactions with Affiliates
Schedule 3.2(c) No Conflict (Buyer)
Schedule 3.2(c)(i) Buyer's Knowledge
Schedule 3.2(e) Commitment Letters
Schedule 4.2 Conduct of the Business Prior to Closing
Schedule 4.13(c) Indebtedness
Schedule 5.1(d) Third Party Consents
Schedule 5.2(d) Canadian Assets and Liabilities
Schedule 5.2(e) Release of Liens
Schedule 5.2(f) Proceedings
Schedule 5.2(g) Termination of Transactions with Affiliates
Schedule 5.3(d) Stay Bonuses
<PAGE>
EXHIBITS
--------
Exhibit A Transition Services Agreement
Exhibit B Canadian Asset Agreement
Exhibit C Terms of Comfort Letter of Seller's Accountants for
Rule 144A Offering
Exhibit D KC Lease Assignment
<PAGE>
STOCK PURCHASE AGREEMENT
----- -------- ---------
This STOCK PURCHASE AGREEMENT (this "Agreement "), dated as of June
---------
24, 1998, is between Pen-Tab Holdings, Inc., a corporation organized and
existing under the laws of the Commonwealth of Virginia ("Buyer"), and
-----
NEWELL CO., a corporation organized and existing under the laws of the State
of Delaware ("Seller").
------
Seller, through its wholly-owned subsidiary STUART HALL COMPANY,
INC., a Missouri corporation ("Stuart Hall"), is engaged in the design,
-----------
manufacture, marketing and sale of stationery products, consisting of
wireless and wirebound notebooks/notepads, softside organizers and planners,
two pocket portfolios, pencil pouches, letterhead stationery, envelopes and
fine stationery (the "Business").
--------
Buyer desires to purchase, and Seller desires to sell, 100% of the
outstanding shares of stock of Stuart Hall, upon the terms and subject to
the conditions set forth herein.
The parties hereto agree as follows:
ARTICLE I
PURCHASE AND SALE OF STOCK
1.1 Stock Purchase. Upon the terms and subject to the conditions of
--------------
this Agreement, at the Closing (as defined in Section 2.1), Seller shall
sell, and Buyer shall purchase, all of the capital stock (the "Stock") of
Stuart Hall.
1.2 Purchase Price. In consideration for the sale and transfer of
--------------
the Stock, on the Closing Date (as defined in Section 2.1) Buyer shall pay
to Seller by wire transfer in immediately available funds an aggregate
amount equal to $107,000,000 (the "Stock Purchase Price").
--------------------
1.3 Adjustment to Purchase Price.
---------- -- -------- -----
(a) Purchase Price Adjustment. Any amounts payable under this
-------------------------
Section 1.3(a) will be paid within five Business Days following the date on
which the Final Closing Statement is finalized. The "Adjusted Purchase
Price" means the Stock Purchase Price minus the amount, if any, by which the
-----
Net Working Capital of Stuart Hall on the Peg Statement of Net Working
Capital (the "Peg Statement") at December 31, 1997 ("Peg Net Working
------------- ---------------
Capital") exceeds the Net Working Capital of Stuart Hall as of the close of
-------
business on the Closing Date as shown on the Final Closing Statement (the
"Closing Net Working Capital") or plus the amount, if any, by which the
--------------------------- ----
Closing Net Working Capital exceeds the Peg Net Working Capital. If the
Stock Purchase Price is greater than the Adjusted Purchase Price, Seller
will pay the difference to Buyer. If the Adjusted Purchase Price is greater
than the Stock Purchase Price, Buyer will pay the difference to Seller. For
purposes of this Agreement, "Net Working Capital" means the excess of the
-------------------
current assets (other than cash and cash equivalents) of Stuart Hall as of
the close of business on the date of determination over the current
liabilities (other than the liabilities set forth on Schedule 1.3(a)(i)(A))
of Stuart Hall as of the close of business on the date
1
<PAGE>
of determination. Closing Net Working Capital shall be prepared using the
same principles, practices, procedures, policies, computational methods and
assumptions including GAAP (subject to the exceptions described in Schedule
1.3(a)(i)(B)) as those used in determining Peg Net Working Capital. Closing
Net Working Capital shall include the same categories of current assets and
current liabilities as the Peg Net Working Capital. The Peg Statement is
attached hereto as Schedule 1.3(a)(ii).
(b) Closing Statement of Net Working Capital. On or immediately
----------------------------------------
prior to the Closing Date, Seller and its Accountants will conduct an audit
(including a physical inventory that Buyer and its Accountants may observe)
of Stuart Hall using the same principles, practices, procedures, policies,
computational methods and assumptions including GAAP as those used in
determining the Peg Net Working Capital. Within 90 days following the
Closing Date, Seller will prepare and deliver to Buyer a statement of Net
Working Capital as of the close of business on the Closing Date (the
"Preliminary Closing Statement"). The Preliminary Closing Statement, as it
------------------------------
may be modified pursuant to Sections 1.3(c) - (g) to become the final
statement of Net Working Capital as of the close of business on the Closing
Date (the "Final Closing Statement"), will set forth a calculation of
-----------------------
Closing Net Working Capital. Any dispute, controversy or claim arising out
of or relating to the Preliminary Closing Statement and the Final Closing
Statement (each, a "Dispute") will be resolved in accordance with Sections
-------
1.3(c) - (g). In connection with preparing the Preliminary Closing Statement
and the Final Closing Statement, Buyer will, and will cause its Accountants
to, give Seller and its representatives access to the books, records and
accounts of Stuart Hall that have been transferred to Buyer. For purposes of
this Section 1.3, "Accountants" means, in the case of Buyer, Deloitte &
-----------
Touche LLP, and means, in the case of Seller, Arthur Andersen LLP.
(c) Buyers Review of Preliminary Closing Statement. Buyer will have
----------------------------------------------
25 days following receipt to review and respond to the Preliminary Closing
Statement, during which period Seller will grant Buyer and its Accountants
reasonable access during normal business hours to the accounting work papers
of Seller's Accountants relating to the preparation of the Financial
Statements, including any accounting working papers or schedules prepared by
Seller or its Accountants with respect to the Preliminary Closing Statement.
Buyer and its Accountants will sign a customary accountants' letter required
by Seller's Accountants prior to a review of Arthur Andersen's work papers.
If, within such 25-day period, Buyer has not delivered to Seller a written
letter ("Buyer's Letter") setting forth in reasonable detail any proposed
--------------
adjustment to the Preliminary Closing Statement and the basis for such
adjustment (including a specific dollar amount and accompanied by a
reasonably detailed explanation), the Preliminary Closing Statement will be
the Final Closing Statement. Any amount set forth in the Preliminary Closing
Statement as to which Buyer has not objected and proposed an adjustment (in
a specific dollar amount and accompanied by a reasonably detailed
explanation) in Buyer's Letter will be deemed to be accepted and will become
part of the Final Closing Statement.
(d) Seller's Response to Buyers Letter. Seller will have 25 days
----------------------------------
following receipt to review and respond to Buyer's Letter. If, within such
25-day period, Seller has not delivered to Buyer a written letter ("Seller's
--------
Letter") setting forth in reasonable detail its objection to any proposed
------
adjustment in Buyer's Letter and the basis for such objection, the proposed
adjustment will be deemed to be accepted, and any amount set forth in
Buyer's Letter as to which Seller has not objected and proposed an
adjustment (in a specific dollar amount and accompanied by a reasonably
detailed explanation) in Seller's Letter will be deemed to be accepted and
will become part of the Final Closing Statement.
2
<PAGE>
(e) Meeting to Resolve Proposed Adjustment . As soon as reasonably
--------------------------------------
practicable following the periods provided in Sections 1.3(c) and (d), but
in any event no later than 15 days after Sellers delivery of Seller's
Letter, the parties will meet and endeavor to resolve the unaccepted
adjustments in Buyer's Letter. If the parties reach agreement on such
adjustments, the Final Closing Statement will be the Preliminary Closing
Statement, modified to reflect the adjustments accepted pursuant to Section
1.3(c) and those otherwise mutually resolved by the parties.
(f) Arbitration of Disputed Purchase Price Adjustments.
---------------------------------------------------
(i) If the parties do not resolve to their mutual
satisfaction all disputed adjustments relating to the Preliminary
Closing Statement described in Buyer's Letter and Seller's Letter
within 25 days following the periods provided in Sections 1.3(c) and
(d), any remaining disputed adjustments will be settled by
arbitration by a three-member arbitration panel (the "Panel") in
-----
accordance with the Center for Public Resources ("CPR") Rules for
---
Non-Administered Arbitration of Business Disputes, as modified by
the provisions set forth in clauses (ii) - (vii) below. The parties
will each separately appoint to the Panel an arbitrator selected
from a panel of CPR neutrals in Chicago, Illinois with relevant
experience in mergers and acquisitions and such arbitrators shall
jointly appoint a third arbitrator from a nationally recognized
accounting firm other than Arthur Andersen LLP, Deloitte & Touche
LLP or Ernst & Young LLP, located in Chicago, Illinois.
(ii) The parties will furnish the Panel with a copy of this
Agreement, the Peg Statement, the Preliminary Closing Statement,
Buyer's Letter, Seller's Letter and any other relevant
correspondence between them. Each party will also give the Panel
access to the Books and Records of Stuart Hall, as well as any
accounting work papers or other schedules relating to the
preparation of the Preliminary Closing Statement, Buyer's Letter and
Seller's Letter. There will be no other discovery during the
arbitration.
(iii) Within 25 days of submitting the disputed adjustments
to the Panel pursuant to Section 1.3(f)(i), Buyer and Seller will
provide to the Panel and to each other a copy of a written
submission setting forth its position with respect to each item in
dispute that is described in Buyer's Letter and Seller's Letter.
Within 25 days thereafter, each party may provide to the Panel and
to each other a written rebuttal, which will be limited to
addressing the points raised in the opposing party's initial written
submission. No additional written submission will be made to the
Panel unless specifically requested by the Panel. No party will be
required to disclose any information protected by the attorney-
client privilege, attorney work product doctrine or other applicable
privilege.
(iv) After receiving the written submissions, rebuttal
responses, if any, and any other written information pursuant to
Section 1.3(f)(iii), the Panel will promptly schedule a date to
interview persons designated by each party to present that party's
position. Such interviews will take place in Chicago, Illinois. The
interviews will be held on at least seven days' notice to each
party, and each party, its counsel and other advisors may be present
and participate in any questioning at such interviews. The
interviewing process will last no more than five days in the
aggregate. The scope of the interviews shall be limited to any
issues raised by Buyer's Letter or Seller's Letter.
3
<PAGE>
(v) The arbitration will be limited to (A) reviewing the
amounts properly placed in dispute by Buyer's Letter and Seller's
Letter pursuant to Sections 1.3(c) and (d); (B) reviewing the
parties' written submissions described in Section 1.3(f)(iii); (C)
considering the interviews described in Section 1.3(f)(iv), (D)
applying GAAP on a basis consistent with the Peg Statement to
determine the proper amount for each disputed adjustment, provided
that such amount must fall within the range set by Seller's
proposed amount in the Preliminary Closing Statement and Buyer's
proposed adjustment in Buyer's Letter; (E) preparing the Final
Closing Statement showing the Net Working Capital, which will
include those amounts in the Preliminary Closing Statement accepted
by Buyer pursuant to Section 1.3(c), Buyer's proposed adjustments
accepted by Seller pursuant to Section 1.3(d) or otherwise mutually
resolved by the parties, and those amounts determined by the Panel
pursuant to subparagraph (D) hereof; and (F) calculating the
Adjusted Purchase Price. The Panel will be instructed to resolve
issues in a manner consistent with the provisions of this
Agreement.
(vi) The Panel will complete its preparation of the Final
Closing Statement and calculation of the Adjusted Purchase Price
within 25 days of the final interview conducted pursuant to Section
1.3(f)(iv) and will deliver a copy of the Final Closing Statement
and the Adjusted Purchase Price to Seller and Buyer, together with
a report setting forth each disputed adjustment, the Panel's
determination with respect thereto, and a statement of the Panel's
reasons for such determination. The Panel's determinations will be
conclusive and binding upon the parties.
(vii) The Panel's decision will be entered and enforced in
any court of competent jurisdiction. Each party will pay 50% of the
fees, costs and expenses of the arbitration.
(g) Notices Relating to the Closing Statement. Each party will
-----------------------------------------
deliver all notices and other communications under this Section 1.3 in
accordance with Section 10.3.
(h) Payment and Interest. Any payment required to be made by Seller
--------------------
or Buyer pursuant to Section 1.3(a) shall be (i) made by wire transfer of
immediately available funds pursuant to written instructions provided by the
party that is to receive payment pursuant to Section 1.3(a) and (ii) bear
interest from the Closing Date through the date of payment on the basis of
the average daily rate of interest publicly announced by The Northern Trust
in Chicago, Illinois from time to time as its base rate from the Closing
Date to the date of such payment.
1.4 Intercompany Obligations.
------------------------
(a) Seller maintains, and until the Closing Date will maintain,
certain intercompany payables and intercompany receivables (the
"Intercompany Accounts") reflecting indebtedness or other liabilities to or
---------------------
from Stuart Hall, on the one hand, and Seller or any of its other
affiliates, as defined in Rule 405 promulgated under the Securities Act of
1933, as amended (each, an "Affiliate") on the other.
(b) If, as of the Closing Date, the Net Intercompany Debt (as
defined below) in the Intercompany Accounts consists of a net indebtedness
---------------------
of Stuart Hall to Seller or its Affiliates, Seller shall, prior to or
simultaneously with the Closing, contribute or cause to be contributed such
Net Intercompany Debt in the Intercompany Accounts to Stuart Hall, or, if
not contributed
4
<PAGE>
will, prior to or simultaneously with the Closing, cause such Net
Intercompany Debt in the Intercompany Accounts to be settled or to be
eliminated in some other manner. If, as of the Closing Date, the Net
Intercompany Debt in the Intercompany Accounts consists of a net
indebtedness of Seller or its Affiliates to Stuart Hall, Seller shall, prior
to or simultaneously with the Closing, cause Stuart Hall to cancel or
dividend an amount equal to such indebtedness to Seller or its Affiliates.
As used herein, the term "Net Intercompany Debt" shall mean the difference
---------------------
between (i) all intercompany liabilities of Stuart Hall to Seller or its
Affiliates in the Intercompany Accounts and (ii) the sum of all intercompany
receivables due to Stuart Hall from Seller or its Affiliates in the
Intercompany Accounts.
ARTICLE 11
CLOSING
2.1 Time and Place. Unless this Agreement shall have been terminated
--------------
or the transactions herein contemplated shall have been abandoned, each
pursuant to Section 10.1, the closing with respect to the purchase and sale
of the Stock (the "Closing") shall take place, subject to the provisions of
-------
Article V, at the offices of Schiff Hardin & Waite, 7300 Sears Tower,
Chicago, Illinois 60606, at 10:00 a.m. on August 24, 1998, in accordance
with Section 10.1 (a)(ii), or such other place, time and date as the
parties may agree. The actual date of the Closing is herein referred to as
the "Closing Date."
------------
2.2 Deliveries by Seller. At the Closing, upon the terms and subject
--------------------
to the conditions of this Agreement, Seller shall deliver to Buyer:
(a) certificates representing 100% of the outstanding capital stock
of Stuart Hall, duly endorsed, or accompanied by stock powers duly executed
with all necessary stock transfer stamps attached thereto and canceled;
(b) a duly executed copy of each of the Ancillary Agreements (as
defined in Section 5.2(d)); and
(c) the other documents to be delivered pursuant to Sections
5.1(d), 5.1(f) and 5.2.
2.3 Deliveries by Buyer. At the Closing, upon the terms and subject
-------------------
to the conditions of this Agreement, Buyer shall deliver to Seller:
(a) the Stock Purchase Price, in immediately available funds by wire
transfer to an account designated by Seller prior to the Closing;
(b) a duly executed copy of each of the Ancillary Agreements; and
(c) the certificates and other documents to be delivered pursuant to
Section 5.3 hereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of Seller. Seller represents and
----------------------------------------
warrants to Buyer as follows:
5
<PAGE>
(a) Due Organization of Stuart Hall. Stuart Hall is a corporation
-------------------------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization. Stuart Hall (i) has the requisite power
and authority to own, lease and operate its properties and assets and to
conduct its business as it is now being conducted and (ii) to the extent
that the concept of good standing exists in the relevant jurisdiction, is in
good standing and is duly qualified to transact business in each
jurisdiction in which the nature of property owned, leased or operated by it
or the conduct of its business requires it to be so qualified, except, in
each case, where the failure to be so qualified or to be in good standing
would not have a Material Adverse Effect. For purposes of this Agreement,
the phrase "Material Adverse Effect" means, with respect to the Seller or
-----------------------
the Business, a material adverse effect on (x) the business, assets,
liabilities or financial condition of the Business taken as a whole or (y)
the ability of Seller to perform its obligations hereunder or under the
Ancillary Agreements and, with respect to the Buyer, to perform its
obligations hereunder or under the Ancillary Agreements. Complete and
correct copies of the respective constituent documents of Stuart Hall, as
amended and in effect as of the date hereof, have been made available to
Buyer.
(b) Due Organization and Power of Seller. Seller is a corporation
------------------------------------
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite corporate power and
authority to enter into this Agreement and the Ancillary Agreements (as
defined in Section 5.2(d) and together with this Agreement, the "Transaction
-----------
Agreements") to which it is a party and to consummate the transactions
----------
contemplated hereby and thereby and perform its obligations hereunder and
thereunder.
(c) Authorization and Validity of Agreements. The execution,
----------------------------------------
delivery and performance, as applicable, by Seller of the Transaction
Agreements and the consummation by it of the transactions contemplated
hereby and thereby have been duly authorized by all necessary corporate
action, and no other corporate action on its part is necessary for the
execution, delivery and performance by it of the Transaction Agreements and
the consummation by it of the transactions contemplated hereby and thereby.
This Agreement has been, and at the Closing each of the Ancillary Agreements
will be, duly executed and delivered by Seller. This Agreement is, and at
the Closing each of the Ancillary Agreements will be, the legal, valid and
binding obligation of Seller, enforceable against Seller in accordance with
its terms, except as the same may be limited by bankruptcy, insolvency,
reorganization, moratorium and other laws relating to or affecting
creditors' rights generally and by general equity principle.
(d) Subsidiaries. Stuart Hall has no subsidiaries.
------------
(e) Capitalization of Stuart Hall. Schedule 3.1(e)(i) sets forth
-----------------------------
for Stuart Hall the authorized capital stock and the number of shares of
outstanding capital stock. All of the outstanding shares of capital stock of
Stuart Hall have been validly issued, are fully paid and nonassessable, and
are owned by Seller free and clear of all Liens other than Permitted Stock
Liens. Except as set forth on Schedule 3.1(e)(ii), there are no outstanding
or authorized options, warrants, calls, rights, stock appreciation rights or
other rights, commitments, interests of any character relating to the sale
or issuance of any shares of capital stock of Stuart Hall. There are no
voting trusts, proxies, or other agreements or understandings with respect
to the voting of capital stock of Stuart Hall.
6
<PAGE>
(f) No Conflict. The execution, delivery and performance by Seller
-----------
of the Transaction Agreements and the consummation by Seller of the
transactions contemplated hereby and thereby, do not and will not, (i) to
the actual knowledge of the officers of Seller set forth on Schedule 3.1
(f)(i) ("Seller's Knowledge"), violate any provision of Federal, state,
------------------
local or foreign law, rule, regulation, order, injunction, judgment or
decree (each, a "Law") applicable to Stuart Hall or to which the Business is
---
subject; (ii) except as set forth on Schedule 3.1(f)(ii), require any
consent or approval of, or filing with or notice to, any governmental
authority whether foreign, federal, state, local or other political
subdivision or agency of any of the foregoing ("Governmental Authority")
----------------------
under any material provision of Law applicable to Stuart Hall; (iii) violate
any provision of the charter or by-laws of Stuart Hall; or (iv) except as
set forth on Schedule 3.1(f)(iv), require any consent, approval or notice
under, or result in the breach, lapse, cancellation or termination of, or
constitute a default under, or result in the acceleration of any right or
obligation of or the performance by Stuart Hall under any material
indenture, lease, license, agreement, or other instrument to which Stuart
Hall is a party or by which Stuart Hall, or any of its assets, is bound or
encumbered.
(g) Financial Statements. Seller has previously delivered to Buyer
--------------------
the audited financial statements for Stuart Hall at and for the fiscal years
ended December 31, 1995, December 31, 1996 and December 31, 1997, which such
financial statements include for each such year the balance sheets,
statements of income, changes in shareholders' equity and cash flow (the
"Financial Statement"), a copy of which is included in Schedule 3.1(g)(i),
-------------------
the unaudited balance sheets, statements of assets and statements of income
of Stuart Hall at and for the months ended January 31, 1998, February 28,
1998, March 31, 1998, April 30, 1998 and May 31, 1998, respectively, and the
statements of income of Stuart Hall for the periods beginning on January 1,
1998 and ending on January 31, 1998, February 28, 1998, March 31, 1998,
April 30, 1998 and May 31, 1998, respectively (the balance sheet of Stuart
Hall at May 31, 1998 being hereinafter referenced as the "1998 Balance
------------
Sheet"), copies of which are included in Schedule 3.1(g)(ii). Except as
-----
described in Schedule 3.1 (g)(i), the Financial Statements were prepared on
a basis consistent with United States Generally Accepted Accounting
Principles ("GAAP") and are complete and correct in all material respects.
Except as set forth in Schedule 3.1(g)(iii), the books, records and
accounts of Seller relating to the Business and Stuart Hall (the "Books and
---------
Records") accurately and fairly reflect, in reasonable detail, all material
-------
transactions and all material items of income and expense, assets and
liabilities and accruals relating to the Business.
(h) Tax Matters.
-----------
(i) To Sellers Knowledge, Seller, Stuart Hall, and any
affiliated group (within the meaning of Section 1504 of the
Internal Revenue Code of 1986, as amended (the "Code") or similar
----
group under state, local or other applicable law of which Stuart
Hall is or has been a member ("Affiliated Group") have filed, or
----------------
caused to be filed, in a timely manner all Tax Returns (as defined
below) required to be filed by Seller, Stuart Hall or any such
Affiliated Group, and all such Tax Returns are complete and correct
in all respects.
(ii) To Seller's Knowledge, all Taxes (as defined below)
due and payable (whether or not shown on any Tax Return) from
Stuart Hall or any Affiliated Group have been timely paid in full
or are not yet delinquent.
7
<PAGE>
(iii) To Seller's Knowledge, Stuart Hall and any Affiliated Group
have complied with all applicable laws relating to the withholding of Taxes
(including, without limitation, withholding of Taxes pursuant to Section
1441 and 1442 of the Code or similar provisions under any foreign laws), and
have, within the time and in the manner prescribed by such laws, withheld
and paid over to the proper Governmental Authorities all amounts required to
be so withheld and paid over under all such applicable laws and has, within
the time and within the manner prescribed by such laws, filed all Tax
Returns with respect to such withholding.
(iv) To Seller's Knowledge, except for ad valorem Taxes and real
and personal property Taxes not yet delinquent, there are no Liens for Taxes
upon any assets of Stuart Hall.
(v) Except as set forth on Schedule 3.1(h)(v), neither Stuart Hall
nor any Affiliated Group have requested, nor has any person requested on
behalf of either of them, any extension of time within which to file any Tax
Return in respect of any taxable year which has not since been filed.
(vi) Except as set forth on Schedule 3.1(h)(vi), there are no
outstanding waivers or extensions of time regarding the application of the
statute of limitations with respect to any Taxes of Stuart Hall or any
Affiliated Group or Tax Returns required to be filed by Stuart Hall or any
Affiliated Group.
(vii) Except as set forth on Schedule 3.1(h)(vii), no deficiency
or claim has been formally asserted, assessed or threatened with regard to
any Taxes of Stuart Hall or any Affiliated Group which has not been received
and paid in full.
(viii) Except as set forth on Schedule 3.1(h)(viii), no audits or
other administrative proceedings or court proceedings are pending and no
written notification of such proceedings has been received by Stuart Hall or
any Affiliated Group with regard to any Taxes of Stuart Hall or such
Affiliated Group or Tax Returns required to be filed by Stuart Hall or any
Affiliated Group.
(ix) Except for leases of personal property by or to Stuart Hall,
Stuart Hall is not a party to, is not bound by, and has no obligation under,
any contract providing for the allocation or sharing of Taxes.
(x) No power of attorney has been granted with respect to any
matter relating to Taxes of Stuart Hall or any Affiliated Group which is
currently in force.
(xi) Stuart Hall is not a party to any contract that could result,
separately or in the aggregate, in the payment of any "excess parachute
payments" within the meaning of Section 280G of the Code and has not made
any such payments since July 8, 1992.
(xii) Stuart Hall has been a member of the Affiliated Group (within
the meaning of Section 1504 of the Code) of which Seller is the common
parent since July 8, 1992.
8
<PAGE>
(xiii) No property of Stuart Hall is property that Stuart
Hall or any party is or will be required to treat as being owned by
another person pursuant to the provisions of Section 168(f)(8) of
the Code (as in effect before amendment by the Tax Reform Act of
1986) or is "tax-exempt use property" within the meaning of Section
168(f) of the Code.
(xiv) Neither Stuart Hall nor any Affiliated Group has
agreed to make, or is required to make, any adjustment under Section
481(a) of the Code.
(xv) Neither Stuart Hall nor any Affiliated Group has
participated in or cooperated with an international boycott within
the meaning of Section 999 of the Code.
(xvi) Seller has provided or made available to Buyer or its
representatives (i) complete and correct copies of the relevant
portions of the consolidated federal income Tax Returns relating to
Stuart Hall and filed by or including Seller for the taxable periods
ended December 31, 1996, and will provide such for the taxable
periods ended on December 31, 1997 as soon as practicable after such
are completed, (ii) complete and correct copies of relevant portions
of the state, local and foreign income Tax Returns relating to
Stuart Hall for the taxable periods ended December 31, 1996, and
will provide such for the taxable periods ended on December 31, 1997
as soon as practicable after such are completed, and (iii) all
examination reports, closing agreements and statements of
deficiencies, if any, relating to the audit of such Tax Returns or
relevant portions thereof by the IRS or the relevant state, local or
foreign taxing authorities. Seller has indicated on Schedule 3.1
(h)(viii) those Tax Returns which have been audited and those which
are currently the subject of audit.
(xvii) For purposes of this Agreement, "Taxes" shall mean
-----
and include all taxes, charges, fees, duties, levies, penalties or
other assessments imposed by any federal state, local or foreign
authority, including, but not limited to, income, gross receipts,
excise, property, sales, gains, use, license, capital stock,
transfer, franchise, payroll, withholding, social security or other
taxes, including any interest, penalties or additions attributable
thereto (whether or not disputed); and "Tax Returns" shall mean and
-----------
include all federal, state, local and foreign tax returns,
declarations, statements, reports, schedules, forms or information
returns or claims for refunds relating to Taxes or other written
information required to be supplied to any taxing Governmental
Authority in connection with Taxes (including any amended Tax
Returns).
(i) Title to Personal Properties; Liens and Encumbrances; No Other
--------------------------------------------------------------
Interests. Other than with respect to real property which is addressed in
---------
Section 3.1(t), to Seller's Knowledge, Stuart Hall or an Affiliate thereof
has good and marketable title to all of the material properties and assets,
tangible or intangible, reflected in the 1998 Balance Sheet, free and clear
of all Liens, except (i) as set forth on Schedule 3.1(i), (ii) Liens that
do not affect the use thereof in any material respect, (iii) statutory Liens
securing payments not yet due and payable, due but not yet delinquent, or
being tested in good faith by appropriate proceedings, for which there are
reserves, (iv) mechanics', carriers', workmen's, repairmen's or other like
Liens arising or incurred in the ordinary course of business, and (v)
original purchase price conditional sales contracts and equipment leases
with third parties entered into in the ordinary course of business
("Permitted Liens"). Each tangible asset that constitutes material
----------------
operating
equipment is in satisfactory operating condition and repair (subject to
normal wear and tear), and is suitable for the purposes for which it
presently is used.
9
<PAGE>
(j) Business Contracts. Schedule 3.1(j)(i) sets forth, as of the
------------------
date hereof, each contract, maintenance and service agreement, purchase
order, and purchase commitment for raw materials, goods and other services,
advertising and promotional agreement, lease, license, shipping agreement,
agreement with a finished goods supplier, and collective bargaining
agreement (i) that relate to the Business, and (ii) to which Stuart Hall or
an Affiliate thereof is a party or by which the assets of the Business are
bound, which (A) require any party thereto to pay an amount (whether in a
lump sum or in a series of installments) in excess of $250,000 annually, (B)
provides for a surety, cosigner, endorser, guaranty or indemnity by Stuart
Hall of any obligation or liability in excess of $250,000, contingent or
otherwise, or (C) has a stated term in excess of one year, requires any
party thereto to pay an amount (whether in a lump sum or in a series of
installments) in excess of $250,000 annually, except for purchase orders and
commitments, sales contracts, and similar agreements in the ordinary course
of business (each, a "Business Contract"). Except as set forth on Schedule
-----------------
3.1(j)(ii), each Business Contract is in full force and effect and is a
legal and valid contract or agreement, binding on Stuart Hall and, to
Seller's Knowledge, each other party thereto. There is no material breach or
default by Stuart Hall (or, to Seller's Knowledge, any event which, with
notice or lapse of time or both, could constitute a material breach or
default) by Stuart Hall or, to Seller's Knowledge, by any other party in the
timely performance of any obligation to be performed or paid under any
provision of any Business Contract. To Seller's Knowledge, no party to any
Business Contract has given written notice or asserted in writing to Stuart
Hall that Stuart Hall is in default under any such Business Contract and, to
Seller's Knowledge, no other party is in material breach or default under
any Business Contract.
(k) Legal Proceedings. As of the date of this Agreement, except as
-----------------
set forth in Schedule 3.1(k), there are no actions, suits or proceedings
instituted or pending, or to Seller's Knowledge, threatened, against Stuart
Hall. Except as set forth on Schedule 3.1(k), Stuart Hall is not subject to
any material judgment, order, writ, injunction or decree.
(l) Government Licenses, Permits and Related Approval. Schedule 3.1
-------------------------------------------------
(l) lists each material license, permit, consent, approval, authorization,
qualification and order of any Governmental Authority required to permit
Stuart Hall to conduct the Business as presently conducted. Each such
license, permit, consent, approval, authorization, qualification and order
(i) is valid and in full force and effect in all material respects and (ii)
to Seller's Knowledge, has not been violated.
(m) Conduct of Business in Compliance with Regulatory Requirements.
---------------------------------------------------------------
To Seller's Knowledge, Stuart Hall is in compliance in all material respects
with each Law, applicable to the operation or conduct of, or ownership of
the property relating to, the Business.
(n) Labor Matters. Except as set forth in Schedule 3.1 (n), Stuart
-------------
Hall is not a party to any collective bargaining agreement or other contract
or agreement with any labor organization or other representative of any of
the employees of the Business, and there is no labor strike, slowdown, work
stoppage or lockout in effect or otherwise affecting Stuart Hall. Stuart
Hall has complied with, and continues to comply with, the terms of the
collective bargaining agreements set forth in Schedule 3.1(n) (each, a
"Collective Bargaining Agreement") in all material respects.
-------------------------------
10
<PAGE>
(o) Intellectual Property
---------------------
(i) Schedule 3.1(o)(i) lists, as of the date of this Agreement, all
(1) United States and foreign patents and patent applications, (2) United
States and foreign trademark and service mark registrations or applications
therefor, (3) United States and foreign copyright registrations and
applications therefor, (4) foreign design registrations, (5) material
utility models, in which Stuart Hall has an interest and that relate to the
Business and the nature of such interest, (6) material trade and corporate
names used by Stuart Hall, (7) material unregistered trademarks, service
marks and copyrights owned or used by Stuart Hall and that relate to the
Business, and (8) material computer software owned Or used by Stuart Hall,
other than mass-marketed software with an annual license fee of less than
$10,000 (collectively, the "Intellectual Property")
---------------------
(ii) (1) Except as set forth on Schedule 3.1(o)(ii), Stuart Hall
owns and possesses all right, title and interest in and to, or has a valid
and enforceable license to use, all intellectual property necessary for the
operation of the Business as currently conducted, free and clear of all
Liens; (2) to Seller's Knowledge, no claim by any third party contesting the
validity, enforceability, use or ownership of any of the Intellectual
Property is currently outstanding or is threatened (including, without
limitation, any demand or request that Stuart Hall license any intellectual
property from a third party), and to Stuart Hall's Knowledge, there are no
grounds for the same; (3) to Seller's Knowledge, Stuart Hall has not
received any notices of, and is not aware of, any facts which indicate a
likelihood of any infringement or misappropriation by any third party of any
Intellectual Property; (4) to Seller's Knowledge, Stuart Hall has not
infringed, misappropriated or otherwise conflicted with any intellectual
property of any third parties, and Stuart Hall is not aware of any
infringement, misappropriation or conflict which will occur as a result of
the continued operation of the Business as currently conducted; (5) except
as set forth on Schedule 3.1(o)(ii), all Intellectual Property owned or
used by Stuart Hall immediately prior to the Closing will be owned or
available for use by Stuart Hall on identical terms and conditions
immediately subsequent to the Closing; and (6) to Seller's Knowledge, the
owners of any Intellectual Property licensed to Stuart Hall have taken all
necessary and desirable action to maintain and protect the Intellectual
Property subject to such licenses.
(p) Employee Benefit Plans.
----------------------
(i) Stuart Hall does not maintain any employee benefit plan as
defined in Section 3(3) of ERISA or any bonus, incentive or other
nonqualified plan of deferred pay or change of control plan or program or
any material fringe benefit plan or program.
(ii) Stuart Hall does not contribute to or have any actual or
potential liability with respect to any multiemployer plan as defined in
Section 3(37) of ERISA other than such plan maintained by the United
Paperworker's International Union AFL-CIO Local 765.
(iii) To Seller's Knowledge, Stuart Hall does not have any actual
or potential liability to the Pension Benefit Guaranty Corporation, the
Internal Revenue Service or the Department of Labor or with respect to any
employee pension benefit plan currently maintained by members of the
controlled group of companies (as defined in Section 414
11
<PAGE>
of the Code) that includes Stuart Hall that has not been satisfied
in full, and no condition exists that presents a material risk to
Stuart Hall of incurring such a liability.
(iv) Stuart Hall has not incurred any liability on account
of a "partial withdrawal" or a "complete withdrawal" (within the
meaning of Sections 4205 and 4203, respectively, of ERISA) from the
multiemployer plan maintained by United Paperworker's International
Union AFL-CIO Local 765, no such liability has been asserted, and
nor to Seller's Knowledge are there any events or circumstances
which could result in any such partial or complete withdrawal. To
Seller's Knowledge, the multiemployer plan maintained by United
Paperworker's International Union AFL-CIO Local 765 complies in form
and has been administered in accordance with the requirements of
ERISA and, where applicable, the Code and such multiemployer plan is
qualified under Section 401 (a) of the Code as amended to the date
hereof and is not in reorganization.
(v) To Seller's Knowledge, Schedule 3.1(p) contains a list
of all employees at Stuart Hall who are on short-term disability,
long-term disability, or leave of absence.
(q) Undisclosed Liabilities. To Seller's Knowledge, Stuart Hall has
-----------------------
no material liability, except for (i) liabilities set forth on the face of
the Financial Statements for the period ended December 31, 1997 (rather than
in any notes thereto), and (ii) liabilities which have arisen after the
Financial Statements in the ordinary course of business.
(r) Environmental Matters.
---------------------
(i) To Seller's Knowledge, Schedule 3.1(r)(i) contains a
list of all Required Environmental Permits (defined below)
(including the expiration date of each, if applicable), all of which
are presently valid and effective. To Seller's Knowledge, except as
set forth in Schedule 3.1(r)(i),
(A) Stuart Hall has obtained all Environmental
Permits that are required for the ongoing operation of the
Business ("Required Environmental Permits"); and
------------------------------
(B) Stuart Hall has not received any written
notice alleging a violation of any such Environmental
Permit, and no proceeding is pending to modify or revoke
any such Environmental Permit.
(ii) To Seller's Knowledge, except as set forth on Schedule
3.1(r)(ii),
(A) Stuart Hall is in compliance in all material
respects with all relevant and applicable Environmental
Laws (as defined below) in connection with the operation of
the Business;
(B) Stuart Hall has not received notice from any
Governmental Authority alleging a material failure of
Stuart Hall to comply with any applicable Environmental Law
in connection with the operation of the Business and no
proceeding alleging such a failure is pending;
12
<PAGE>
(C) there have been no material Releases of Hazardous
Substances (as defined below) on or from the real property owned or
used by Stuart Hall or generated in connection with the Business,
except as in substantial compliance with applicable Environmental
Laws;
(D) Hazardous Substances have not at any time been
generated, used, treated, recycled or stored on the real property
owned or used by Stuart Hall and used in connection with the
operation of the Business, except in substantial compliance in all
material respects with applicable Environmental Laws;
(E) there are no underground storage tanks located on the
real property owned or used by Stuart Hall;
(F) Stuart Hall has not received any notice, written or
oral, alleging that Stuart Hall is or may be obligated to
investigate or remediate Hazardous Substances at any site; and
(G) no material Lien in favor of any Governmental
Authority for any damages or other liability under applicable
Environmental Law or for costs incurred in response to a Release of
Hazardous Substances has been filed or attached to the real
property owned or used by Stuart Hall.
(iii) Seller has or has caused to be given to Buyer access to all
material records and files in its possession, including, without limitation,
all reports, studies, analyses, tests or monitoring results, pertaining to
the existence of Hazardous Substances or any other material concerns related
to the real property owned by Stuart Hall or concerning compliance by
Stuart Hall with Environmental Law.
(iv) For purposes of this Agreement, "Environmental Statutes" means
----------------------
Federal, state, local and foreign statutes and ordinances, and regulations
promulgated thereunder, in effect prior to Closing and intended to provide
protection for public health or the environment, including, without
limitation, the Clean Air Act, the Federal Water Pollution Control Act, the
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), the Emergency Planning and Community Right to Know Act, the
------
Solid Waste Disposal Act (including the Resource Conservation and Recovery
Act), the Toxic Substances Control Act, the Safe Drinking Water Act and
other substantially similar state statutes and regulations, as amended from
time to time; "Environmental Law" means Environmental Statutes and any
-----------------
common law (A) creating a cause of action for damage to person or property
due to exposure to Hazardous Substances or (B) governing the contamination,
pollution or protection of public health or the environment or allocating
liabilities in respect thereof; "Hazardous Substance" means any hazardous
-------------------
material, hazardous substance, toxic substance or words of similar import
under any Environmental Statute; "Environmental Permits" means Federal,
state and local permits, licenses, and authorizations issued to Stuart Hall
under Environmental Law in connection with the operation of the Business;
and "Release" means any spilling, leaking, pumping, pouring, emitting,
emptying, discharging, injecting, escaping, dumping or disposing of a
Hazardous Substance into the environment.
13
<PAGE>
(s) Absence of Changes. Except as set forth in Schedule 3.1 (s)(i),
------------------
since December 31, 1997, there has not been any event or circumstance that,
individually or in the aggregate, has had or would have a Material Adverse
Effect. Additionally, except as set forth on Schedule 3.1(s)(i); since
December 31, 1997 Stuart Hall has not taken or permitted to be taken any of
the actions in Section 4.2 of this Agreement. Except as set forth on
Schedule 3.1(s)(ii), since December 31, 1997, no key employee of Stuart
Hall has left employment at Stuart Hall to assume a position of employment
with another operating division of Newell Co.
(t) Leased Real Property.
--------------------
(i) Stuart Hall owns no real property.
(ii) Attached as Schedule 3.1 (t)(ii)(A) is a list of all
leases, subleases and other occupancy agreements, including all
amendments, extensions and other modifications (the "Leases") for
------
real property (the "Leased Property") to which Stuart Hall is (or
---------------
shall be as of the Closing Date) the "tenant", "subtenant" or other
lessee party. Stuart Hall has a good and valid leasehold interest in
and to all of the Leased Property, subject to no Liens,
encroachments, encumbrances or other defects in title (collectively,
"Encumbrances") except as described in such Schedule and except as
------------
would not materially adversely affect the use, possession or
marketability of such Leased Property. To Seller's Knowledge, each
Lease is in full force and effect and is enforceable in accordance
with its terms. To Seller's Knowledge, there exists no default or
condition which, with the giving of notice, the passage of time or
both, could become a default under any Lease. Seller has previously
delivered to Buyer true and complete copies of all the Leases.
Except as described on Schedule 3.1(t)(ii)(B), no consent, waiver,
approval or authorization is required from the landlord under any
Lease as a result of the execution of this Agreement or the
consummation of the transactions contemplated hereby.
(iii) The Leased Property constitutes all of the real
property owned, leased or otherwise occupied in connection with the
Business. Other than Stuart Hall, except as set forth in Schedule
3.1(t)(iii) (the "Subleases"), there are no parties in possession
---------
or parties having any current or future right to occupy any of the
Leased Property. Each Sublease is in full force and effect and is
enforceable in accordance with its terms. To Sellers Knowledge,
there exists no default or condition which, with the giving of
notice, the passage of time or both, could become a default under
any Sublease. Seller has previously delivered to Buyer true and
complete copies of all the Subleases. No consent, waiver, approval
or authorization is required from the subtenant under any Sublease
as a result of the execution of this Agreement or the consummation
of the transactions contemplated hereby. The Leased Property is in
good condition and repair and is sufficient and appropriate for the
conduct of the Business. All improvements located on the Leased
Property have direct access to a public road adjoining such Leased
Property. No such improvements or accessways encroach on land not
included in the Leased Property and no such improvement is dependent
for its access, operation or utility on any land, building or other
improvement not included in the Leased Property. There is no pending
or, to Seller's Knowledge, any threatened condemnation proceeding
affecting any portion of the Leased Property.
14
<PAGE>
(iv) To Sellers' Knowledge, there are no outstanding
options or rights of first refusal with respect to the purchase or
use of any of the Leased Property, any portion thereof or interest
therein. To Seller's Knowledge, Stuart Hall is not obligated to
purchase or lease any real property.
(u) Insurance. Seller has casualty, general liability and other
---------
insurance policies for the assets and properties of Stuart Hall that is
customary and adequate for corporations of similar size engaged in similar
lines of business.
(v) Company Transactions. Neither the Seller nor Stuart Hall is
--------------------
party to or bound by any agreement with respect to a Company Transaction
other than this Agreement and the Seller has terminated all discussions with
third parties (other than Buyer) regarding Company Transactions.
(w) Sufficiency of Assets. Stuart Hall owns, leases, possesses a
---------------------
valid license or otherwise has the legal right to use all buildings,
machinery, equipment, and other assets used in the conduct of the Business
as presently conducted and as conducted on December 31, 1997, except as
could not reasonably be expected to have a Material Adverse Effect.
(x) Transactions with Affiliates. Except as set forth on Schedule
----------------------------
3.1 (y), none of Seller or its Affiliates owns any material asset, tangible
or intangible, which is used in the Business.
(y) No Other Representations or Warranties. Except for the
--------------------------------------
representations and warranties contained in this Section 3.1 and in the
Ancillary Agreements, Seller makes no other express or implied warranty or
representation in the Transaction Agreements.
3.2 Representations and Warranties of Buyer. Buyer represents and
---------------------------------------
warrants on behalf of itself and, as applicable, its Affiliates, to Seller
as follows:
(a) Due Organization and Power. Each of Buyer and its Affiliates
--------------------------
that is a party to an Ancillary Agreement is a corporation duly organized,
validly existing and in good standing to the extent that the concept of good
standing exists in the relevant jurisdiction, under the laws of the
jurisdiction of its incorporation and has all requisite corporate power and
authority to enter into the Transaction Agreements to which it is a party
and perform its obligations thereunder.
(b) Authorization and Validity of Agreements. The execution,
----------------------------------------
delivery and performance by each of Buyer and any Affiliate of Buyer of the
Transaction Agreements to which it is a party, and the consummation by Buyer
or its Affiliates, as applicable, of the applicable transactions
contemplated hereby and thereby, have been duly authorized by all necessary
corporate and shareholder action, and no other corporate action on its part
is necessary for the execution, delivery and performance by it of the
Transaction Agreements to which it is a party and the consummation by it of
the applicable transactions contemplated hereby and thereby. This Agreement
has been, and at the Closing the Ancillary Agreements Will be, duly executed
and delivered by Buyer. This Agreement is, and at the Closing the Ancillary
Agreements will be, the legal, valid and binding obligation of Buyer,
enforceable against Buyer in accordance with their respective terms, except
as the same may be limited by bankruptcy, insolvency, reorganization,
moratorium and other laws relating to or affecting creditors' rights
generally and by general equity principles.
15
<PAGE>
(c) No Conflict. Except as set forth in Schedule 3.2(c), the
-----------
execution, delivery and performance by each of Buyer and any Affiliate of
Buyer of the Transaction Agreements to which it is a party and the
consummation by Buyer or its Affiliates, as applicable, of the transactions
contemplated thereby does not, and will not (i) to the actual knowledge of
the officers of Buyer set forth in Schedule 3.2(c)(i), violate any provision
of Law applicable to Buyer or any of its Affiliates or to which their
respective properties are subject; (ii) except as set forth on Schedule
3.2(c), require any consent or approval of, or filing with or notice to, any
Governmental Authority under any provision of Federal, state, local and
foreign law applicable to Buyer or any of its Affiliates; (iii) violate any
provision of the charter or by-laws or other constituent documents of Buyer
or any of its Affiliates; or (iv) require any consent, approval or notice
under, or result in the breach, lapse, cancellation or termination of, or
constitute a default under, or result in the acceleration of, any right or
obligation of or the performance by Buyer or any of its Affiliates under any
material indenture, lease, franchise, agreement, or other instrument to
which Buyer or any of its Affiliates is a party or by which any of them or
their assets are bound or encumbered.
(d) Brokers, Finders. etc. None of Buyer or its Affiliates have
---------------------
entered into any contract, arrangement or understanding with any person or
firm that may result in the obligation of any of them to pay any finders
fees, brokerage or agent's commissions or other like payments in connection
with the transactions contemplated hereby or by the Ancillary Agreements.
(e) Commitment Letters. Attached hereto as Schedule 3.2(e) are
------------------
true, complete and correct copies of the following: (i) Letter Agreement,
dated June 10, 1998, between Bank of American National Trust and Savings
Association and Pen-Tab Industries, Inc., (ii) Letter Agreement, dated June
24, 1998, between Citicorp Mezzanine Partners, L.P. and Citicorp Venture
Capital, Ltd., and (iii) Letter, dated June 24, 1998, J.P. Morgan
Securities, Inc. to Pen Tab Holdings, Inc. (collectively, the "Commitment
----------
Letters").
-------
3.3 Supplements to Schedules. From time to time prior to the
------------------------
Closing, Seller will promptly supplement or amend the Schedules with respect
to any matter hereafter arising which, if existing or occurring at the date
of this Agreement, would have been required to be set forth or described in
the Schedules; provided, however, that any such supplement or amendment, if
material, will not be deemed to be part of the applicable Schedule until
Buyer consents to such supplement in writing (which consent shall not be
unreasonably withheld).
ARTICLE IV
PRE-CLOSING COVENANTS
4.1 Access to Information Concerning Properties and Records;
Confidentiality
-------------------------------------------------------
During the period commencing on the date hereof and ending on the
Closing Date, Seller shall cause Stuart Hall to, upon reasonable notice,
afford to Buyer, its counsel, accountants, lenders and other authorized
representatives such access, during normal business hours, to the
facilities, properties, books, records, Tax Returns, documents, personnel
and auditors of the Business, as Buyer shall reasonably request. Buyer
agrees that its inspections shall be undertaken in a manner to cause minimal
and limited interference with the operations of Stuart Hall and Seller.
Seller shall cause Stuart Hall and its respective officers, employees,
accountants and other agents to furnish to Buyer such additional financial
and
16
<PAGE>
operating data and information relating to the Business as Buyer may from
time to time reasonably request. If this Agreement is terminated pursuant to
Section 10.1 prior to the Closing Date, Buyer shall return to Seller or
certify to Seller as to the destruction of all copies held by Buyer or its
representatives of such books, records, Tax Returns and documents and
results of such inspections, assessments, audits and tests. Buyer agrees
that it will continue to treat all information so obtained from Seller as
"Information" under the Confidentiality Agreement, dated as of January 20,
1998, between Seller and Buyer (the "Confidentiality Agreement"), and will
-------------------------
continue to honor its obligations thereunder, until the Closing Date on
which date Section 9.6 will govern the confidentiality obligations of the
parties to this Agreement.
4.2 Conduct of the Business Prior to the Closing Date. Seller
-------------------------------------------------
agrees that, except as provided in this Agreement or consented to or
approved in writing by Buyer (which consent shall not be unreasonably
withheld) or set forth on Schedule 4.2, during the period commencing on the
date hereof and ending at the Closing Date, Stuart Hall shall not take any
of the following actions with respect to the Business or its employees:
(a) Ordinary Course. Conduct the Business other than in the
---------------
ordinary course of business;
(b) Changes in Compensation. Grant any general increase in
-----------------------
compensation or benefits to its employees or to its officers, except in the
ordinary course of business or as required by law; pay any bonus
compensation except in the ordinary course of business or in accordance with
the provisions of any applicable program or plan adopted by the Board of
Directors of Seller or Stuart Hall prior to the date hereof; enter into or
amend the terms of any severance agreements with its officers; or effect any
change in retirement benefits for any Transferred Employees (as defined
herein) or officers (unless such change is required by applicable law);
provided, however, that nothing in this subsection (b) shall prevent the
payment or other performance of any award or grant made prior to the date
hereof and disclosed in the Schedules or pursuant to this Agreement;
(c) Assets. Sell, lease, license, abandon or otherwise dispose of
------
any of its assets, tangible or intangible (including but not limited to
Intellectual Property), other than inventory, or acquire any business or
assets, except in the ordinary course of business and in any event not to
exceed $500,000 in the aggregate;
(d) Capital Stock. Issue (i) any additional shares of capital stock
-------------
of any class or series, (ii) any securities convertible into or exchangeable
for shares of capital stock, or (iii) any options, warrants or other rights
to acquire any shares of capital stock, of Stuart Hall;
(e) Dividends. Stuart Hall will not declare or pay any dividend,
---------
other than to repay intercompany obligations as provided in Section 1.4;
(f) Capital Expenditures. Authorize or commit to, or make new
--------------------
capital expenditures, except in the ordinary course of business and in any
event not to exceed $500,000 in the aggregate;
17
<PAGE>
(g) Liens. Mortgage or otherwise encumber or subject to any Lien any
-----
material assets used in the Business (including the Leases) and owned by
Stuart Hall, except for Permitted Liens;
(h) Accounting Practice. Make any material change to the accounting
-------------------
(including Tax accounting) methods, principles or practices of the Business,
except as may be required by GAAP;
(i) Constituent Documents. Make any material amendment to its
---------------------
charter or by-laws;
(j) Taxes. Incur any Taxes other than in the ordinary course of
-----
business or make any Tax election or give any ruling request without the
written consent of Buyer, which shall not be unreasonably withheld; or
(k) Other. Agree in writing to do any of the foregoing.
-----
4.3 Preservation of Business. Seller will use its, and will cause
------------------------
Stuart Hall to use its reasonable efforts to preserve intact the business
organization of the Business, to keep available the services of their
present officers and key employees, and to preserve the good will of those
having business relationships with the Business.
4.4 Authorizations. Subject to the terms and conditions herein
--------------
provided, Seller and Buyer shall (a) promptly make their respective filings
and thereafter make any other required submissions under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"); (b)
-------
use their reasonable best efforts to cooperate with each other in (I)
determining which filings are required to be made prior to the Closing Date
with, and which consents, approvals, permits or authorizations are required
to be obtained prior to the Closing Date from any Governmental Authority in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby, and (ii) timely making
all such filings and timely seeking all such consents, approvals, permits or
authorizations; and (c) use their reasonable best efforts to, or cause to be
taken, all other action and do, or cause to be done, all other things
necessary, proper or appropriate to consummate and make effective the
transactions contemplated by this Agreement. If, at any time after the
Closing Date, any further action is necessary or desirable to carry out the
purposes of this Agreement, the officers and directors of the parties shall
take all such necessary action.
4.5 Cash Management.
---------------
(a) Between the date of this Agreement and the Closing Date. Stuart
Hall shall continue to participate in the central cash management system of
Seller in accordance with prior practice.
(b) In the event that Seller receives any payments after the Closing
Date that are intended for Stuart Hall, Seller shall promptly remit such
payments to Buyer.
4.6 Intercompany Services and Products. Any intercompany services
----------------------------------
provided by Seller or its Affiliates to Stuart Hall shall terminate as of
the Closing Date, except as set forth in this Agreement, and all amounts
(but without duplication of amounts included in accrued
18
<PAGE>
expenses) owing by Stuart Hall with respect to such services as of the close
of business on the day preceding the Closing Date with respect to such
services shall be paid prior to Closing or simultaneously therewith.
Notwithstanding the foregoing, Seller or its Affiliates shall provide
transition services pursuant to the Transition Services Agreement (as
defined in Section 5.2(d)) to Stuart Hall on such terms and conditions and
for such prices and duration as described in such agreements.
4.7 Further Actions
---------------
(a) Subject to the terms and conditions of this Agreement, each of
the parties hereto will use their reasonable best efforts to take, or cause
to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this
Agreement and shall use its best efforts to satisfy the conditions to the
transactions contemplated hereby and to obtain all waivers, permits,
consents and approvals and to effect all registrations, filings and notices
with or to third parties or any Governmental Authority that are necessary or
desirable in connection with the transactions contemplated by this
Agreement.
(b) Seller agrees to promptly notify Buyer in writing of any
material change to Seller's or Stuart Hall's representations or Disclosure
Schedules in this Agreement.
4.8 Exclusivity. None of the Seller, Stuart Hall or any of their
-----------
respective Affiliates, representatives, officers, employees, directors or
agents shall, directly or indirectly, (a) 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 (i) reorganization, liquidation, dissolution or
recapitalization of Stuart Hall, (ii) merger or consolidation involving
Stuart Hall, (iii) 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 Stuart Hall, or (iv) similar
transaction or business combination involving Stuart Hall, the Business or
the assets of Stuart Hall (each of the foregoing actions described in
clauses (i) through (iv), a "Company Transaction"), (b) 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 (c) enter into any agreement, arrangement or understanding
requiring the Seller or Stuart Hall to abandon, terminate or fail to
consummate any of the transactions contemplated hereby. The Seller and
Stuart Hall agree to notify Buyer immediately if any person makes any
proposal, offer, inquiry or contact with respect to a Company Transaction.
4.9 Buyer's Financing
-----------------
(a) Seller has provided Buyer with confidential evaluation material
for the sole purpose of assisting Buyer in deciding whether to proceed with
a further investigation of Stuart Hall and the Business. Buyer has conducted
its own due diligence investigation of Stuart Hall and the Business and
hereby acknowledges that the only representations or warranties of Seller
with respect to Stuart Hall and the Business are contained in Section 3.1 of
this Agreement.
(b) Notwithstanding the provisions of the last sentence of Section
4.1 of this Agreement relating to confidentiality obligations prior to the
Closing Date, Seller will permit
19
<PAGE>
Buyer to utilize such confidential information as may be legally required to
complete and issue an Offering Memorandum as part of a private placement of
securities pursuant to Rule 144A under the Securities Act of 1933, as
amended (the "Rule 144A Offering"), provided that (i) Buyer shall give
------------------
Seller a reasonable period of time to review such Offering Memorandum and
will not include any information or statement about Stuart Hall, its
Affiliates or the Business to which Seller reasonably objects, and (ii) such
Offering Memorandum shall include a legend stating that neither Stuart Hall
nor any of its Affiliates is making any representations or warranties with
respect to any information included in such Offering Memorandum.
(c) Seller will use its reasonable best efforts to cause its
accountants, Arthur Andersen LLP, to issue a comfort letter to Buyer in
connection with the Rule 144A Offering in accordance with the memorandum,
dated June 18, 1998, from Cahill Gordon & Reindel attached hereto as Exhibit
C.
4.10 Customer Confirmation. Prior to the Closing Date, Buyer is
---------------------
permitted to place one telephone call to not more than three key customers
of Stuart Hall, subject to the prior consent and participation of Seller,
which consent shall not be unreasonably withheld.
4.11 Release From Lease. Subject to the terms and conditions of this
------------------
Agreement, Buyer shall use its reasonable best efforts to assist Seller, as
Seller requests, in obtaining a release from its obligations accruing from
and after the Closing Date relating to the Standard Commercial Lease, dated
April 2, 1993, identified on Schedule 3.1(t)(ii)(A) as amended, among Mid-
West Terminal Warehouse Company, Stuart Hall and Seller (the "Kansas City
-----------
Lease").
-----
4.12 Commitment Letters. Buyer and its Affiliates will comply in a
------------------
timely fashion with all of their obligations (including, conditions,
covenants) set forth in the Commitment Letters.
4.13 Miscellaneous. Prior to the Closing Date, Seller will take all
-------------
action necessary to ensure that on the Closing Date:
(a) Stuart Hall and the Business will have no contract, arrangement
or understanding with any person or firm that may result in the obligation
of either of them to pay any finder's fee, brokerage or agent's commission
or other like payments in connection with the transactions contemplated
hereby or by the Ancillary Agreements;
(b) Stuart Hall and the Business will have no involvement in any
material business arrangement or relationship with Seller or any of its
Affiliates (except as provided in the Transition Services Agreement
described in Section 5.2(d) and the arrangement between Seller and Buyer
relating to the Kansas City Lease described in Section 5.1(f));
(c) except as set forth on Schedule 4.13(c), Stuart Hall and the
Business will have no indebtedness constituting (i) obligations for borrowed
money or evidenced by bonds, debentures, notes, letters of credit or other
similar instruments, (ii) obligations as lessee under capital leases and
(iii) material guarantees of debts of third parties, including such
guarantees supported by Stuart Hall or secured by a Lien on any of the
assets of Stuart Hall or the Business;
(d) there will be no liens, charges, security interests,
restrictions or other legal or equitable encumbrances ("Liens") on the
-----
Stock.
20
<PAGE>
ARTICLE V
CONDITIONS PRECEDENT
5.1 Conditions Precedent to Obligations of Parties. The respective
----------------------------------------------
obligations of Buyer and Seller hereunder are subject to the satisfaction or
waiver, at or prior to the Closing Date of each of the following conditions:
(a) Antitrust Laws. The waiting period applicable to the
--------------
consummation of the transactions contemplated hereby under the HSR Act shall
have expired or been terminated.
(b) No Injunction. None of the parties hereto shall be subject to
-------------
any order or injunction of a court of competent jurisdiction that prohibits
the consummation of the transactions contemplated by this Agreement. In the
event any such order or injunction shall have been issued, each party agrees
to use its reasonable best efforts to have any such order overturned or
injunction lifted.
(c) Governmental Authority Consents. All material consents,
-------------------------------
authorizations, orders and approvals of (or filings or registrations with)
any Governmental Authority required in connection with the execution,
delivery and performance of this Agreement (including the transfer of the
Stock to Buyer) shall have been obtained or made.
(d) Third Party Consents. The consents of third parties required in
--------------------
connection with the execution, delivery and performance of this Agreement
and listed on Schedule 5.1(d) shall have been obtained by Seller with such
assistance from Buyer as Seller shall reasonably request.
(e) Financing. Buyer shall have received cash proceeds sufficient
---------
to pay the Stock Purchase Price, pay all fees and expenses incurred in
connection with the transactions contemplated hereby and provide Stuart Hall
with their working capital, all on terms and conditions satisfactory to
Buyer.
(f) Kansas City Lease. Seller shall have assigned to Stuart Hall
-----------------
all of Seller's rights as a tenant under the Kansas City Lease effective as
of the Closing, and Stuart Hall shall have assumed from Seller all of
Seller's obligations as a tenant under the Kansas City Lease which accrue
from and after the Closing pursuant to an assignment instrument
substantially in the form attached hereto as Exhibit D (the "KC Lease
--------
Assignment"); provided, however, if after having used commercially
----------
reasonable efforts, Seller is unable to obtain the consent of the KC
Landlord to the KC Lease Assignment and a release of Seller thereunder (as
contemplated in Section 4.11 of this Agreement), then the condition set
forth in this Section 5.1(f) shall be deemed satisfied if either of the
following occurs in the following order of priority: first, Seller shall use
commercially reasonable efforts so that Seller shall have assigned to Stuart
Hall all of Seller's rights as a tenant under the Kansas City Lease
effective as of the Closing, and Stuart Hall shall have assumed from Seller
all of Seller's obligations as a tenant under the Kansas City Lease which
accrue from and after the Closing pursuant to the KC Lease Assignment, with
the consent of the KC Landlord, whether or not Seller remains liable to the
KC Landlord, or second, if Seller is unable to obtain the consent as set
forth above, then Seller shall use commercially reasonable efforts to create
some other arrangement, which is mutually satisfactory to Seller and Buyer
between Seller and Stuart Hall, which is consented to by the KC Landlord, as
required, whereby Stuart Hall shall be the sole tenant or subtenant under
the Kansas City
21
<PAGE>
Lease and Seller is indemnified or otherwise protected to its reasonable
satisfaction against obligations accruing under the KC Lease from and after
the Closing.
5.2 Conditions Precedent to Obligation of Buyer. The obligation of
-------------------------------------------
Buyer to consummate the transactions contemplated by this Agreement is
subject to the satisfaction or waiver by Buyer at or prior to the Closing
Date of each of the following additional conditions:
(a) Accuracy of Representations and Warranties. (i) Each of the
------------------------------------------
representations and warranties of Seller contained herein that are not
subject to a materiality or Material Adverse Effect qualifier shall be true
and correct in all material respects as of the date of this Agreement and as
of the Closing Date, with the same force and effect as though made at and as
of the Closing Date, except for changes permitted or contemplated by this
Agreement and except that to the extent any such representations or
warranties were made as of a specified date, which need be true only as of
such date, and (ii) each of the representations and warranties of Seller
made herein that is subject to a materiality or Material Adverse Effect
qualifier is true and correct in all respects as of the date of this
Agreement and on and as of the Closing Date, with the same force and effect
as though made at and as of the Closing Date, except for changes permitted
or contemplated by this Agreement and except that to the extent any such
representations or warranties were made as of a specified date, which need
be true only as of such date.
(b) Performance of Agreements. Each of the agreements and contracts
-------------------------
of Seller to be performed and complied with by Seller under this Agreement
prior to or at the Closing Date shall have been performed and complied with
in all material respects.
(c) Certificates. Buyer shall have received (i) a certificate of
------------
Seller, dated the Closing Date, executed on behalf of Seller by its
president or any of its vice presidents, to the effect that the conditions
specified in paragraphs (a) and (b) above have been fulfilled; (ii) a
certificate of the Secretary of Seller, dated the Closing Date, with true
and complete copies of Stuart Hall's charter, by-laws and resolutions
relating to this transaction attached, and (iii) a Certificate of Good
Standing from the Secretary of State of the State of Missouri, dated as of a
recent date.
(d) Ancillary Agreements. Seller shall have executed and delivered
--------------------
a Transition Services Agreement substantially in the form attached hereto as
Exhibit A. Seller's Affiliate, Newell Industries Canada, Inc., and Buyer
shall have entered into a Canadian Asset Transfer Agreement pursuant to
which the assets and liabilities listed on Schedule 5.2(d) will be
transferred to Buyer, substantially in the form reasonably satisfactory to
Buyer and Seller attached hereto as Exhibit B (together with the Transition
Services Agreement, the "Ancillary Agreements").
--------------------
(e) Release of Liens. Except as set forth on Schedule 5.2(e), the
----------------
Seller shall have obtained releases of all Liens (other than any Permitted
Liens) relating to the assets and properties of Stuart Hall.
(f) Proceedings. Except a set forth on Schedule 5.2(f), all
-----------
corporate and other proceedings taken or required to be taken by Seller or
Stuart Hall 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 Buyer.
22
<PAGE>
(g) Transactions with Affiliates. Except as set forth on Schedule
----------------------------
5.2(g), all transactions, agreements or other arrangements between Stuart
Hall and the Seller or any of its Affiliates, other than the Transition
Services Agreement and this Agreement, shall have been terminated.
(h) Additional Matters. All corporate and other proceedings and all
------------------
documents, instruments and other legal matters in connection with the
transactions contemplated by the Transaction Agreements shall be reasonably
satisfactory to Buyer and Buyer shall have received such other documents as
it shall reasonably request.
(i) Material Adverse Change. Since December 31, 1997, there shall
-----------------------
have been no fact, event or circumstance which could reasonably be expected
to have a Material Adverse Effect.
(j) No Conflict with Applicable Laws. The consummation by Seller of
--------------------------------
this Agreement, the Ancillary Agreements, and the transactions contemplated
hereby and thereby shall not violate any material provision of applicable
Law, and Stuart Hall shall be in compliance in all material respects with
each applicable Law.
5.3 Conditions Precedent to the Obligation of Seller. The
------------------------------------------------
obligation of Seller to consummate the transactions contemplated by this
Agreement is subject to the satisfaction or waiver by Seller at or prior to
the Closing Date of each of the following additional conditions:
(a) Accuracy of Representations and Warranties. The representations
------------------------------------------
and warranties of Buyer contained herein shall be true and correct in all
material respects as of the date of this Agreement and as of the Closing
Date, with the same force and effect as though made at and as of the Closing
Date, except for changes permitted or contemplated by this Agreement and
except that to the extent any representations or warranties is made as of a
specified date, which need be true only as of such date.
(b) Performance of Agreements. Each of the agreements and covenants
-------------------------
of Buyer to be performed prior to or at the Closing Date shall have been
performed and complied with in all material respects.
(c) Certificates. Seller shall have received (i) a certificate of
------------
Buyer, dated the Closing Date, executed on behalf of Buyer by its president
or any of its vice presidents, to the effect that the conditions specified
in paragraphs (a) and (b) above have been fulfilled; (ii) a certificate of
the Secretary of Buyer, dated the Closing Date, with true and complete
copies of Buyer's charter, by-laws and resolutions relating to this
transaction attached; and (iii) a Certificate of Good Standing from the
Secretary of State of the Commonwealth of Virginia, dated as of a recent
date.
(d) Payment of 33% of Stay Bonuses. Buyer shall have paid to each
------------------------------
"Eligible Participant" 33% of his or her "Stay Bonus" as described in
-------------------- ----------
Schedule 5.3(d).
23
<PAGE>
ARTICLE VI
PROVISIONS AS TO TAX MATTERS
6.1 Certain Tax Matters.
-------------------
(a) Preparation and Filing of Tax Returns. Seller shall prepare and timely
-------------------------------------
file (or shall cause to be prepared and timely filed) all Tax Returns in respect
of Stuart Hall and its assets and activities that (i) are required to be filed
on or before the Closing Date or (ii) are required to be filed after the Closing
Date and (A) are paid on a consolidated, unitary, combined or similar basis with
respect to Tax Returns ("Consolidated Tax Returns") or (B) are with respect to
------------------------
Taxes based upon, measured by, or calculated with respect to gross or net
income, receipts or profits ("Income Taxes") and are required to be filed on a
------------
separate return basis for any Tax period ending on or before the Closing Date.
To the extent reasonably requested by Seller, Buyer shall cause Stuart Hall to
assist Seller in the preparation and timely filing of the Tax Returns specified
in the preceding sentence. Buyer shall prepare or cause to be prepared all other
Tax Returns required of Stuart Hall, its assets or activities. To the extent
reasonably requested by Buyer, Seller shall assist Buyer in the preparation and
timely filing of the Tax Returns specified in the preceding sentence.
(b) Payment of Taxes. Seller shall timely pay or cause to be paid, but only
----------------
to the extent not reflected on the Final Closing Statement, all Taxes due with
respect to Tax Returns that Seller is obligated to prepare and file or cause to
be prepared and filed pursuant to Section 6.1(a) and all Taxes due on or before
the Closing Date for which no Tax Return is required to be filed. Except as
provided in Section 6.1(e) below, Buyer shall pay or cause to be paid all Taxes
due with respect to periods ending after the Closing Date and Taxes shown on the
Final Closing Statement.
(c) Carryforwards and Carrybacks. Buyer shall cause Stuart Hall to elect,
----------------------------
where permitted by law, to carry forward any net operating loss, charitable
contribution or other item arising after the Closing Date that could, in the
absence of such an election, be carried back to a taxable period of Stuart Hall
ending on or before the Closing Date in which Stuart Hall was included in a
Consolidated Tax Return.
(d) Refunds. Seller shall be entitled to retain (or receive within 10 days
-------
of receipt by Buyer) payment from Buyer or any of its subsidiaries or Affiliates
(including Stuart Hall) equal to any refund or credit for Taxes with respect to
any Tax period ending on or before the Closing Date relating to Stuart Hall
("Seller's Refunds") (other than any refund or credit resulting from a carry
----------------
back permitted under Section 6.1(c)).
(e) Straddle Periods. Any Taxes of Stuart Hall attributable to a Tax period
----------------
which begins before and ends after the Closing Date (a "Straddle Period") shall
---------------
be apportioned between Seller and Buyer based on the actual operations and
transactions of Stuart Hall during the portion of such period ending on the
Closing Date, and the portion of such beginning on the day following the Closing
Date, respectively, calculated as though the taxable year of Stuart Hall
terminated at the close of business on the Closing Date, except that any tax
based on capital or the value of any asset shall be apportioned between Buyer
and Seller based on the ratio of (i) the number of days in the relevant taxable
period up to and including the Closing Date to (ii) the number of days in the
relevant taxable period following the Closing Date.
24
<PAGE>
6.2 Tax Indemnification.
-------------------
(a) Seller Indemnification. Seller hereby agrees to indemnify Buyer and
----------------------
hold it harmless from all liability for Taxes imposed on Stuart Hall (including
without limitation liability under Treas. Reg. ss. 1. 1502-6 or any comparable
provision of state law) for any taxable year or period ending on or before the
Closing Date and Seller's portion of the Straddle Period Taxes.
(b) Buyer Indemnification. Buyer hereby agrees to indemnify Seller and the
---------------------
Affiliates and hold them harmless from all liability for Taxes imposed on Stuart
Hall for any taxable year or period beginning, after the Closing Date and
Buyer's portion of the Straddle Period Taxes.
(c) Determining Liability for Taxes. Whenever it is necessary to determine
-------------------------------
liability for Straddle Period Taxes, the determination shall be made assuming
that there was a closing of the books at 11:59 p.m. (local time) on the Closing
Date, except that any tax based on capital or the value of any asset shall be
apportioned between Buyer and Seller based on the ratio of (i) the number of
days in the relevant taxable period up to and including the Closing Date to (ii)
the number of days in the relevant taxable period following the Closing Date.
(d) Indemnification for Post-Closing Transaction. Buyer hereby agrees to
--------------------------------------------
indemnify Seller for any additional Tax owed by Seller (including Tax owed by
Seller due to this indemnification payment) resulting from any transaction or
action not in the ordinary course of business occurring on the Closing Date
after Buyer's purchase of the Stock and effected or procured by Buyer.
6.3 Contest Provisions. Buyer shall promptly notify Seller in writing upon
------------------
receipt by Buyer or any of its Affiliates of notice of any pending or threatened
audits or assessments that may materially affect the Tax liabilities of Stuart
Hall for which Seller would be required to indemnify Buyer pursuant to Section
6.2(a). Seller shall have the sole right to represent Stuart Hall's interests in
any Tax audit or administrative or court proceeding relating to taxable periods
ending on or before the Closing Date, and to settle any such proceeding as it
sees fit so long as Seller indemnifies Buyer against the effects of any such
settlement as if it had taken place prior to the Closing Date. Seller shall be
entitled to participate at its expense in the defense of any claim for Taxes for
a year or period ending after the Closing Date which may be the subject of
indemnification by Seller pursuant to Section 6.2(a) and, with the written
consent of Buyer, may assume the entire defense of any such claim. Neither Buyer
nor Stuart Hall may agree to settle any Tax claim for the portion of the year or
period ending on the Closing Date which may be the subject of indemnification by
Seller under Section 6.2(a) without the prior written consent of Seller which
shall not be unreasonably withheld.
6.4 Section 338 Elections and Forms.
-------------------------------
(a) With respect to Buyer's acquisition of the Stock hereunder, at the
written request of Buyer, Seller will agree to join in making an election under
Section 338(h)(10) of the Code, and the Treasury Regulations promulgated
thereunder and all similar elections under applicable state and local law (the
"Section 338(h)(10) Election") within 180 days after the Closing Date. Buyer
---------------------------
shall be responsible for preparation and timely filing of Form 8023-A (or any
successor form) in connection with the Section 338(h)(10) Election, and Seller
shall use reasonable efforts
25
<PAGE>
to cooperate with Buyer, to prepare and file such form and to complete the
Section 338(h)(10) Election.
(b) The Purchase Price and the liabilities of Stuart Hall and other
relevant items shall be allocated to the assets of Stuart Hall in accordance
with the rules of Section 338(h)(10) of the Code and the Treasury Regulations
promulgated thereunder. Such allocation shall be set forth on a schedule which
shall be prepared by Buyer and provided to Seller no later than 90 days
following the Closing Date for Seller's review and approval, which approval
shall not be unreasonably withheld. All allocations contained in such schedule
shall be used by each party in preparing Form 8023-A (or any successor form) and
all relevant Tax Returns, subject to adjustment to reflect (i) Seller's selling
expenses as a reduction of sales proceeds, and (ii) Buyer's acquisition expenses
as an addition to purchase price. Any appraisal costs incurred in connection
with the Section 338(h)(10) Election shall be paid by Buyer. If the Section
338(h)(10) Election is disputed by a Governmental Authority, the party receiving
notice of such dispute shall promptly notify the other party concerning such
dispute.
(c) Buyer agrees that it shall not make a filing under Section 338(g) of
the Code in connection with Buyer's acquisition of the Stock hereunder.
6.5 Audits. Buyer shall promptly notify Seller in writing upon receipt by
------
Buyer or any Affiliate of Buyer of notice of any pending or threatened Tax
audits or assessments which may affect the Tax liabilities or indemnification
obligations of, or otherwise relate to, Seller for Tax periods ending on or
prior to the Closing Date. Seller shall have the sole right, at its expense, to
represent all interests in any such Tax matter, including any Tax audit or
administrative or court proceedings ("Tax Matters"), and to employ counsel of
-----------
its choice. Buyer agrees that it will cooperate fully with Seller and its
counsel in the defense against, or compromise of, any claim in any said
proceeding. Buyer shall have the sole right, at its expense, to represent all
interests in any Tax Matter for Tax periods ending after the Closing Date, and
to employ counsel of its choice; provided, however, that with respect to
Straddle Periods, Buyer shall obtain Seller's consent, which shall not be
unreasonably withheld.
6.6 Cooperation. After the Closing, Buyer and Seller shall promptly make
-----------
available or cause to be made available to the other, as reasonably requested,
and to any taxing authority, all information, records or documents relating to
Tax liabilities, potential Tax liabilities, or refunds of or relating to Stuart
Hall and the Business for all periods prior to or including the Closing Date and
shall preserve all such information, records and documents until the expiration
of any applicable statute of limitations or extensions thereof. Buyer and Seller
shall otherwise cooperate with respect to any Tax Matter or other claim for
Seller's Refunds, including by provision of appropriate powers of attorney.
Buyer shall prepare and provide to Seller any Federal, state, local and foreign
Tax information packages requested by Seller for Seller's use in preparing
Stuart Hall's Tax Returns. Such Tax information packages shall be completed by
Buyer and provided to Seller within 45 days after Seller's request therefor.
Each party shall bear its own expense in complying with the foregoing
provisions.
ARTICLE VII
LABOR MATTERS, EMPLOYEE RELATIONS AND BENEFITS
7.1 Offers of Employment. As of the Closing Date, Buyer shall continue to
--------------------
employ any and all individuals who are employed by Stuart Hall as of such
Closing Date, including such
26
<PAGE>
individuals on short-term disability, long-term disability or other leave
of absence (each such individual being referred to as an "Employee"); provided,
--------
however, that this Section shall not require Buyer to continue the employment of
any Employee for a specified period of time after the Closing Date. Buyer shall
assume all liability for wages and payroll deductions with respect to Employees
for the period ending on the day preceding the Closing Date.
7.2 Participating an Buyers Retirement Plans. As of the Closing Date, Buyer
----------------------------------------
shall offer Employees not covered by a Collective Bargaining Agreement the right
to participate in the qualified retirement plans sponsored by or contributed to
by Buyer. Buyer's retirement plans shall credit such Employees with all service
credited to the Employees under Seller's retirement plans for purposes of
determining the Employees' eligibility to participate in and vesting under
Buyer's retirement plans.
7.3 Health and Welfare Plans. As of the Closing Date, Buyer shall provide
------------------------
Employees with coverage under Buyer's health and welfare plans on terms
substantially similar to those applicable to Buyer's employees. Buyers health
and welfare plans shall credit Employees with all service credited to the
Employees under Seller's health and welfare plans for purposes of determining
eligibility to participate in Buyer's health and welfare plans. Buyer shall
waive any waiting periods, pre-existing condition exclusions and
actively-at-work requirements and provide that any expenses incurred on or
before the Closing Date by an Employee or an Employee's covered dependents shall
be taken into account for purposes of satisfying applicable deductible,
coinsurance and maximum out-of-pocket provisions of Buyer's health and welfare
plans.
7.4 No Rights or Remedies. Nothing in this Article shall confer upon any
---------------------
Employees or legal representative thereof any rights or remedies, including any
right to employment, or continued employment for any specified period, of any
nature or kind whatsoever under or by reason of this Agreement.
7.5 Indemnification. Buyer shall indemnify Seller and its Affiliates and
---------------
hold each of them harmless and against any liabilities which may be incurred or
suffered by any of them in connection with any claim made by any Employee by
reason of Buyer's failure to comply with any provision of this Article.
ARTICLE VIII
SURVIVAL AND INDEMNIFICATION
8.1 Survival. All of the representations and warranties contained in
Sections 3.1 and 3.2 will survive the Closing and continue in full force and
effect until six months after the Closing Date; except that the representations
and warranties contained in Section 3.1(h) (Tax Matters) will survive the
Closing and continue in full force and effect until the applicable statutes of
limitation (after giving effect to any extensions or waivers thereof); the
representations and warranties in Section 3.1(r) (Environmental Matters) will
survive the Closing and continue in full force and effect until two years after
the Closing Date; and the representations and warranties in Section 3.1(g)
(Financial Statements) and Section 3.1(q) (Undisclosed Liabilities) will
survive the Closing and continue in full force and effect until April 15, 1999.
All of the covenants contained in this Agreement will survive the Closing and
continue in full force and effect in accordance with their terms.
27
<PAGE>
8.2 Indemnification Provisions for the Benefit of Buyer. In the event (a)
---------------------------------------------------
Seller breaches any of its representations or warranties contained in this
Agreement and provided that Buyer makes a written claim for indemnification
against Seller within the applicable survival period, (b) Seller breaches any of
its covenants contained in this Agreement (including all of the covenants in
Article IV to be performed by Seller and other than Tax matters, which are
addressed in Article VI), provided that Buyer makes a written claim against
Seller promptly, but in no event later than ten Business Days, after becoming
aware of such breach, provided that no delay on the part of Buyer in notifying
Seller will relieve Seller from its obligations under this clause (b) unless
Seller is actually prejudiced thereby, or (c) Buyer sustains Damages as a direct
result of any of the liabilities retained by Seller, as set forth in Schedule
1.3(a)(i)(A), then Seller agrees to indemnify, defend and hold harmless Buyer
and Stuart Hall from and against all losses, liabilities, damages and expenses
(including reasonable attorneys' fees and expenses) (collectively, "Damages")
-------
Buyer or Stuart Hall suffers caused by such event; provided, however, that
Seller will not have any obligation to indemnify Buyer and Stuart Hall from and
against such Damages in connection with matters described in clause (a) above
(i) until Buyer and Stuart Hall have suffered aggregate Damages, by reason of
all such breaches, in excess of $3,000,000 (after which point Seller will be
obligated only to indemnify Buyer and Stuart Hall from and against aggregate
Damages in excess of $3,000,000) and (ii) to the extent the aggregate Damages
Buyer and Stuart Hall have suffered by reason of all of such breaches exceeds
$15,000,000; provided, however, that this Cap on indemnification for Damages
shall not apply to any claim for common law fraud brought by Buyer against
Seller that is based on any intentional misrepresentation or omission of facts
within Seller's Knowledge on or prior to the Closing Date; and further provided
that, in the event Seller prevails against any such common law fraud claim,
Buyer shall indemnify Seller for its attorney's fees, costs and other expenses
incurred in connection with defending against such claim. Notwithstanding the
foregoing, if the amount of any claim or series of related claims for Damages
suffered by Buyer and Stuart Hall in connection with the matters described in
clause (a) above does not exceed $10,000, then the amount of such claim or
series of claims will be excluded from the calculation of the aggregate amount
of Damages for purposes of this Section 8.2; provided that this sentence shall
not apply to claims resulting directly from a breach of a representation or
warranty that is subject to a materiality qualifier.
8.3 Indemnification Provisions for the Benefit of Seller. In the event (a)
----------------------------------------------------
Buyer breaches any of its representations, warranties, covenants or agreements
contained in this Agreement or (b) after the Closing, Stuart Hall breaches any
of its covenants or agreements contained in the Kansas City Lease Assignment, or
any other arrangement agreed to under Section 5.1(f), then Buyer agrees to
indemnify, defend and hold harmless Seller from and against any Damages Seller
suffers caused by such breach; provided that Seller makes a written claim
against Buyer promptly, but in no event later than ten Business Days, after
becoming aware of such breach, provided further that no delay on the part of
Seller in notifying Buyer will relieve Seller from its obligations under this
Section 8.3 unless Seller is actually prejudiced thereby.
8.4 Matters Involving Third Parties. If any third party notifies any party
-------------------------------
hereto (the "Indemnified Party") with respect to any matter which may give rise
-----------------
to a claim for indemnification against the other party hereto (the "Indemnifying
------------
Party") under this Article VIII, then the Indemnified Party will notify the
- -----
Indemnifying Party thereof promptly, but in no event later than ten Business
Days, after receiving such notice; provided that no delay on the part of the
Indemnified Party in notifying the Indemnifying Party will relieve the
Indemnifying Party from
28
<PAGE>
any obligation hereunder unless the Indemnifying Party is actually
prejudiced thereby. Once the Indemnified Party has given notice of the matter to
the Indemnifying Party, the Indemnifying Party may defend against the matter in
any manner it reasonably may deem appropriate; provided that (a) the Indemnified
Party may retain separate counsel at its sole cost and expense to participate in
such defense (provided that such participation does not unreasonably interfere
with the Indemnifying Party's ability to defend against the matter), and (b) the
Indemnifying Party shall not be entitled to assume control of such defense and
shall pay the reasonable fees and expenses of counsel retained by the
Indemnified Party and reasonably acceptable to the Indemnifying Party if (1)
such matter relates to or arises in connection with any criminal proceeding,
action, indictment, allegation or investigation, (2) a material conflict of
interest exists between the Indemnifying Party and the Indemnified Party (the
parties agreeing that a dispute over legal fees will not constitute such a
conflict of interest); or (3) the Indemnifying Party fails to defend such a
claim. The Indemnified Party will provide any assistance reasonably requested by
the Indemnifying Party; provided that the Indemnifying Party will reimburse the
Indemnified Party for all expenses (including, without limitation, fees and
expenses of counsel selected by the Indemnifying Party) as they are accrued in
connection with providing such assistance. The Indemnifying Party will not
consent to the entry of a judgment or enter into any settlement agreement with
respect to such matter without the written consent of the Indemnified Party
(which consent will not be unreasonably withheld), unless such judgment or
settlement involves only money Damages for which the Indemnifying Party will be
liable or otherwise releases the Indemnified Party from all liability with
respect to such matter. If the Indemnifying Party does not notify the
Indemnified Party within 30 days after the Indemnified Party has given notice of
the matter that the Indemnifying Party is assuming all responsibility therefor,
the Indemnified Party may defend against, consent to the entry of any judgment
or enter into any settlement with respect to the matter in any manner the
Indemnified Party reasonably deems appropriate without waiving any right to
indemnity therefor by the Indemnifying Party; provided that the Indemnified
Party will not consent to the entry of a judgment or enter into any settlement
with respect to such matter without the written consent of the Indemnifying
Party (which consent will not be withheld unreasonably).
8.5 Adjustments. Any Damages recovered pursuant to this Article VIII shall
-----------
be reduced by any Tax benefits and/or insurance coverage proceeds relating
thereto actually realized or received by the Indemnified Party. Seller and Buyer
agree to make reasonable best efforts to receive or collect such benefits or
proceeds promptly. All indemnification payments made pursuant to this Article
VIII shall be deemed to be adjustments to the Stock Purchase Price.
8.6 Exclusive Remedy. Except as provided in this Agreement, indemnification
----------------
under this Article VIII shall constitute the exclusive remedy for disputes
arising under this Agreement for which Damages are available. Indemnification
under this Articles VIII shall not preclude any available equitable remedies
(including, without limitation, specific performance).
8.7 Payment and Interest. Any payment required to be made by Seller or
--------------------
Buyer pursuant to this Article VIII shall be (i) made by wire transfer of
immediately available funds pursuant to written instructions provided by the
party that is to receive payment pursuant to this Article VIII and (ii) bear
interest from the Closing Date through the date of payment on the basis of the
average daily rate of interest publicly announced by The Northern Trust in
Chicago, Illinois from time to time as its base rate from the Closing Date to
the date of such payment.
29
<PAGE>
ARTICLE IX
OTHER POST-CLOSING COVENANTS
9.1 Post-Closing Accounting Cooperation. Until the later of five years
-----------------------------------
following the Closing Date or the expiration of the applicable statute of
limitations for any Tax filings by Seller, Seller and Buyer agree that Seller
and/or its independent auditors shall have reasonable access during normal
business hours, provided such access shall not interfere with the normal
operations of the Business, to the Books and Records applicable to the period
the Business was directly or indirectly owned by Seller and have the reasonable
assistance and cooperation of the appropriate personnel of Buyer in the review
of such Books and Records consistent with assistance and cooperation furnished
during the period the Business was directly or indirectly owned by Seller.
9.2 Transfer Taxes. Buyer shall pay any and all transfer, documentary,
---------------
stamp, excise or similar Taxes (including, without limitation, any real estate
transfer or value-added Taxes) incurred in connection with the transactions
contemplated by this Agreement, whether such Taxes are imposed on Buyer, Buyer's
Affiliates, Seller, or Seller's Affiliates.
9.3 Further Actions. Subject to the terms and conditions of this Agreement,
---------------
from and after the Closing, each of the parties hereto will use their reasonable
best efforts to take, or cause to be taken, all action, and to do, or cause to
be done, all things necessary, proper or advisable under applicable laws and
regulations to consummate and make effective the transactions contemplated by
this Agreement.
9.4 Subsequent Access. Following the Closing, Buyer shall provide Seller
-----------------
and its representatives and accountants reasonable access to personnel and
records of Buyer relating to the Business to the extent Seller reasonably
requests such access, provided such access shall not unreasonably interfere with
the normal operations of the Business.
9.5 Payment of Remainder of Stay Bonuses. Within 90 days following the
------------------------------------
Closing, Buyer shall pay to each Eligible Participant the remaining 67% of his
or her Stay Bonus described in Schedule 5.3(d).
9.6 Confidentiality. After the Closing Date, the following provisions of
---------------
this Section 9.6 will govern the confidentiality obligations between the
parties.
(a) By Seller. Seller and its Affiliates will not disclose any information
---------
which is confidential, proprietary or otherwise not publicly available
("Confidential Information") about (i) the Business, or (ii) Buyer and its
------------------------
Affiliates obtained while in the performance of this Agreement for a period of
three (3) years following the Closing Date.
(b) By Buyer. Buyer and its Affiliates will not disclose any Confidential
--------
Information about Seller and its Affiliates obtained in the performance of the
Agreement (other than with respect to the Business) for a period of three (3)
years following the Closing Date.
(c) Exceptions. The obligations provided for in this Section 9.6 will not
-----------
apply to information which: (i) can be reasonably shown to have been in the
possession of the party receiving the information as of the date of receipt;
(ii) is disclosed to the receiving party by a third party which has a legal
right to make such disclosure; (iii) was in the public domain or
30
<PAGE>
generally available as of the date of disclosure through no fault of the
receiving party or; (iv) which is required by law to be disclosed; or (v) with
respect to Seller, relates to Stuart Hall or the Business and is legally
required to be disclosed in the Form S-3 (or amendments thereto).
9.7 Buyer's Financing.
-----------------
(a) Seller will use its reasonable best efforts to cause its accountants,
Arthur Andersen LLP, to issue its consent to be filed as an exhibit to the
resale registration statement on the applicable form to be filed with the
Securities and Exchange Commission relating to the securities offered pursuant
to the Rule 144A Offering (the "SEC Form").
--------
(b) Seller will provide Buyer and its representatives and accountants
reasonable access to the personnel and records of Seller for information about
Stuart Hall and the Business legally required to be disclosed in the SEC Form
(or amendments thereto).
9.8 Nonsolicitation. Between the Closing Date and the date 18 months from
---------------
the date of the Closing Date, Seller shall not without the prior consent of
Buyer (a) induce or attempt to induce any employee of the Business on the date
hereof to leave the employ of the Business or (b) hire any person who was an
employee of the Business on the date hereof, unless such person's employment was
terminated by Stuart Hall or the Buyer for any reason after the Closing Date.
The foregoing provisions do not apply to the ability of a Newell Co. division
(other than Stuart Hall) to employ James J. Tiffany.
9.9 Nonsolicitation. Between the Closing Date and the date 18 months from
---------------
the date of the Closing Date, Seller shall not without the prior consent of
Buyer (a) induce or attempt to induce any employee of the Business on the date
hereof to leave the employ of the Business or (b) hire any person who was an
employee of the Business on the date hereof, unless such person's employment was
terminated by Stuart Hall or the Buyer for any reason after the Closing Date.
The foregoing provisions do not apply to the ability of a Newell Co. division
(other than Stuart Hall) to employ James J. Tiffany.
ARTICLE X
MISCELLANEOUS
10.1 Termination.
-----------
(a) General. This Agreement may be terminated and the transactions
-------
contemplated hereby may be abandoned at any time, but not later than the Closing
Date:
(i) by mutual written consent of Buyer and Seller;
(ii) subject to Section 10.1 (a)(iii), by Seller on or
after the date 61 days (but no later than 89 days) after the date
of this Agreement, if on such date (1) the conditions precedent to
the obligations of Buyer set forth in Sections 5.1 and 5.2 (other
than the condition precedent set forth in Section 5.1 (e))
("Buyer's Condition") shall have been satisfied, and (2) Buyer is
-----------------
unable to pay the Purchase Price; provided that Seller has given
Buyer 14 days' written notice that Buyer's Conditions have been
satisfied or will be satisfied by the date 14 days from the date of
such notice.
(iii) by Seller or Buyer the date that is 90 days after the
date of this Agreement, through no fault of the party seeking to
terminate, the Closing shall not have occurred; or
(iv) by Seller or Buyer, upon written notice to the other
party, if any Governmental Authority of competent jurisdiction
shall have issued an injunction, order or decree enjoining or
otherwise prohibiting the consummation of the transactions
contemplated by this Agreement, and such injunction, order or
decree shall have
31
<PAGE>
become final and non-appealable; provided, however, that the party
seeking to terminate this Agreement pursuant to this clause (iv)
has used its reasonable best efforts to remove such injunction,
order or decree.
(b) Procedure Upon Termination. In the event of the termination and
--------------------------
abandonment of this Agreement, written notice thereof shall promptly be given to
the other party hereto and this Agreement shall terminate (subject to Section
10.1(c)) and the transactions contemplated hereby shall be abandoned without
further action by any of the parties hereto.
(c) Survival of Certain Provision. The respective obligations of the
-----------------------------
parties hereto pursuant to Sections 9.6, 10.2, 10.3 and 10. 11 shall survive any
termination of this Agreement.
10.2 Fees and Expenses.
-----------------
(a) Whether or not the transactions contemplated hereby are consummated,
each of the parties hereto shall pay its own fees and expenses incident to the
negotiation, preparation and execution of this Agreement, including attorneys',
accountants' and other advisors' fees; provided, however, that Buyer shall be
responsible for the audit fees of Arthur Andersen LLP incurred in connection
with this transaction (including, without limitation, any fees charged by Arthur
Andersen LLP in connection with the audit performed in contemplation of the Rule
144A Offering, the comfort letter to be issued pursuant to Section 4.9(c) of
this Agreement and the audit to be performed pursuant to Section 1.3(b)).
(b) Notwithstanding the generality of Section 10.2(a), in the event Seller
terminates this Agreement in accordance with Section 10.1(a)(ii), Buyer will
pay Seller, at the open of business on the day immediately after termination, a
termination fee of $6,000,000 by wire transfer in immediately available funds
pursuant to written instructions provided by Seller. Buyer and Seller agree that
such payment will constitute complete, reasonable and adequate payment of
liquidated damages and will not constitute a penalty or forfeiture, because at
the time of execution of this Agreement, the determination of the actual damages
to Seller resulting from the actions requiring the payment of such liquidated
damages would be impracticable or extremely difficult to ascertain.
10.3 Notices. All notices, requests, demands, waivers and other
-------
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or by overnight courier with delivery charges prepaid, or sent by telecopy, as
follows:
(a) if to Seller
Newell Co.
One Millington Road
Beloit, Wisconsin 53511
Attention: William T. Alldredge
Facsimile No.: (608) 365-3453
32
<PAGE>
with copies to:
Newell Co.
4000 Auburn Street
Rockford, Illinois 61101
Attention: Dale L. Matschullat
Facsimile No.: (815) 969-6106
and
Schiff Hardin & Waite
7300 Sears Tower
Chicago, Illinois 60606
Attention: Andrea L. Home
Facsimile No.: (312) 258-5600
(b) if to Buyer
Pen-Tab Holdings, Inc.
167 Kelley Drive
Front Royal, VA 22630
Attention: Alan Hodes
Facsimile No.: (540) 622-2008
with a copy to:
Kirkland & Ellis
Citicorp Center
153 East 53rd Street
New York, New York 10022-4675
Attention: Kimberly P. Taylor
Facsimile No.: (212) 446-4900
or to such other person or address as either party shall specify by notice
in writing to the other party. All such notices, requests, demands, waivers and
communications shall be deemed to have been received on the date of delivery.
10.4 Entire Agreement. This Agreement (including the Exhibits and
----------------
Schedules, which are hereby fully incorporated into this Agreement), together
with the Ancillary Agreements and the Confidentiality Agreement, constitutes the
entire agreement between the parties hereto with respect to the subject matter
hereof and supersedes all prior agreements and understandings, oral and written,
between the parties hereto with respect to the subject matter hereof.
10.5 Binding Effect; Benefit. This Agreement shall inure to the benefit of
-----------------------
and be binding upon the parties hereto and their respective successors and
permitted assigns. Nothing in this Agreement, express or implied, is intended to
confer on any person other than the parties hereto or their respective
successors and assigns, any rights, remedies, obligations or liabilities under
or by reason of this Agreement.
33
<PAGE>
10.6 Assignability. This Agreement shall be binding upon and inure to the
-------------
benefit of the parties hereto and their respective successors and assigns and
shall not be assigned by either of the parties hereto without the prior written
consent of the other party, except under the following conditions: (i) Seller
may, at its election, assign this Agreement and its rights, interests and
obligations hereunder to one or more of its Affiliates without the prior written
approval of Buyer, in which case Seller will continue to be liable for the
performance of its obligations under this Agreement; and (ii) Buyer may, at its
election, assign this Agreement and its rights, interests and obligations
hereunder to (A) one or more of its Affiliates, (B) to a subsequent purchaser of
the Business, or (C) to Buyer's lenders for collateral purposes without the
prior written approval of Seller, in which case Buyer will continue to be liable
for the performance of its obligations under this Agreement.
10.7 Amendment and Modification; Waiver. Subject to applicable law, this
----------------------------------
Agreement and any Schedule or Exhibit attached hereto may be amended, modified
and supplemented by a written instrument expressly identified as an amendment
hereto authorized and executed on behalf of Buyer and Seller at any time prior
to the Closing Date with respect to any of the terms contained herein. No waiver
by any party of any of the provisions hereof shall be effective unless
explicitly set forth in writing and executed by the party so waiving. The waiver
by any party hereto of a breach of any provision of this Agreement shall not
operate or be construed as a waiver of any other or subsequent breach. No
failure on the part of either party hereto to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof. The remedies
herein are cumulative and not exclusive of any remedies provided by law.
10.8 Public Announcements. Unless otherwise required by law, prior to the
--------------------
Closing Date, no news release or other public announcement pertaining to the
transactions contemplated by this Agreement will be made by or on behalf, of any
party without the prior approval of the other party.
10.9 Interpretation.
(a) Any reference to any Federal, state or local statute or law will be
deemed also to refer to all rules and regulations promulgated thereunder, unless
the context requires otherwise. When a reference is made in this Agreement to an
Article, Section, Schedule or Exhibit, such reference is to an Article, Section,
Schedule or Exhibit of this Agreement, unless otherwise indicated. The table of
contents contained in this Agreement is for reference purposes only and will not
affect in any way the meaning or interpretation of this Agreement. Whenever the
words "include," "includes" or "including" are used in this Agreement, they will
be understood be followed by the words "without limitation." Words (including
defined terms) in the singular will be held to include the plural and vice versa
words of one gender will be held to include the other genders as the context
requires.
(b) Any disclosure which should, based on the description included in a
particular Schedule, be applicable to another Schedule to this Agreement shall
be deemed to be made with respect to such other Schedule regardless of whether
or not a specific cross reference is made thereto. Certain information set forth
in the Schedules is included solely for informational purposes and may not be
required to be disclosed pursuant to this Agreement. The disclosure of any
information in the Schedules shall not be deemed to constitute an acknowledgment
that such information is required to be disclosed in connection with the
representations and
34
<PAGE>
warranties made by Seller in this Agreement or that it is material, nor
shall such information be deemed to establish a standard of materiality.
10.10 Counterparts. This Agreement may be executed in any number of
------------
Counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument.
10.11 Applicable Law. This Agreement and the legal relations between the
--------------
parties hereto shall be governed by and construed in accordance with the laws of
the State of Illinois without regard to conflict of laws principles thereof,
except that the Federal Arbitration Act, 9 U.S.C. Sections 1-16 will govern all
questions relating to the arbitrability of any claim or dispute in connection
with Section 1.3, and to the enforcement of the arbitration provisions contained
in Section 1.3. All actions and proceedings arising out of or relating to this
Agreement shall be heard and determined in any Illinois state or Federal court
sifting in the Northern District of Illinois, and the parties hereby consent to
the jurisdiction of such courts in any such action or proceeding.
10.12 Severability of Provisions. Any provision of this Agreement that is
--------------------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent and only for the duration of such prohibition or
enforceability without invalidating the remaining provisions hereof or affecting
the validity or enforceability of such provisions in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
10.13. Time is of the Essence. Each of the parties agrees that time is of
----------------------
the essence with respect to every date, every action and every delivery set
forth herein.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
35
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
NEWELL CO.
By: /s/ Dale L. Matschullat
-----------------------------
Name: Dale L. Matschullat
Title: Vice President
PEN-TAB HOLDINGS, INC.
By: /s/ Alan Hodes
-----------------------------
Name: Alan Hodes
Title: CEO
36
<PAGE>
Defined Terms List
------------------
1998 Balance Sheet ......................................... 7
Accountants ................................................ 2
Adjusted Purchase Price .................................... 1
Affiliate .................................................. 4
Affiliated Group ........................................... 7
Agreement .................................................. 1
Ancillary Agreements ....................................... 22
Books and Records .......................................... 7
Business ................................................... 1
Business Contract .......................................... 10
Buyer ...................................................... 1
Buyer's Condition .......................................... 31
Buyer's Letter ............................................. 2
CERCLA ..................................................... 13
Closing .................................................... 5
Closing Date ............................................... 5
Closing Net Working Capital ................................ 1
Code ....................................................... 7
Collective Bargaining Agreement ............................ 10
Commitment Letters ......................................... 16
Company Transaction ........................................ 19
Confidential Information ................................... 30
Confidentiality Agreement .................................. 17
Consolidated Tax Returns ................................... 24
CPR ........................................................ 3
Damages .................................................... 28
Dispute .................................................... 2
Eligible Participant ....................................... 23
Employee ................................................... 27
Encumbrances ............................................... 14
Environmental Law .......................................... 13
Environmental Permits ...................................... 13
Environmental Statutes ..................................... 13
Final Closing Statement .................................... 2
Financial Statements ....................................... 7
GAAP ....................................................... 7
Governmental Authority ..................................... 7
Hazardous Substance ........................................ 13
HSR Act .................................................... 18
Income Taxes ............................................... 24
Indemnified Party .......................................... 28
Indemnifying Party ......................................... 28
Intellectual Property ...................................... 11
Intercompany Accounts....................................... 4
Kansas City Lease .......................................... 20
37
<PAGE>
Law ........................................................ 7
Leased Property ............................................ 14
Leases ..................................................... 14
Liens ...................................................... 20
Material Adverse Effect .................................... 6
Net Intercompany Debt ...................................... 5
Net Working Capital ........................................ 1
Panel ...................................................... 3
Peg Net Working Capital .................................... 1
Peg Statement .............................................. 1
Permitted Liens ............................................ 9
Preliminary Closing Statement .............................. 2
Release .................................................... 13
Required Environmental Permits ............................. 12
Rule 144A Offering ......................................... 20
SEC Form ................................................... 31
Section 338(h)(10) Election ................................ 25
Seller ..................................................... 1
Seller's Knowledge ......................................... 7
Seller's Letter ............................................ 2
Seller's Refunds ........................................... 24
Stay Bonus ................................................. 23
Stock ...................................................... 1
Stock Purchase Price ....................................... 1
Straddle Period ............................................ 24
Stuart Hall ................................................ 1
Subleases .................................................. 14
Tax Matters ................................................ 26
Tax Returns ................................................ 9
Taxes ...................................................... 9
Transaction Agreements ..................................... 6
38
<PAGE>
EXHIBIT 10.18
===============================================================================
SECURED
CREDIT AGREEMENT
Dated as of August 20, 1998
among
PEN-TAB INDUSTRIES, INC.,
PEN-TAB HOLDINGS, INC.,
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION,
as Agent
and
Letter of Credit Issuing Bank,
and
THE OTHER FINANCIAL INSTITUTIONS PARTY HERETO
arranged by
BANCAMERICA ROBERTSON STEPHENS
===============================================================================
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<C> <S> <C>
ARTICLE I DEFINITIONS........................................................................ 1
1.1 Certain Defined Terms.............................................................. 1
1.2 Other Interpretive Provisions...................................................... 22
1.3 Accounting and Financial Determinations............................................ 23
ARTICLE II THE CREDITS........................................................................ 24
2.1 Amounts and Terms of Commitments................................................... 24
2.2 Notes.............................................................................. 24
2.3 Procedure for Borrowing............................................................ 24
2.4 Conversion and Continuation Elections.............................................. 25
2.5 Voluntary Termination or Reduction of Revolving Commitments........................ 26
2.6 Optional Prepayments............................................................... 27
2.7 Mandatory Prepayments of Loans; Mandatory Commitment Reductions.................... 27
2.8 Repayment.......................................................................... 27
2.9 Interest........................................................................... 28
2.10 Fees............................................................................... 29
2.11 Computation of Fees and Interest................................................... 29
2.12 Payments by the Company............................................................ 30
2.13 Payments by the Lenders to the Agent............................................... 30
2.14 Sharing of Payments, Etc........................................................... 31
ARTICLE III THE LETTERS OF CREDIT.............................................................. 31
3.1 The Letter of Credit Subfacility................................................... 31
3.2 Issuance, Amendment and Renewal of Letters of Credit............................... 32
3.3 Existing BofA Letters of Credit; Risk Participations, Drawings and Reimbursements.. 34
3.4 Repayment of Participations........................................................ 36
3.5 Role of the Issuing Bank........................................................... 36
3.6 Obligations Absolute............................................................... 37
3.7 Cash Collateral Pledge............................................................. 38
3.8 Letter of Credit Fees.............................................................. 38
3.9 Uniform Customs and Practice....................................................... 39
ARTICLE IV TAXES, YIELD PROTECTION AND ILLEGALITY............................................. 39
4.1 Taxes.............................................................................. 39
4.2 Illegality......................................................................... 40
4.3 Increased Costs and Reduction of Return............................................ 41
4.4 Funding Losses..................................................................... 41
4.5 Inability to Determine Rates....................................................... 42
4.6 Certificates of Lenders............................................................ 42
4.7 Substitution of Lenders............................................................ 42
4.8 Survival........................................................................... 43
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
Page
<S> <C> <C>
ARTICLE V CONDITIONS PRECEDENT............................................................... 43
5.1 Conditions of Initial Credit Extensions............................................ 43
5.2 Conditions to All Credit Extensions................................................ 45
ARTICLE VI REPRESENTATIONS AND WARRANTIES..................................................... 46
6.1 Corporate Existence and Power...................................................... 46
6.2 Corporate Authorization; No Contravention.......................................... 46
6.3 Governmental Authorization......................................................... 47
6.4 Binding Effect..................................................................... 47
6.5 Litigation......................................................................... 47
6.6 No Default......................................................................... 47
6.7 ERISA Compliance................................................................... 48
6.8 Use of Proceeds; Margin Regulations................................................ 48
6.9 Title to Properties................................................................ 48
6.10 Taxes.............................................................................. 49
6.11 Financial Condition................................................................ 49
6.12 Environmental Matters.............................................................. 49
6.13 Regulated Entities................................................................. 49
6.14 No Burdensome Restrictions......................................................... 50
6.15 Copyrights, Patents, Trademarks and Licenses, etc.................................. 50
6.16 Subsidiaries....................................................................... 50
6.17 Insurance.......................................................................... 50
6.18 Real Property...................................................................... 50
6.19 Transaction Documents.............................................................. 50
6.20 Solvency........................................................................... 50
6.21 Year 2000.......................................................................... 50
6.22 Full Disclosure.................................................................... 51
ARTICLE VII AFFIRMATIVE COVENANTS.............................................................. 51
7.1 Financial Statements............................................................... 51
7.2 Certificates; Other Information.................................................... 52
7.3 Notices............................................................................ 53
7.4 Preservation of Corporate Existence, Etc........................................... 54
7.5 Maintenance of Property............................................................ 54
7.6 Insurance.......................................................................... 54
7.7 Payment of Obligations............................................................. 54
7.8 Compliance with Laws............................................................... 55
7.9 Inspection of Property and Books and Records....................................... 55
7.10 Environmental Laws................................................................. 55
7.11 Use of Proceeds.................................................................... 55
7.12 Maintenance of Bank Accounts....................................................... 55
7.13 Annual Clean-Up.................................................................... 56
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
(continued)
Page
<S> <C>
ARTICLE VIII NEGATIVE COVENANTS.............................................................. 56
8.1 Limitation on Liens............................................................. 56
8.2 Disposition of Assets........................................................... 57
8.3 Consolidations and Mergers...................................................... 58
8.4 Loans and Investments........................................................... 58
8.5 Limitation on Indebtedness...................................................... 59
8.6 Transactions with Affiliates.................................................... 59
8.7 Use of Proceeds................................................................. 60
8.8 Contingent Obligations.......................................................... 60
8.9 Joint Ventures.................................................................. 60
8.10 Lease Obligations............................................................... 60
8.11 Restricted Payments............................................................. 60
8.12 Subsidiary, Etc................................................................. 61
8.13 Assets of the Parent............................................................ 61
8.14 Modification of Certain Agreements.............................................. 61
8.15 Subordinated Debt............................................................... 61
8.16 Change in Business.............................................................. 62
8.17 Accounting Changes.............................................................. 62
ARTICLE VIII A FINANCIAL COVENANTS............................................................. 62
8A.1 Fixed Charge Coverage Ratio..................................................... 62
8A.2 Net Worth....................................................................... 62
8A.3 Capital Expenditures............................................................ 62
ARTICLE IX EVENTS OF DEFAULT............................................................... 62
9.1 Event of Default................................................................ 62
9.2 Remedies........................................................................ 65
9.3 Rights Not Exclusive............................................................ 65
ARTICLE X THE AGENT....................................................................... 66
10.1 Appointment and Authorization................................................... 66
10.2 Delegation of Duties............................................................ 66
10.3 Liability of Agent.............................................................. 66
10.4 Reliance by Agent............................................................... 67
10.5 Notice of Default............................................................... 67
10.6 Credit Decision................................................................. 67
10.7 Indemnification................................................................. 68
10.8 Agent in Individual Capacity.................................................... 68
10.9 Successor Agent................................................................. 68
10.10 Withholding Tax................................................................. 69
ARTICLE XI MISCELLANEOUS................................................................... 70
11.1 Amendments, Waivers and Collateral Releases..................................... 70
</TABLE>
iii
<PAGE>
TABLE OF CONTENTS
(continued)
<TABLE>
<CAPTION>
Page
<S> <C>
11.2 Notices......................................................................... 71
11.3 No Waiver; Cumulative Remedies.................................................. 72
11.4 Costs and Expenses.............................................................. 72
11.5 Indemnity....................................................................... 72
11.6 Payments Set Aside.............................................................. 73
11.7 Successors and Assigns.......................................................... 73
11.8 Assignments, Participations, etc................................................ 73
11.9 Set-off......................................................................... 75
11.10 Automatic Debits of Fees........................................................ 75
11.11 Notification of Addresses, Lending Offices, Etc................................. 75
11.12 Counterparts.................................................................... 75
11.13 Severability.................................................................... 76
11.14 No Third Parties Benefited...................................................... 76
11.15 Governing Law and Jurisdiction.................................................. 76
11.16 Waiver of Jury Trial............................................................ 76
11.17 Entire Agreement................................................................ 77
11.18 Replacement..................................................................... 77
</TABLE>
iv
<PAGE>
TABLE OF CONTENTS
(continued)
Page
SCHEDULES
Schedule 3.3 Existing BofA Letters of Credit
Schedule 6.7 ERISA
Schedule 6.11 Permitted Liabilities
Schedule 6.12 Environmental Matters
Schedule 6.16 Subsidiaries and Minority Interests
Schedule 6.17 Insurance Matters
Schedule 6.18 Real Property
Schedule 8.1 Permitted Liens
Schedule 8.5 Permitted Indebtedness
Schedule 8.8 Contingent Obligations
EXHIBITS
Exhibit A Form of Notice of Borrowing
Exhibit B Form of Notice of Conversion/Continuation
Exhibit C Form of Compliance Certificate
Exhibit D Form of Legal Opinion of Company's Counsel
Exhibit E Form of Assignment and Acceptance
Exhibit F-1 Form of Term Note
Exhibit F-2 Form of Revolving Note
Exhibit G Form of Security Agreement
Exhibit H Form of Trademark Security Agreement
Exhibit I Form of Pledge Agreement
Exhibit J Form of Landlord's Consent
Exhibit K-1 Form of Mortgage
Exhibit K-2 Form of Leasehold Mortgage
Exhibit L Form of Borrowing Base Certificate
Exhibit M Form of Guaranty
Exhibit N Form of Subordination Agreement
v
<PAGE>
SECURED CREDIT AGREEMENT
------------------------
This SECURED CREDIT AGREEMENT is entered into as of August 20, 1998, among
Pen-Tab Industries, Inc., a Delaware corporation (the "Company"), Pen-Tab
-------
Holdings, Inc., a Virginia corporation (the "Parent"), the several financial
institutions from time to time party to this Agreement (collectively, the
"Lenders"; individually, a "Lender"), and Bank of America National Trust and
- -------- ------
Savings Association, as letter of credit issuing bank and as agent for the
Lenders.
WHEREAS, the Lenders have agreed to make available to the Company a term
loan and revolving credit facility with a letter of credit subfacility upon the
terms and conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained herein, the parties agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Certain Defined Terms. The following terms have the following meanings:
---------------------
"Account" shall mean any and all accounts for goods sold or services
-------
rendered, whether now owned or hereafter acquired by the Company or Stuart
Hall.
"Account Debtor" shall mean any Person who is or who may become
--------------
obligated to the Company or Stuart Hall, as the case may be, under, with
respect to, or on account of an Account.
"Acquisition" means any transaction or series of related transactions
-----------
for the purpose of or resulting, directly or indirectly, in (a) the
acquisition of all or substantially all of the assets of a Person, or of
any business or division of a Person, (b) the acquisition, of in excess of
50% of the capital stock, partnership interests or equity of any Person or
otherwise causing any Person to become a Subsidiary of the Company, or (c)
a merger or consolidation or any other combination with another Person
(other than a Person that is a Subsidiary of the Company) provided that the
Company or the Company's Subsidiary is the surviving entity.
"Acquisition Agreement" means that certain Stock Purchase Agreement
---------------------
dated as of June 24, 1998 between the Company and Newell Co. pursuant to
which the Company has agreed to acquire all the issued and outstanding
capital stock of Stuart Hall.
"Affiliate" means, as to any Person, any other Person which, directly
---------
or indirectly, is in control of, is controlled by, or is under common
control with, such Person. A Person shall be deemed to control another
Person if the controlling Person possesses, directly or indirectly, the
power to direct or cause the direction of the management and policies of
<PAGE>
the other Person, whether through the ownership of voting securities, by
contract or otherwise.
"Agent" means BofA in its capacity as agent for the Lenders hereunder,
-----
and any successor agent.
"Agent-Related Persons" means BofA and any successor agent arising
---------------------
under Section 10.9 and any successor letter of credit issuing bank
------------
hereunder, together with their respective Affiliates, and the officers,
directors, employees, agents and attorneys-in-fact of such Persons and
Affiliates.
"Agent's Payment Office" means the address for payments set forth on
----------------------
the signature page hereto in relation to the Agent or such other address as
the Agent may from time to time specify.
"Agreement" means this Secured Credit Agreement.
---------
"Applicable Margin" with respect to any Offshore Rate Loan, Base Rate
-----------------
Loan or the Commitment Fee, means a margin based on the Fixed Charge
Coverage Ratio, as follows:
<TABLE>
<CAPTION>
Fixed Charge Coverage Ratio Offshore Rate Base Rate Commitment Fee
Applicable Margin Applicable Margin Applicable Margin
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than 2.5:1 2.00% 1.00% 0.50%
- -------------------------------------------------------------------------------------------------
Greater than or equal to 1.75% 0.75% 0.40%
2.5:1
- -------------------------------------------------------------------------------------------------
</TABLE>
The Applicable Margin shall be adjusted on the fifteenth day following
receipt by the Agent of the certificate pursuant to Section 7.1(a) or (b),
-------------- ---
based on the Fixed Charge Coverage Ratio as of the last day of the fiscal
period most recently ended; it being understood, that if the Company fails
-- ----- ----------
to timely deliver the certificate in accordance with Section 7.1(a) or (b),
-------------- ---
then, until receipt of such certificate by the Agent, the Applicable Margin
shall be 2.00% with respect to Offshore Rate Loans, 1.00% with respect to
Base Rate Loans and 0.50% with respect to the Commitment Fee.
Notwithstanding the foregoing, from the Closing Date through February 28,
1999, the Offshore Rate Applicable Margin shall be 2.00%, the Base Rate
Applicable Margin shall be 1.00% and the Commitment Fee Applicable Margin
shall be 0.50%.
"Arranger" means BancAmerica Robertson Stephens.
--------
"Assignee" has the meaning specified in Section 11.8(a).
-------- ---------------
"Attorney Costs" means and includes all reasonable fees and
--------------
disbursements of any law firm or other external legal counsel, the
allocated cost of internal legal services and all disbursements of internal
counsel.
-2-
<PAGE>
"Bankruptcy Code" means the Federal Bankruptcy Reform Act of 1978 (11
---------------
U.S.C. (S)101, et seq.).
-------
"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 BofA in San Francisco, California, as
its "reference rate." (It is a rate set by BofA based upon various
factors including BofA'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 BofA shall take effect
at the opening of business on the day specified in the public announcement
of such change.
"Base Rate Loan" means a Loan that bears interest based on the Base
--------------
Rate.
"BofA" means Bank of America National Trust and Savings Association, a
----
national banking association.
"Borrowing" means a borrowing hereunder consisting of Revolving Loans
---------
or Term Loans of the same Type made to the Company on the same day by the
Lenders under Article II.
----------
"Borrowing Base" means, at any time, (a) the sum of
---------
(i) an amount equal to 85% of the net amount (after deduction of
such reserves and allowances as the Agent may reasonably deem proper
and necessary) of the Eligible Accounts of the Company and Stuart Hall
as of the date of the most recently delivered Borrowing Base
certificate; plus
----
(ii) an amount equal to the lesser of (i) 60% of the net value
(as determined by the Agent and after deduction of such reserves and
allowances, as the Agent may reasonably deem proper and necessary on a
first-in first-out basis in accordance with GAAP) of Eligible
Inventory of the Company and Stuart Hall and (ii) at all times from
February 1 through June 30 of each year, $45,000,000, and at all other
times, $30,000,000; minus
-----
(b) the sum at such time of (i) the aggregate undrawn amount of any
outstanding Letters of Credit (other than the IRB Letter of Credit); plus
----
(ii) the aggregate face amount of any LC Applications; plus (iii) the
----
aggregate unreimbursed amounts drawn under any Letters of Credit or paid
under any LC Application; plus (iv) without duplication, the aggregate
----
outstanding amount of all Revolving Loans; plus (v) $2,500,000 reserved in
----
connection with the IRB Letter of Credit.
-3-
<PAGE>
Notwithstanding anything contained in the foregoing to the contrary,
the Agent reserves the right, at any time, as it reasonably deems proper or
necessary, to reduce or increase any of the percentages or dollar amounts
set forth above. Nothing contained herein shall (1) be construed as the
Agent's agreement to resort or look to any particular type or item of
Collateral as security for any specific Loan, Letter of Credit or advance
or in any way limit the Agent'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 or New York City are
authorized or required by law to close and, if the applicable Business Day
relates to any Offshore Rate Loan, means such a day on which dealings are
carried on in the applicable offshore dollar interbank market.
"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.
"Capitalized Lease Liabilities" means with respect to any Person all
-----------------------------
monetary obligations of such Person or any of its Subsidiaries under any
leasing or similar arrangement which, in accordance with GAAP, would be
classified as capitalized leases, and, for purposes of this Agreement and
each other Loan Document, the amount of such obligations shall be the
capitalized amount thereof, determined 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.
"Cash Collateralize" means to pledge and deposit with or deliver to
------------------
the Agent, for the benefit of the Agent, the Issuing Bank and the Lenders,
as additional collateral for the Obligations, cash or deposit account
balances pursuant to documentation in form and substance satisfactory to
the Agent and the Issuing Bank (which documents are hereby consented to by
the Lenders). Derivatives of such term shall have corresponding meaning.
The Company hereby grants the Agent, for the benefit of the Agent, the
Issuing Bank and the Lenders, a security interest in all such cash and
deposit account balances. Cash collateral shall be maintained in blocked,
non-interest bearing deposit accounts at BofA.
"Change in Control" means the occurrence, after the date of this
-----------------
Agreement, of any of the following: (a) any Person or two or more persons
(other than Management Investors or CVC Group) acting in concert acquiring
beneficial ownership (within the meaning of Rule 13d-3 of the SEC under the
Exchange Act), directly or indirectly, of securities of the Parent (or
other securities convertible into such securities) representing
-4-
<PAGE>
30% or more of the combined voting power of all securities of the Parent
entitled to vote in the election of directors; (b) during any period of up
to 12 consecutive months, commencing after the Closing Date, individuals
who at the beginning of such 12-month period were directors of the Company
and/or the Parent ceasing for any reason to constitute a majority of the
Board of Directors unless the Persons replacing such individuals were
nominated by the Board of Directors of the Company and/or the Parent; or
(c) when the Parent fails to own 100% of the Company.
"Closing Date" means the date on which all conditions precedent set
------------
forth in Section 4.1 are satisfied or waived by all Lenders.
-----------
"CMP Loan Agreement" means that certain Senior Subordinated Credit
------------------
Agreement dated August 20, 1998, between the Parent, as borrower, and
Citicorp Mezzanine Partners, L.P., as lender.
"Code" means the Internal Revenue Code of 1986, and regulations
----
promulgated thereunder.
"Collateral" means all property which is subject to, or is to be
----------
subject to, the Lien granted under any Collateral Document.
"Collateral Documents" means, collectively, (a) the Security
--------------------
Agreements, the Trademark Security Agreements, the Mortgage, the Leasehold
Mortgage, the Landlord's Consents, the Pledge Agreement and all other
security agreements, mortgages, deeds of trust, patent and trademark
assignments, lease assignments, guarantees and other similar agreements
between the Company, the Parent or their respective Subsidiaries and the
Agent for the benefit of the Lenders now or hereafter delivered to the
Agent pursuant to or in connection with the transactions contemplated
hereby, and all financing statements (or comparable documents now or
hereafter filed in accordance with the Uniform Commercial Code or
comparable law) against the Company, the Parent or their respective
Subsidiaries, as debtor, in favor of the Agent for the benefit of the
Lenders, as secured party, and (b) any amendments, supplements,
modifications, renewals, replacements, consolidations, substitutions and
extensions of any of the foregoing.
"Commitment," as to each Lender, has the meaning specified in Section
---------- -------
2.1(b).
------
"Commitment Percentage" means, as to any Lender at any time, the
---------------------
percentage equivalent (expressed as a decimal, rounded to the ninth decimal
place) at such time of such Lender's Commitment divided by the combined
Commitments of all Lenders.
"Company" has the meaning specified in the Preamble.
-------
"Compliance Certificate" means a certificate substantially in the form
----------------------
of Exhibit C.
---------
"Consolidated Capital Expenditures" means, for any period, the capital
---------------------------------
expenditures of the Company and its consolidated Subsidiaries for such
period, as the
-5-
<PAGE>
same are (or would in accordance with GAAP be) set forth in the
consolidated statement of cash flows of the Company and its
consolidated Subsidiaries for such period; provided, that for purposes of
--------
calculating Consolidated Capital Expenditures (a) for each fiscal year,
such calculation shall be made net of any cash proceeds received by the
Company or its consolidated Subsidiaries during such fiscal year from the
sale or trade-in of capital assets which were replaced during such fiscal
year by capital assets which performed the same or similar function(s), and
(b) for any period ending on or before June 30, 1999, such calculation
shall be made as if the Company's Acquisition of Stuart Hall occurred on
the first day of such period.
"Consolidated EBITDA" means, for any period, the consolidated net
-------------------
earnings of the Company and its consolidated Subsidiaries plus, without
----
duplication, (i) the sum of the aggregate amounts actually deducted in
determining such net earnings for such period in respect of (a) gross
interest charges, (b) imputed interest charges related to any capital
leases, (c) provision for income taxes, amortization and depreciation, (d)
transaction expenses paid to third parties in connection with this
Agreement or the Transaction Documents actually paid on or before December
31, 1998 (provided, that such transaction expenses shall not exceed in
--------
aggregate $4,000,000) and (e) losses on sales of assets (excluding sales in
the ordinary course of business) and other extraordinary losses or non-cash
charges; less (ii) the amount for such period of gains on sales of assets
----
(excluding sales in the ordinary course of business) and other
extraordinary or non-recurring gains. Net earnings shall be calculated on
a first-in-first-out basis in accordance with GAAP; provided, that for
--------
purposes of calculating Consolidated EBITDA for any period ending on or
before June 30, 1999, such calculation shall be made as if the Company's
Acquisition of Stuart Hall occurred on the first day of such period.
"Consolidated Fixed Charges" means, for any period, without
--------------------------
duplication, the consolidated cash interest expense and letter of credit
fees (including all imputed interest related to any capital lease) of the
Company and its consolidated Subsidiaries for such period, plus all
----
required principal payments on any Indebtedness (including, without
duplication, all payments related to the Term Loans and to any capital
lease) made by the Company and its consolidated Subsidiaries for such
period; provided, that for purposes of calculating Consolidated Fixed
--------
Charges for any period ending on or before June 30, 1999, such calculation
shall be made as if the Company's Acquisition of Stuart Hall occurred on,
and all Indebtedness incurred in connection with such Acquisition was
incurred on, the first day of 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 Company and
its consolidated Subsidiaries, calculated in accordance with GAAP.
"Contingent Obligation" means, as to any Person, any direct or
---------------------
indirect liability of that Person, whether or not contingent, with or
without recourse, (a) with respect to any Indebtedness, lease, dividend,
letter of credit or other obligation (the "primary obligations") of another
Person (the "primary obligor"), including any obligation of that
-6-
<PAGE>
Person (i) to purchase, repurchase or otherwise acquire such primary
obligations or any security therefor, (ii) to advance or provide funds for
the payment or discharge of any such primary obligation, or to maintain
working capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency or any balance sheet item, level of
income or financial condition of the primary obligor, (iii) to purchase
property, securities or services primarily for the purpose of assuring the
owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation, or (iv) otherwise to assure or
hold harmless the holder of any such primary obligation against loss in
respect thereof (each, a "Guaranty Obligation"); (b) with respect to any
-------------------
Surety Instrument (other than any Letter of Credit) issued for the account
of that Person or as to which that Person is otherwise liable for
reimbursement of drawings or payments; (c) to purchase any materials,
supplies or other property from, or to obtain the services of, another
Person if the relevant contract or other related document or obligation
requires that payment for such materials, supplies or other property, or
for such services, shall be made regardless of whether delivery of such
materials, supplies or other property is ever made or tendered, or such
services are ever performed or tendered, or (d) in respect of any Swap
Contract. The amount of any Contingent Obligation shall, in the case of
Guaranty Obligations, be deemed equal to the stated or determinable amount
of the primary obligation in respect of which such Guaranty Obligation is
made or, if not stated or if indeterminable, the maximum reasonably
anticipated liability in respect thereof, and in the case of other
Contingent Obligations, shall be equal to the maximum reasonably
anticipated liability in respect thereof.
"Contractual Obligation" means, as to any Person, any provision of any
----------------------
security issued by such Person or of any agreement, undertaking, contract,
indenture, mortgage, deed of trust or other instrument, document or
agreement to which such Person is a party or by which it or any of its
property is bound.
"Conversion/Continuation Date" means any date on which, under Section
---------------------------- -------
2.4, the Company (a) converts Loans of one Type to another Type, or (b)
---
continues as Loans of the same Type, but with a new Interest Period, Loans
having Interest Periods maturing on such date.
"Credit Extension" means and includes (a) the making of any Loans
----------------
hereunder, and (b) the Issuance of any Letters of Credit hereunder
(including the Existing BofA Letters of Credit).
"CVC Group" means collectively, Citicorp Venture Capital, Ltd., a New
---------
York corporation ("CVC"), CCT Partners IV, L.P., a Delaware limited partnership,
and individual employees, officers and consultants of CVC, respective Affiliates
of each of the foregoing (other than Citicorp Mezzanine Partners, L.P.) and with
respect to any of the foregoing natural persons, such persons' spouses,
siblings, descendants (whether natural or adopted) and any trust or entity
solely for the benefit of such persons and/or such persons' spouses, siblings,
and their respective ancestors and/or descendants (whether natural or adopted).
-7-
<PAGE>
"Default" means any event or circumstance which, with the giving of
-------
notice, the lapse of time, or both, would (if not cured or otherwise
remedied during such time) constitute an Event of Default.
"Dollars", "dollars" and "$" each mean lawful money of the United
------- ------- -
States.
"Effective Amount" means (a) with respect to any Revolving Loans and
----------------
Term Loans on any date, the aggregate outstanding principal amount thereof
after giving effect to any Borrowings and prepayments or repayments of
Revolving Loans and Term Loans, as the case may be, occurring on such date;
and (b) with respect to any outstanding L/C Obligations on any date, the
amount of such L/C Obligations on such date after giving effect to any
Issuances of Letters of Credit occurring on such date and any other changes
in the aggregate amount of the L/C Obligations as of such date, including
as a result of any reimbursements of outstanding unpaid drawings under any
Letters of Credit or any reductions in the maximum amount available for
drawing under Letters of Credit taking effect on such date.
"Eligible Account" shall mean an Account owing to the Company or
----------------
Stuart Hall (each, for purposes of this definition, a "Person") 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 Agent's reasonable discretion in determining which Accounts
are eligible hereunder:
(a) it is genuine and in all respects what it purports to be;
(b) it arises from: (i) the performance of services by such
Person and such services have been fully performed and acknowledged
and accepted by the Account Debtor with respect thereto; or (ii) the
sale or lease of goods by such Person, 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 such Person has possession of, or has
delivered to the Agent, at the Agent's request, shipping and delivery
receipts evidencing such shipment;
(c) 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 60 days of
the date of such invoice, and is not evidenced by any instrument or
chattel paper, provide, that invoices arising from any "Back-to-
-------
School" program may have terms in excess of 60 days but in no event
may such terms extend beyond either September 10 or October 1 of the
calendar year in which such invoices arise;
(d) it is not subject to any Lien, other than the Lien of the
Agent under any Collateral Document;
(e) it is a valid, legally enforceable and unconditional
obligation of the Account Debtor with respect thereto, and is not
subject to setoff, counterclaim,
-8-
<PAGE>
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
invoice;
(f) 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;
(g) it does not arise out of a contract or order which, by its
terms, forbids or makes void or unenforceable the assignment by such
Person to the Agent of the Account arising with respect thereto;
(h) the Account Debtor is not a director, officer, employee,
agent, Subsidiary, or Affiliate of the Company;
(i) 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
$10,000,000 at any time;
(j) it is not an Account arising from a "sale on approval," "sale
or return," "consignment," or subject to any other repurchase or
return agreement;
(k) 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 such Person (or by any agent or custodian of such Person)
for the account of or subject to further and/or future direction from
the Account Debtor thereof;
(l) 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 such Person's Accounts;
(m) the Account Debtor thereunder is not located in the State of
New Jersey, Minnesota, Indiana or any other state denying creditors
access to its courts unless such Person has filed a Notice of Business
Activities Report or similar filing with the applicable state agency
for the then current year;
(n) it is not owing by any Account Debtor who shall have failed
to pay in full any invoice evidencing any Account within 60 days after
the due date of such invoice, unless the total invoices of such
Account Debtor which have not been paid within 60 days of the due date
represent less than 10% of the total invoice amounts then outstanding
of such Account Debtor or, in the case of any invoice arising from any
"Back-to-School" program, such Account Debtor fails to pay in full any
such invoice on or before October 31 of the calendar year in which
such invoice arises.
-9-
<PAGE>
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 Agent at any time or times
hereafter determines in its reasonable 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 such Person 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 Assignee" means (a) a commercial bank organized under the
-----------------
laws of the United States, or any state thereof, and having a combined
capital and surplus of at least $100,000,000; (b) a commercial bank
organized under the laws of any other country which is a member of the
Organization for Economic Cooperation and Development (the "OECD"), or a
political subdivision of any such country, and having a combined capital
and surplus of at least $100,000,000, provided that such bank is acting
through a branch or agency located in the United States; (c) a Person that
is primarily engaged in the business of commercial banking and that is (i)
a Subsidiary of a Lender, (ii) a Subsidiary of a Person of which a Lender
is a Subsidiary, or (iii) a Person of which a Lender is a Subsidiary; (d) a
commercial finance company or finance subsidiary of a corporation organized
under the laws of the United States of America, or any State thereof, and
having total assets in excess of $100,000,000; (e) a savings bank or
savings and loan association organized under the laws of the United States
of America, or any State thereof, and having total assets in excess of
$100,000,000; (f) as to the Term Loans, an "accredited investor" as such
term is defined in Rule 510(a) of Regulation D under the Security Act of
1933, as amended (other than the Company or an Affiliate of the Company);
and (g) any other entity approved by the Company and the Agent.
"Eligible Inventory" shall mean Inventory of the Company or Stuart
------------------
Hall (each, for purposes of this definition, a "Person") 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 Agent's reasonable discretion in determining which Inventory
is eligible hereunder:
(a) it is owned by such Person, and is not subject to any Lien,
other than the Lien of the Agent hereunder;
(b) if held for sale or lease or furnishing under contracts of
service, it is (except as the Agent may otherwise consent in writing)
finished, new and unused;
(c) it is not now and shall not at any time or times hereafter be
stored with a bailee, warehouseman or similar party without the
Agent's prior written consent, and in such event, such Person will
concurrently therewith cause any such bailee, warehouseman or similar
party to issue and deliver to the Agent, in
-10-
<PAGE>
form and substance acceptable to the Agent, warehouse receipts
therefor in the Agent's name;
(d) the Agent has in good faith determined in accordance with the
Agent's prudent business practices that it is not unacceptable due to
age, type, category, quality and/or quantity;
(e) 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 such Person's Inventory;
(f) it consists of raw materials or finished goods which are in
marketable condition;
(g) in the case of Inventory which incorporates any trademark
with respect to which either the Company or Stuart Hall is a licensee,
the licensor of such trademark shall have consented to the Agent's
Lien thereon in a manner reasonably acceptable to the Agent.
Inventory of such Person 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 until such time, if any, as such
Inventory no longer fails to meet any of the foregoing requirements.
"Environmental Claims" means all claims, however asserted, by any
--------------------
Governmental Authority alleging potential liability or responsibility for
violation of any Environmental Law, or for release or injury to the
environment.
"Environmental Laws" means all federal, state or local laws, statutes,
------------------
common law duties, rules, regulations, ordinances and codes, together with
all administrative orders, directed duties, requests, licenses,
authorizations and permits of, and agreements with, any Governmental
Authorities, in each case relating to environmental, health, safety and
land use matters.
"ERISA" means the Employee Retirement Income Security Act of 1974, and
-----
regulations promulgated thereunder.
"ERISA Event" means (a) a Reportable Event with respect to a Pension
-----------
Plan; (b) a withdrawal by the Company, the Parent or any Subsidiary from a
Pension Plan subject to Section 4063 of ERISA during a plan year in which
it was a substantial employer (as defined in Section 4001(a)(2) of ERISA)
or a cessation of operations which is treated as such a withdrawal under
Section 4062(e) of ERISA; (c) the filing of a notice of intent to
terminate, the treatment of a plan amendment as a termination under Section
4041 or 4041A of ERISA or the commencement of proceedings by the PBGC to
terminate a Pension Plan subject to Title IV of ERISA; (d) a failure by the
Company, the Parent or any Subsidiary to make required contributions to a
Pension Plan or other Plan subject to Section 412 of the Code; (e) an event
or condition which might reasonably be expected to constitute grounds under
Section 4042 of ERISA for the termination of, or
-11-
<PAGE>
the appointment of a trustee to administer, any Pension Plan; (f) the
imposition of any liability under Title IV of ERISA, other than PBGC
premiums due but not delinquent under Section 4007 of ERISA, upon the
Company, the Parent or any Subsidiary; or (g) an application for a funding
waiver or an extension of any amortization period pursuant to Section 412
of the Code with respect to any Pension Plan.
"Eurodollar Reserve Percentage" has the meaning specified in the
-----------------------------
definition of "Offshore Rate".
"Event of Default" means any of the events or circumstances specified
----------------
in Section 8.1.
-----------
"Exchange Act" means the Securities Exchange Act of 1934, and
------------
regulations promulgated thereunder.
"Existing BofA Letters of Credit" means the IRB Letter of Credit and
-------------------------------
other letters of credit described in Schedule 3.3.
------------
"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 Agent 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 Agent.
"Fee Letters" means those letter agreements referenced in Section 2.10
----------- ------------
relating to payment of certain fees and other amounts.
"Fixed Charge Coverage Ratio" means the ratio set forth in Section
--------------------------- -------
8A.1.
-----
"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, net income taxes and franchise
taxes), and all liabilities with respect thereto, imposed by any
jurisdiction on account of amounts paid pursuant to Section 4.1.
-----------
"GAAP" means generally accepted accounting principles set forth from
----
time to time in the opinions and pronouncements of the Accounting
Principles Board and the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards
Board (or agencies with similar functions of
-12-
<PAGE>
comparable stature and authority within the U.S. accounting profession),
which are applicable to the circumstances as of the date of determination.
"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.
"Guaranty" means any Guaranty in substantially the form of Exhibit M
-------- ---------
executed by the Parent or any Subsidiary in favor of the Agent for the
benefit of the Banks.
"Guaranty Obligation" has the meaning specified in the definition of
-------------------
"Contingent Obligation."
"Honor Date" has the meaning specified in Section 3.3(c).
---------- --------------
"Indebtedness" of any Person means, without duplication, (a) all
------------
indebtedness for borrowed money; (b) all obligations issued, undertaken or
assumed as the deferred purchase price of property or services (other than
trade payables entered into in the ordinary course of business on ordinary
terms); (c) all non-contingent reimbursement or payment obligations with
respect to Surety Instruments; (d) all obligations evidenced by notes,
bonds, debentures or similar instruments, including obligations so
evidenced incurred in connection with the acquisition of property, assets
or businesses; (e) all indebtedness created or arising under any
conditional sale or other title retention agreement, or incurred as
financing, in either case with respect to property acquired by the Person
(even though the rights and remedies of the seller or bank under such
agreement in the event of default are limited to repossession or sale of
such property); (f) all Capitalized Lease Liabilities; (g) all net
obligations with respect to Swap Contracts; (h) all indebtedness referred
to in clauses (a) through (g) above secured by (or for which the holder of
such Indebtedness has an existing right, contingent or otherwise, to be
secured by) any Lien upon or in property (including accounts and contracts
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness; and (i) all Guaranty
Obligations in respect of indebtedness or obligations of others of the
kinds referred to in clauses (a) through (g) above.
"Indemnified Liabilities" has the meaning specified in Section 11.5.
----------------------- ------------
"Indemnified Person" has the meaning specified in Section 11.5.
------------------ ------------
"Independent Auditor" has the meaning specified in Section 7.1(a).
------------------- --------------
"Insolvency Proceeding" means (a) any case, action or proceeding
---------------------
before any court or other Governmental Authority relating to bankruptcy,
reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the
benefit of creditors, composition, marshalling of assets for creditors, or
other, similar arrangement in respect of its creditors generally or any
substantial
-13-
<PAGE>
portion of its creditors; undertaken under U.S. Federal, state or foreign
law, including the Bankruptcy Code.
"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 Business Day of each calendar quarter and
each date such Loan is converted into another Type of Loan, provided, 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.
"Interest Period" means, as 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 Company in its Notice of
Borrowing or Notice of Conversion/Continuation;
provided that:
--------
(a) 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;
(b) 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;
(c) no Interest Period for any Term Loan shall extend beyond the
Term Maturity Date and no Interest Period for any Revolving Loan shall
extend beyond the Revolving Termination Date; and
(d) no Interest Period applicable to a Term Loan or portion
thereof shall extend beyond any date upon which is due any scheduled
principal payment in respect of the Term Loans unless the aggregate
principal amount of Term Loans represented by Base Rate Loans and/or
by Offshore Rate Loans having Interest Periods that will expire on or
before such date equals or exceeds the amount of such principal
payment.
"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 transit by the Borrower.
-14-
<PAGE>
"IRB Bond" or "IRB Bonds" means the Industrial Development Revenue
-------- ---------
Bonds (Pen-Tab Industries, Inc. Project) Series 1995, of the Authority (as
defined in the IRB Indenture) in the original aggregate principal amount of
$7,500,000 issued under the IRB Indenture, the liabilities of which have
been previously assigned to and assumed by the Company.
"IRB Indenture" means that certain Indenture of Trust dated as of
-------------
April 1, 1995 between The Industrial Development Authority of the Town of
Front Royal and the County of Warren, Virginia and Signet Trust Company, as
trustee, pursuant to which the Bonds were issued.
"IRB Letter of Credit" means that certain Letter of Credit issued by
--------------------
the Issuing Bank on behalf of the Company in connection with the IRB
Indenture, as the same may be amended, modified, restated, refinanced,
refunded or renewed from time to time in whole or in part.
"IRS" means the Internal Revenue Service, and any Governmental
---
Authority succeeding to any of its principal functions.
"Issuance Date" has the meaning specified in Section 3.1(a).
------------- --------------
Issue" means, with respect to any Letter of Credit, to incorporate the
-----
Existing BofA Letters of Credit into this Agreement, or to issue or to
extend the expiry of, or to renew or increase the amount of, such Letter of
Credit; and the terms "Issued," "Issuing" and "Issuance" have corresponding
------ ------- --------
meanings.
"Issuing Bank" means BofA in its capacity as issuer of one or more
------------
Letters of Credit hereunder, together with any replacement letter of credit
issuer arising under Section 10.1(b) or Section 10.9.
--------------- ------------
"Joint Venture" means a single-purpose corporation, partnership, joint
-------------
venture or other legal arrangement (whether created by contract or
conducted through a separate legal entity) now or hereafter formed by the
Company or any of its Subsidiaries with another Person in order to conduct
a common venture or enterprise with such Person.
"Kansas City Lease" means a certain Standard Commercial Lease, dated
-----------------
as of April 2, 1993, as amended, by and between Mid-West Terminal Warehouse
Company as lessor, and Newell Co. and Stuart Hall, as lessee, relating to
real property located in Kansas City, Missouri.
"Landlord's Consent" means any Landlord's Waiver Agreement and Consent
------------------
in substantially the form of Exhibit J (or in such other form as the Agent
---------
shall agree in response to negotiations with the respective landlord)
executed in favor of the Agent for the benefit of the Lenders.
"L/C Advance" means each Lender's participation in any L/C Borrowing
-----------
in accordance with its Commitment Percentage.
-15-
<PAGE>
"L/C Amendment Application" means an application form for amendment of
-------------------------
outstanding standby or commercial documentary letters of credit as shall at
any time be in use at the Issuing Bank, as the Issuing Bank shall request.
"L/C Application" means an application form for issuances of standby
---------------
or commercial documentary letters of credit as shall at any time be in use
at the Issuing Bank, as the Issuing Bank shall request.
"L/C Borrowing" means an extension of credit resulting from a drawing
-------------
under any Letter of Credit which shall not have been reimbursed on the date
when made nor converted into a Borrowing of Revolving Loans under Section
-------
3.3(c).
------
"L/C Commitment" means the commitment of the Issuing Bank to Issue,
--------------
and the commitment of the Lenders severally to participate in Letters of
Credit (including the Existing BofA Letters of Credit) from time to time
Issued or outstanding under Article III, in an aggregate amount not to
-----------
exceed on any date the amount of $25,000,000, as the same shall be reduced
as a result of a reduction in the L/C Commitment pursuant to Section 2.5;
-----------
provided, that the L/C Commitment is a part of the combined Commitments,
--------
rather than a separate, independent commitment.
"L/C Obligations" means at any time the sum of (a) the aggregate
---------------
undrawn amount of all Letters of Credit then outstanding, plus (b) the
amount of all unreimbursed drawings under all Letters of Credit, including
all outstanding L/C Borrowings.
"L/C-Related Documents" means the Letters of Credit, the L/C
---------------------
Applications, the L/C Amendment Applications and any other document
relating to any Letter of Credit, including any of the Issuing Bank's
standard form documents for letter of credit issuances.
"Leasehold Mortgage" means the Leasehold Deed of Trust (Assignment of
------------------
Leases and Rents and Security Agreement) in substantially the form of
Exhibit K-2 executed by Stuart Hall in favor of the trustee named therein
------------
for the benefit of the Agent, as beneficiary, for the benefit of the
Lenders with respect to the Kansas City Lease.
"Lender" has the meaning specified in the introductory clause hereto.
------
References to the "Lenders" shall include BofA, including in its capacity
as Issuing Bank; for purposes of clarification only, to the extent that
BofA may have any rights or obligations in addition to those of the Lenders
due to its status as Issuing Bank, its status as such will be specifically
referenced.
"Lending Office" means, as to any Lender, the office or offices of the
--------------
Lender specified as its "Lending Office" or "Domestic Lending Office" or
"Offshore Lending Office", as the case may be, beneath its name on the
applicable signature page hereto, or such other office or offices as the
Lender may from time to time notify the Company and the Agent.
-16-
<PAGE>
"Letters of Credit" means the Existing BofA Letters of Credit and any
-----------------
letters of credit (whether standby letters of credit or commercial
documentary letters of credit) Issued by the Issuing Bank pursuant to
Article III.
-----------
"Lien" means any security interest, mortgage, deed of trust, pledge,
----
hypothecation, assignment, charge or deposit arrangement, encumbrance, lien
(statutory or other) (including those created by, arising under or
evidenced by any conditional sale or other title retention agreement, the
interest of a lessor under a capital lease, any financing lease having
substantially the same economic effect as any of the foregoing, or the
filing of any financing statement naming the owner of the asset to which
such lien relates as debtor, under the Uniform Commercial Code or any
comparable law) but not including the interest of a lessor under an
operating lease.
"Loan" means an extension of credit by a Lender to the Company under
----
Article II or Article III in the form of a Revolving Loan, Term Loan or L/C
---------- -----------
Advance.
"Loan Documents" means this Agreement, the Notes, the Collateral
--------------
Documents, the Guaranties, the Subordination Agreement, the Fee Letters,
the L/C-Related Documents, and all other documents delivered to the Agent
or any Lender in connection herewith.
"Majority Lenders" means at any time Lenders then holding in excess of
----------------
66-2/3% of the then aggregate unpaid principal amount of the Loans, but in
any event not less than two Lenders, or, if no such principal amount is
then outstanding, Lenders then having in excess of 66-2/3% of the
Commitments, but in any event not less than two Lenders.
"Management Investors" means any of Alan Hodes, Michael Greenberg, and
--------------------
other full-time members of management of the Parent, the Company or Stuart
Hall who acquire common stock of the Parent through management stock
purchase or option plans, together with any such person's spouse, siblings,
descendants (whether natural or adopted) and any trust or entity solely for
the benefit of such person and/or such person's spouse, siblings, and their
respective ancestors and/or descendants (whether natural or adopted).
"Margin Stock" means "margin stock" as such term is defined in
------------
Regulation G, T, U or X of the FRB.
"Material Adverse Effect" means (a) a material adverse change in, or a
-----------------------
material adverse effect upon, the operations, business, properties,
condition (financial or otherwise) or prospects of the Company or the
Company and its Subsidiaries taken as a whole; (b) a material impairment of
the ability of the Company, the Parent or any Subsidiary to perform under
any Loan Document; or (c) a material adverse effect upon the legality,
validity, binding effect or enforceability against the Company, the Parent
or any Subsidiary of any Loan Document.
"Maximum Loan Availability" means, at any time, the lesser of (a) the
-------------------------
Borrowing Base as of the date of the most recent Borrowing Base certificate
delivered pursuant to Section 7.2(g) and (b) the combined Commitment.
--------------
-17-
<PAGE>
"Minimum Consolidated Net Worth" means, at any time, an amount which
------------------------------
shall equal the sum of (a) $12,750,000 (provided, that such sum shall be
--------
adjusted upon delivery by the Company to the Agent of the financial
statements delivered pursuant to Section 7.1(b) with respect to the
--------------
Company's third fiscal quarter, 1998 to be 85% of the Company's
consolidated net worth calculated as of the Closing Date) plus (b) 50% of
----
consolidated net income of the Company and its consolidated Subsidiaries
for each fiscal year ending after the Closing Date; provided, that for
--------
purposes of the fiscal year ending December 31, 1998, consolidated net
income shall be calculated on a pro forma basis as if the Company's
Acquisition of Stuart Hall occurred on January 1, 1998.
"Mortgage" means the deed of trust in substantially the form of
--------
Exhibit K-1 executed by the Company in favor of the Agent for the benefit
-----------
of the Lenders with respect to real property owned by the Company located
in Front Royal, Virginia.
"1997 Debt Indenture" means that certain Indenture, dated as of
-------------------
February 1, 1997, between the Company and U.S. Trust Company of New York,
as Trustee.
"Note" means either a Revolving Loan Note or a Term Loan Note.
----
"Notice of Borrowing" means a notice in substantially the form of
-------------------
Exhibit A.
---------
"Notice of Conversion/Continuation" means a notice in substantially
---------------------------------
the form of Exhibit B.
---------
"Obligations" means all advances, debts, liabilities, obligations,
-----------
covenants and duties arising under any Loan Document, owing by the Company
to any Lender, the Agent, or any Indemnified Person, whether direct or
indirect (including those acquired by assignment), absolute or contingent,
due or to become due, now existing or hereafter arising.
"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 Agent 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 any Lender) 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
-18-
<PAGE>
"IBOR" means the rate of interest per annum determined by the
----
Agent as the rate at which dollar deposits in the approximate amount
of BofA's Offshore Rate Loan for such Interest Period would be offered
by BofA's Grand Cayman Branch, Grand Cayman B.W.I. (or such other
office as may be designated for such purpose by BofA), to major banks
in the offshore dollar interbank market at their request at
approximately 11:00 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.
"Organization Documents" means, for any corporation, the certificate
----------------------
or articles of incorporation, the bylaws, any certificate of determination
or instrument relating to the rights of preferred shareholders of such
corporation, any shareholder rights 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 has the meaning specified in the Preamble.
------
"Participant" has the meaning specified in subsection 11.8(d).
----------- ------------------
"PBGC" means the Pension Benefit Guaranty Corporation, or any
----
Governmental Authority succeeding to any of its principal functions under
ERISA.
"Pension Plan" means a pension plan (as defined in Section 3(2) of
------------
ERISA) subject to Title IV of ERISA which the Company, the Parent or any
Subsidiary sponsors, maintains, or to which it makes, is making, or is
obligated to make contributions, or in the case of a multiple employer plan
(as described in Section 4064(a) of ERISA) has made contributions at any
time during the immediately preceding five (5) plan years.
"Permitted Liens" has the meaning specified in Section 8.1.
--------------- -----------
"Person" means an individual, partnership, corporation, limited
------
liability company, business trust, joint stock company, trust,
unincorporated association, joint venture or Governmental Authority.
"Plan" means an employee benefit plan (as defined in Section 3(3) of
----
ERISA) which the Company, the Parent or any Subsidiary sponsors or
maintains or to which the Company, the Parent or any Subsidiary makes, is
making, or is obligated to make contributions and includes any Pension
Plan.
"Pledge Agreement" means a Pledge Agreement, substantially in the form
----------------
of Exhibit H, executed by the Parent or the Company in favor of the Agent
---------
for the benefit of the Lenders, covering among other things (a) in the case
of the Parent, all of the capital
-19-
<PAGE>
stock of the Company and (b) in the case of the Company, all of the capital
stock of its Subsidiaries.
"Reportable Event" means, any of the events set forth in Section
----------------
4043(b) of ERISA or the regulations thereunder, other than any such event
for which the 30-day notice requirement under ERISA has been waived in
regulations issued by the PBGC.
"Requirement of Law" means, as to any Person, any law (statutory or
------------------
common), treaty, rule or regulation or determination of an arbitrator or of
a Governmental Authority, in each case applicable to or binding upon the
Person or any of its property or to which the Person or any of its property
is subject.
"Responsible Officer" means, with respect to the Company or the
-------------------
Parent, the chief executive officer or the president of such Person, or any
other officer having substantially the same authority and responsibility;
or, with respect to compliance with financial covenants, the chief
financial officer or the treasurer of such Person, or any other officer
having substantially the same authority and responsibility.
"Revolving Loan" has the meaning specified in Section 2.1(b), and may
-------------- --------------
be a Base Rate Loan or an Offshore Rate Loan (each, a "Type" of Revolving
----
Loan).
"Revolving Loan Note" means a promissory note duly executed by the
-------------------
Company in substantially the form of Exhibit F-2, appropriately completed.
-----------
"Revolving Termination Date" means August 20, 2001.
--------------------------
"SEC" means the Securities and Exchange Commission, or any
---
Governmental Authority succeeding to any of its principal functions.
"Security Agreement" means any Security Agreement in substantially the
------------------
form of Exhibit G executed by the Company or any Subsidiary in favor of the
---------
Agent for the benefit of the Lenders.
"Solvent" means, as to any Person at any time, that (a) the fair value
-------
of the property of such Person is greater than the amount of such Person's
liabilities (including disputed, contingent and unliquidated liabilities)
as such value is established and liabilities evaluated for purposes of
Section 101(31) of the Federal Bankruptcy Reform Act of 1978 and, in the
alternative, for purposes of the Illinois Uniform Fraudulent Transfer Act;
(b) the present fair saleable value of the property of such Person is not
less than the amount that will be required to pay the probable liability of
such Person on its debts as they become absolute and matured; (c) such
Person is able to realize upon its property and pay its debts and other
liabilities (including disputed, contingent and unliquidated liabilities)
as they mature in the normal course of business; (d) such Person does not
intend to, and does not believe that it will, incur debts or liabilities
beyond such Person's ability to pay as such debts and liabilities mature;
and (e) such Person is not engaged in business or a transaction, and is not
about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
-20-
<PAGE>
"Stuart Hall" means Stuart Hall Company, Inc., a Missouri corporation.
-----------
"Subordinated Debt" means all Indebtedness of the Company issued
-----------------
pursuant to 1997 Debt Indenture and all Indebtedness of the Parent issued
pursuant to the CMP Loan Agreement.
"Subordination Agreement" means a Subordination Agreement in
-----------------------
substantially the form of Exhibit N covering the Parent's liabilities under
---------
the CMP Loan Agreement.
"Subsidiary" of a Person means any corporation, association,
----------
partnership, joint venture or other business entity of which more than 50%
of the voting stock or other equity interests (in the case of Persons other
than corporations), is owned or controlled directly or indirectly by the
Person, or one or more of the Subsidiaries of the Person, or a combination
thereof. Unless the context otherwise clearly requires, references herein
to a "Subsidiary" refer to a Subsidiary of the Company.
"Surety Instruments" means all letters of credit (including standby
------------------
and commercial), banker's acceptances, bank guaranties, shipside bonds,
surety bonds and similar instruments.
"Swap Contracts" means swap agreements (as such term is defined in
--------------
Section 101 of the Bankruptcy Code) and any other agreements or
arrangements designed to provide protection against fluctuations in
interest or currency exchange rates or commodity prices.
"Tax Distributions" shall have the meaning assigned to such term in
-----------------
Section 8.11.
------------
"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 each Lender and the Agent, respectively, taxes imposed for the privilege
of doing business, or imposed on or measured by its net income, by a
jurisdiction (or any political subdivision thereof) under the laws of which
such Lender or the Agent, as the case may be, is organized or maintains a
lending office.
"Term Commitment" means thirty-five million dollars ($35,000,000).
---------------
"Term Loan" has the meaning specified in Section 2.1 and may be a Base
--------- -----------
Rate Loan or an Offshore Rate Loan.
"Term Loan Note" means a promissory note duly executed by the Company
--------------
in substantially the form of Exhibit F-1, appropriately completed.
-----------
"Term Maturity Date" means August 20, 2001.
------------------
"Trademark Security Agreement" means any Security Trademark Agreement,
----------------------------
substantially in the form of Exhibit H, executed by the Company or any
---------
Subsidiary in favor of the Agent for the benefit of the Lenders.
-21-
<PAGE>
"Transaction Documents" means the CMP Loan Agreement, the Acquisition
---------------------
Agreement and all other documents delivered in connection therewith on or
about the Closing Date.
"Type" has the meaning specified in the definition of "Revolving
----
Loan."
"UCP" has the meaning specified in Section 3.9.
--- -----------
"Unfunded Pension Liability" means the excess of a Plan's benefit
--------------------------
liabilities under Section 4001(a)(16) of ERISA, over the current value of
that Plan's assets, determined in accordance with the assumptions used for
funding the Pension Plan pursuant to Section 412 of the Code for the
applicable plan year.
"United States" and "U.S." each means the United States of America.
------------- ----
"Vinylweld" means Vinylweld, L.L.C., a Delaware limited liability
---------
company.
"Wholly-Owned Subsidiary" means any corporation in which (other than
-----------------------
directors' qualifying shares required by law) 100% of the capital stock of
each class having ordinary voting power, and 100% of the capital stock of
every other class, in each case, at the time as of which any determination
is being made, is owned, beneficially and of record, by the Company, or by
one or more of the other Wholly-Owned Subsidiaries, or both.
1.2 Other Interpretive Provisions.
-----------------------------
(a) The meanings of defined terms are equally applicable to the
singular and plural forms of the defined terms.
(b) The words "hereof", "herein", "hereunder" and similar words refer
to this Agreement as a whole and not to any particular provision of this
Agreement; and subsection, Section, Schedule and Exhibit references are to
this Agreement unless otherwise specified.
(c) (i) The term "documents" includes any and all instruments,
documents, agreements, certificates, indentures, notices and other writings,
however evidenced.
(ii) The term "including" is not limiting and means "including,
without limitation."
(iii) The term "pro rata" means ratably in accordance with the
respective Commitment Percentages.
(iv) In the computation of periods of time from a specified date
to a later specified date, the word "from" means "from and including"; the
words "to" and "until" each mean "to but excluding", and the word "through"
means "to and including."
(d) Unless otherwise expressly provided herein, (i) references to
agreements (including this Agreement) and other contractual instruments shall be
deemed to include all
-22-
<PAGE>
subsequent amendments and other modifications thereto, but only to the extent
such amendments and other modifications are not prohibited by the terms of any
Loan Document, and (ii) references to any statute or regulation are to be
construed as including all statutory and regulatory provisions consolidating,
amending, replacing, supplementing or interpreting the statute or regulation.
(e) The captions and headings of this Agreement are for convenience of
reference only and shall not affect the interpretation of this Agreement.
(f) This Agreement and other Loan Documents may use several different
limitations, tests or measurements to regulate the same or similar matters. All
such limitations, tests and measurements are cumulative and shall each be
performed in accordance with their terms.
(g) This Agreement and the other Loan Documents are the result of
negotiations among and has been reviewed by counsel to the Agent, the Company
and the other parties, and are the products of all parties. Accordingly, they
shall not be construed against the Lenders or the Agent merely because of the
Agent's or Lenders' involvement in their preparation.
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 GAAP. In the event any "Accounting Changes" (as defined below) shall occur
and such changes affect financial covenants, standards or terms in this
Agreement, then the Company and Lenders 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 the Company 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 the Company and the Majority Lenders, (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) the
Company 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 the Company and (y) changes in accounting principles
recommended by the Company's certified public accountants. All effects of
purchase accounting principles (A.P.B. 16 and/or 17 and EITF 88-16 and FASB 109)
shall be excluded for purposes of preparation of financial statements and other
calculations and information to be provided to the Lender.
-23-
<PAGE>
ARTICLE II
THE CREDITS
-----------
2.1 Amounts and Terms of Commitments.
--------------------------------
(a) The Term Credit. Each Lender severally agrees, on the terms and conditions
---------------
set forth herein, to make a single loan to the Company (each such loan, a
"Term Loan") on the Closing Date in an amount not to exceed such Lender's
----------
Commitment Percentage of the Term Commitment. Amounts borrowed as Term
Loans which are repaid or prepaid by the Company may not be reborrowed.
(b) The Revolving Credit. Each Lender severally agrees, on the terms and
--------------------
conditions set forth herein, to make loans to the Company (each such loan,
a "Revolving Loan") from time to time on any Business Day during the period
--------------
from the Closing Date to the Revolving Termination Date, in an aggregate
amount not to exceed at any time outstanding the amount set forth opposite
the Lender's name on the applicable signature page hereto (such amount, as
the same may be reduced under Section 2.5 or as a result of one or more
-----------
assignments under Section 11.8, the Lender's "Commitment"); provided, that,
------------ ---------- --------
after giving effect to any Borrowing of Revolving Loans, the Effective
Amount of all outstanding Revolving Loans and the Effective Amount of all
L/C Obligations, shall not at any time exceed the Maximum Loan
Availability; and provided further, that the Effective Amount of the
--- -------- -------
Revolving Loans of any Lender, plus the participation of such Lender in the
Effective Amount of all L/C Obligations shall not at any time exceed such
Lender's Commitment. Within the limits of each Lender's Commitment, and
subject to the other terms and conditions hereof, the Company may borrow
under this Section 2.01(b), prepay under Section 2.6 and reborrow under
--------------- -----------
this Section 2.01(b).
---------------
2.2 Notes.
-----
(a) The Term Loans made by each Lender are evidenced by a Term Note payable to
the order of that Lender in an amount equal to its Commitment Percentage of
the Term Commitment. The Revolving Loans made by each Lender are evidenced
by a Revolving Loan Note payable to the order of that Lender in an amount
equal to its Commitment.
(b) Each Lender will endorse on the schedules annexed to its Notes, the date,
amount and maturity of each respective Loan made by it and the amount of
each payment of principal made by the Company with respect thereto. Each
Lender is irrevocably authorized by the Company to endorse its Notes and
each Lender's record shall be conclusive absent manifest error; provided,
--------
that the failure of a Lender to make, or an error in making, a notation
thereon with respect to any Loan shall not limit or otherwise affect the
obligations of the Company hereunder or under any such Note to such Lender.
2.3 Procedure for Borrowing.
-----------------------
(a) Each Borrowing of Revolving Loans shall be made upon the Company's
irrevocable written notice delivered to the Agent in the form of a Notice
of Borrowing (which notice must be received by the Agent prior to 10:00
a.m. Chicago time) (i)
three Business Days
-24-
<PAGE>
prior to the requested Borrowing Date, in the case of Offshore Rate Loans;
and (ii) one Business Day prior to the requested Borrowing Date, in the
case of Base Rate Loans, specifying:
(A) the amount of the Borrowing, which shall be in an aggregate
minimum amount of five hundred thousand dollars ($500,000) or any multiple
of five hundred thousand dollars ($500,000) in excess thereof;
(B) the requested Borrowing Date, which shall be a Business Day;
(C) the Type of Loans comprising the Borrowing; and
(D) the duration of the Interest Period applicable to such Loans
included in such notice. If the Notice of Borrowing fails to specify the
duration of the Interest Period for any Borrowing comprised of Offshore
Rate Loans, such Interest Period shall be three months;
notwithstanding the foregoing, the Company shall not be permitted, without the
Agent's consent, to submit a Notice of Borrowing which includes Offshore Rate
Loans prior to September 20, 1998.
(b) The Agent will promptly notify each Lender of its receipt of any Notice of
Borrowing and of the amount of such Lender's Commitment Percentage of that
Borrowing.
(c) Each Lender will make the amount of its Commitment Percentage of each
Borrowing available to the Agent for the account of the Company at the
Agent's Payment Office by 2:00 p.m. (Chicago time) on the Borrowing Date
requested by the Company in funds immediately available to the Agent. The
proceeds of all such Loans will then be made available to the Company by
the Agent at such office by crediting the account of the Company on the
books of BofA with the aggregate of the amounts made available to the Agent
by the Lenders and in like funds as received by the Agent.
(d) After giving effect to any Borrowing, there may not be more than eight
different Interest Periods in effect.
2.4 Conversion and Continuation Elections.
-------------------------------------
(a) The Company may, upon irrevocable written notice to the Agent:
(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, to
convert any such Loans (or any part thereof in an amount not less than
$500,000, or that is in an integral multiple of $500,000 in excess thereof)
into Loans of any other Type; or
(ii) elect to renew on the last day of the applicable Interest Period any
Revolving Loans or Term Loans having Interest Periods maturing on such day
(or any part thereof in an amount not less than $500,000, or that is in an
integral multiple of $500,000 in excess thereof);
-25-
<PAGE>
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 Company to continue such Loans as, and convert such Loans into, Offshore
Rate Loans shall terminate.
(b) The Company shall deliver a Notice of Conversion/Continuation to be
received by the Agent not later than 10:00 a.m. (Chicago time) at least
(i) three Business Days in advance of the Conversion/Continuation Date, if
the Loans are to be converted into or continued as Offshore Rate Loans; and
(ii) one Business Day prior to the Conversion/Continuation Date, if the
Loans are to be converted into Base Rate Loans, specifying:
(A) the proposed Conversion/Continuation Date;
(B) the aggregate amount of Loans to be converted or renewed;
(C) the Type of Loans resulting from the proposed conversion or
continuation; and
(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 Company has failed to select timely a new Interest Period to be
applicable to such Offshore Rate Loans, as the case may be, or if any
Default or Event of Default then exists, the Company 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) The Agent will promptly notify each Lender of its receipt of a Notice of
Conversion/Continuation, or, if no timely notice is provided by the
Company, the Agent will promptly notify each Lender of the details of any
automatic conversion. All conversions and continuations shall be made
ratably according to the respective outstanding principal amounts of the
Loans with respect to which the notice was given held by each Lender.
(e) Unless the Majority Lenders otherwise agree, during the existence of a
Default or Event of Default, the Company may not elect to have a Loan
converted into or continued as an Offshore Rate Loan.
(f) After giving effect to any conversion or continuation of Loans, there may
not be more than eight different Interest Periods in effect.
2.5 Voluntary Termination or Reduction of Revolving Commitments.
-----------------------------------------------------------
The Company may, upon not less than five Business Days' prior notice to the
Agent, terminate the Commitments, or permanently reduce the Commitments by an
aggregate minimum amount of $1,000,000 or any multiple of $500,000 in excess
thereof; unless, after giving effect thereto and to any prepayments of Loans
made on the effective date thereof, (a) the Effective Amount of all Revolving
Loans, and L/C Obligations together would exceed the amount of the combined
Commitments then in effect, or (b) the Effective Amount of all L/C Obligations
then outstanding
-26-
<PAGE>
would exceed the L/C Commitment. Once reduced in accordance with this Section,
the Commitments may not be increased. Any reduction of the Commitments shall be
applied pro rata to each Lender's Commitment. If and to the extent specified by
the Company in the notice to the Agent, some or all of the reduction in the
combined Commitments shall be applied to reduce the L/C Commitment. All accrued
commitment and letter of credit fees to, but not including, the effective date
of any reduction or termination of Commitments, shall be paid on the effective
date of such reduction or termination.
2.6 Optional Prepayments. Subject to Section 4.4, the Company may,
--------------------
without penalty or premium, at any time or from time to time, upon not less than
one Business Day's irrevocable notice to the Agent, ratably prepay Loans in
whole or in part, in minimum amounts 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, whether such prepayment should be applied to the Term Loans or
the Revolving Loans and the Type(s) of Loans to be prepaid. The Agent will
promptly notify each Lender of its receipt of any such notice, and of such
Lender's Commitment Percentage of such prepayment. If such notice is given by
the Company, the Company 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 4.4. Optional prepayments of Term Loans
shall be applied pro rata to all subsequent regularly scheduled principal
payments.
2.7 Mandatory Prepayments of Loans; Mandatory Commitment Reductions.
---------------------------------------------------------------
If on any date the Effective Amount of L/C Obligations exceeds the L/C
Commitment, the Company shall Cash Collateralize on such date the outstanding
Letters of Credit in an amount equal to the excess of the maximum amount then
available to be drawn under the Letters of Credit over the L/C Commitment.
Subject to Section 4.4, if on any date after giving effect to any Cash
Collateralization made on such date pursuant to the preceding sentence, the
Effective Amount of all Revolving Loans then outstanding plus the Effective
Amount of all L/C Obligations exceeds the Maximum Loan Availability, the Company
shall immediately, and without notice or demand, prepay the outstanding
principal amount of the Revolving Loans and L/C Advances by an amount equal to
the applicable excess.
2.8 Repayment.
---------
(a) The Term Credit. The Company shall repay the Term Loans on
---------------
the last Business Day of each calendar quarter of each year (commencing on
December 31, 1998) and on the Term Maturity Date (each a "Principal Payment
-----------------
Date") in an aggregate amount equal to the amount set forth below opposite such
- ----
Principal Payment Date:
-27-
<PAGE>
Principal Payment Date Amount
- -------------------------------- ---------------------------
December 31, 1998
Through September 30, 1999 $ 750,000
December 31, 1999
Through September 30, 2000 $1,250,000
December 31, 2000
Through June 30, 2001 $1,750,000
Term Maturity Date Balance of Term Loans
then outstanding
(b) The Revolving Credit. The Company shall repay to the Lenders in full on
--------------------
the Revolving Termination Date the aggregate principal amount of Revolving
Loans outstanding on such date.
2.9 Interest.
--------
(a) Each Revolving Loan and Term 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 or the Base Rate, as the case may be (and
subject to the Company's right to convert to other Types of Loans under
Section 2.4), plus the Applicable Margin.
----------- ----
(b) Interest on each Revolving Loan and Term Loan shall be paid in arrears on
each Interest Payment Date. Interest shall also be paid on the date of any
prepayment of Offshore Rate Loans under Section 2.6 or 2.7, upon payment
----------- ---
(including prepayment) in full of all Loans hereunder and, during the
existence of any Event of Default, interest shall be paid on demand of the
Agent at the request or with the consent of the Majority Lenders.
(c) Notwithstanding clause (a) of this Section, while any Event of Default
----------
under Section 9.1(a) exists or following written notice from the Majority
--------------
Lenders while any other Event of Default exists or after acceleration, the
Company shall pay interest (after as well as before entry of judgment
thereon to the extent permitted by law) on the principal amount of all
Loans due and unpaid, at a rate per annum which is determined by adding 2%
per annum to the Applicable Margin then in effect for such Loans; provided,
--------
that, on and after the expiration of any Interest Period applicable to any
Offshore Rate Loan outstanding on the date of occurrence of such Event of
Default or acceleration, the principal amount of such Loan shall, during
the continuation of such Event of Default or after acceleration, bear
interest at a rate per annum equal to the Base Rate plus the Applicable
Margin plus 2%.
(d) 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 respective Lender would be
-28-
<PAGE>
contrary to the provisions of any law applicable to such Lender limiting
the highest rate of interest that may be lawfully contracted for, charged
or received by such Lender, and in such event the Company shall pay such
Lender interest at the highest rate permitted by applicable law.
2.10 Fees. In addition to certain fees described in Section 3.8:
---- -----------
(a) Arrangement Fee. The Company shall pay to the Arranger for the Arranger's
---------------
own account an arrangement fee as required by the letter agreement between
the Company and the Arranger dated July 17, 1998.
(b) Commitment Fees. The Company shall pay to the Agent for the account of
---------------
each Lender a commitment fee on the average daily unused portion of such
Lender's Commitment, computed on a quarterly basis in arrears on the last
Business Day of each calendar quarter based upon the daily utilization for
that quarter as calculated by the Agent, at a rate per annum equal to the
Commitment Fee Applicable Margin from time to time in effect. For purposes
of calculating utilization under this subsection, the Commitments shall be
deemed used to the extent of the Effective Amount of Revolving Loans then
outstanding, plus the Effective Amount of L/C Obligations then outstanding.
Such commitment fee shall accrue from the Closing Date to the Revolving
Termination Date and shall be due and payable quarterly in arrears on the
last Business Day of each calendar quarter commencing on September 30, 1998
through the Revolving Termination Date, with the final payment to be made
on the Revolving Termination Date; provided that, in connection with any
--------
reduction or termination of Commitments under Section 2.5, the accrued
-----------
commitment fee calculated for the period ending on the date of such
reduction or termination shall also be paid on the date of such reduction
or termination, with the following quarterly payment being calculated on
the basis of the period from such reduction or termination date to such
quarterly payment date. The commitment fees provided in this subsection
shall accrue at all times after the above-mentioned commencement date,
including at any time during which one or more conditions in Article V are
---------
not met.
(c) Agency Fee. The Company shall pay to the Agent for the Agent's own account
----------
an agency fee in the amount and at the times set forth in a letter
agreement between the Company and the Agent dated July 17, 1998.
2.11 Computation of Fees and Interest.
--------------------------------
(a) All computations of interest for Base Rate Loans when the Base Rate is
determined by BofA's "reference rate" shall be made on the basis of a year
of 365 or 366 days, as the case may be, and actual days elapsed. All other
computations of fees and interest shall be made on the basis of a 360-day
year and actual days elapsed (which results in more interest being paid
than if computed on the basis of a 365-day year). Interest and fees shall
accrue during each period during which interest or such fees are computed
from the first day thereof to the last day thereof.
-29-
<PAGE>
2.12 Payments by the Company.
-----------------------
(a) All payments to be made by the Company shall be made without set-off,
recoupment or counterclaim. Except as otherwise expressly provided herein,
all payments by the Company shall be made to the Agent for the account of
the Lenders at the Agent's Payment Office, and shall be made in dollars and
in immediately available funds, no later than 12:00 noon (Chicago time) on
the date specified herein. The Agent will promptly distribute to each
Lender its pro rata share (or other applicable share as expressly provided
herein) of such payment in like funds as received. Any payment received by
the Agent later than 12:00 noon (Chicago time) shall be deemed to have been
received on the following Business Day and any applicable interest or fee
shall continue to accrue.
(b) Subject to the provisions set forth in the definition of "Interest Period"
herein, whenever any payment is due on a day other than a Business Day,
such payment shall be made on the following Business Day, and such
extension of time shall in such case be included in the computation of
interest or fees, as the case may be.
(c) Unless the Agent receives notice from the Company prior to the date on
which any payment is due to the Lenders that the Company will not make such
payment in full as and when required, the Agent may assume that the Company
has made such payment in full to the Agent on such date in immediately
available funds and the Agent may (but shall not be so required), in
reliance upon such assumption, distribute to each Lender on such due date
an amount equal to the amount then due such Lender. If and to the extent
the Company has not made such payment in full to the Agent, each Lender
shall repay to the Agent on demand such amount distributed to such Lender,
together with interest thereon at the Federal Funds Rate for each day from
the date such amount is distributed to such Lender until the date repaid.
2.13 Payments by the Lenders to the Agent.
------------------------------------
(a) Unless the Agent receives notice from a Lender on or prior to the Closing
Date or, with respect to any Borrowing after the Closing Date, at least one
Business Day prior to the date of such Borrowing, that such Lender will not
make available as and when required hereunder to the Agent for the account
of the Company the amount of that Lender's Commitment Percentage of the
Borrowing, the Agent may assume that each Lender has made such amount
available to the Agent in immediately available funds on the Borrowing Date
and the Agent may (but shall not be so required), in reliance upon such
assumption, make available to the Company on such date a corresponding
amount. If and to the extent any Lender shall not have made its full
amount available to the Agent in immediately available funds and the Agent
in such circumstances has made available to the Company such amount, that
Lender shall on the Business Day following such Borrowing Date make such
amount available to the Agent, together with interest at the Federal Funds
Rate for each day during such period. A notice of the Agent submitted to
any Lender with respect to amounts owing under this subsection (a) shall be
conclusive, absent manifest error. If such amount is so made available,
such payment to the Agent shall constitute such Lender's Loan on the date
of Borrowing for all purposes of this Agreement. If such amount is not
made available to the Agent on the Business Day following the Borrowing
Date, the Agent will notify the Company of such failure to fund and, upon
demand by the Agent, the Company shall pay such amount to the Agent for the
Agent's account,
-30-
<PAGE>
together with interest thereon for each day elapsed since
the date of such Borrowing, at a rate per annum equal to the interest rate
applicable at the time to the Loans comprising such Borrowing.
(b) The failure of any Lender to make any Loan on any Borrowing Date shall not
relieve any other Lender of any obligation hereunder to make a Loan on such
Borrowing Date, but no Lender shall be responsible for the failure of any
other Lender to make the Loan to be made by such other Lender on any
Borrowing Date.
2.14 Sharing of Payments, Etc. If, other than as expressly provided elsewhere
-------------------------
herein, any Lender shall obtain on account of the Loans made by it any non-
pro rata payment (whether voluntary, involuntary, through the exercise of
any right of set-off, or otherwise), such Lender shall immediately (a)
notify the Agent of such fact, and (b) purchase from the other Lenders such
participations in the Loans made by them as shall be necessary to cause
such purchasing Lender to share the excess payment pro rata with each of
them; provided, that if all or any portion of such excess payment is
--------
thereafter recovered from the purchasing Lender, such purchase shall to
that extent be rescinded and each other Lender shall repay to the
purchasing Lender the purchase price paid therefor, together with an amount
equal to such paying Lender's Commitment Percentage (according to the
proportion of (i) the amount of such paying Lender's required repayment to
(ii) the total amount so recovered from the purchasing Lender) of any
interest or other amount paid or payable by the purchasing Lender in
respect of the total amount so recovered. The Company agrees that any
Lender so purchasing a participation from another Lender may, to the
fullest extent permitted by law, exercise all its rights of payment
(including the right of set-off, but subject to Section 10.9) with respect
------------
to such participation as fully as if such Lender were the direct creditor
of the Company in the amount of such participation. The Agent will keep
records (which shall be conclusive and binding in the absence of manifest
error) of participations purchased under this Section and will in each case
notify the Lenders following any such purchases or repayments.
ARTICLE III
THE LETTERS OF CREDIT
---------------------
3.1 The Letter of Credit Subfacility.
--------------------------------
(a) On the terms and conditions set forth herein (i) the Issuing Bank agrees,
(A) from time to time on any Business Day during the period from the
Closing Date to the Revolving Termination Date to issue Letters of Credit
for the account of the Company for itself or on behalf of Stuart Hall, and
to amend or renew Letters of Credit previously issued by it, in accordance
with Sections 3.2(c) and 3.02(d), and (B) to honor drafts under the Letters
--------------- -------
of Credit; and (ii) the Lenders severally agree to participate in Letters
of Credit Issued for the account of the Company; provided, that the Issuing
--------
Bank shall not be obligated to Issue, and no Lender shall be obligated to
participate in, any Letter of Credit if as of the date of Issuance of such
Letter of Credit (the "Issuance Date") (1) the Effective Amount of all L/C
-------------
Obligations plus the Effective Amount of all Revolving Loans exceeds the
combined Commitments, (2) the participation of such Lender in the Effective
Amount of all L/C Obligations plus the Effective Amount of the Revolving
Loans of such Lender exceeds such Lender's Commitment, or (3) the Effective
Amount of L/C Obligations exceeds the L/C Commitment. Within the foregoing
limits, and
-31-
<PAGE>
subject to the other terms and conditions hereof, the Company's ability to
obtain Letters of Credit shall be fully revolving, and, accordingly, the
Company may, during the foregoing period, obtain Letters of Credit to
replace Letters of Credit which have expired or which have been drawn upon
and reimbursed.
(b) The Issuing Bank is under no obligation to Issue any Letter of Credit if:
(i) any order, judgment or decree of any Governmental Authority or
arbitrator shall by its terms purport to enjoin or restrain the Issuing
Bank from Issuing such Letter of Credit, or any Requirement of Law
applicable to the Issuing Bank or any request or directive (whether or not
having the force of law) from any Governmental Authority with jurisdiction
over the Issuing Bank shall prohibit, or request that the Issuing Bank
refrain from, the Issuance of letters of credit generally or such Letter of
Credit in particular or shall impose upon the Issuing Bank with respect to
such Letter of Credit any restriction, reserve or capital requirement (for
which the Issuing Bank is not otherwise compensated hereunder) not in
effect on the Closing Date, or shall impose upon the Issuing Bank any
unreimbursed loss, cost or expense which was not applicable on the Closing
Date and which the Issuing Bank in good faith deems material to it;
(ii) the Issuing Bank has received written notice from any Lender, the
Agent or the Company, on or prior to the Business Day prior to the
requested date of Issuance of such Letter of Credit, that one or more of
the applicable conditions contained in Article V is not then satisfied;
---------
(iii) the expiry date of any requested Letter of Credit is (A) more
than one year after the date of Issuance, unless the Majority Lenders have
approved such expiry date in writing, or (B) after the Revolving
Termination Date, unless all of the Lenders have approved such expiry date
in writing;
(iv) any requested Letter of Credit does not provide for drafts, or is
not otherwise in form and substance acceptable to the Issuing Bank, or the
Issuance of a Letter of Credit shall violate any applicable policies of the
Issuing Bank; or
(v) any standby Letter of Credit is for the purpose of supporting the
issuance of any letter of credit by any other Person.
3.2 Issuance, Amendment and Renewal of Letters of Credit.
----------------------------------------------------
(a) Each Letter of Credit shall be issued upon the irrevocable written request
of the Company received by the Issuing Bank at least five days (or such
shorter time as the Issuing Bank may agree in a particular instance in its
sole discretion) prior to the proposed date of issuance. Each such request
for issuance of a Letter of Credit shall be by facsimile, confirmed
immediately in an original writing, in the form of an L/C Application, and
shall specify in form and detail satisfactory to the Issuing Bank: (i) the
proposed date of issuance of the Letter of Credit (which shall be a
Business Day); (ii) the face amount of the Letter of Credit; (iii) the
expiry date of the Letter of Credit; (iv) the name and address of the
beneficiary thereof; (v) the documents to be presented by the beneficiary
of the Letter of Credit in case of any drawing
-32-
<PAGE>
thereunder; (vi) the full text of any certificate to be presented by the
beneficiary in case of any drawing thereunder; and (vii) such other matters
as the Issuing Bank may require.
(b) At least two Business Days prior to the Issuance of any Letter of Credit,
the Issuing Bank will confirm with the Agent (by telephone or in writing)
that the Agent has received a copy of the L/C Application or L/C Amendment
Application from the Company and, if not, the Issuing Bank will provide the
Agent with a copy thereof. Unless the Issuing Bank has received notice on
or before the Business Day immediately preceding the date the Issuing Bank
is to issue a requested Letter of Credit from the Agent (A) directing the
Issuing Bank not to issue such Letter of Credit because such issuance is
not then permitted under Section 3.1(a) as a result of the limitations set
--------------
forth in clauses (1) through (3) thereof or Section 3.1(b)(ii); or (B) that
------------------
one or more conditions specified in Article V are not then satisfied; then,
---------
subject to the terms and conditions hereof, the Issuing Bank shall, on the
requested date, issue a Letter of Credit for the account of the Company in
accordance with the Issuing Bank's usual and customary business practices.
(c) From time to time while a Letter of Credit is outstanding and prior to the
Revolving Termination Date, the Issuing Bank will, upon the written request
of the Company received by the Issuing Bank (with a copy sent by the
Company to the Agent) at least five days (or such shorter time as the
Issuing Bank may agree in a particular instance in its sole discretion)
prior to the proposed date of amendment, amend any Letter of Credit issued
by it. Each such request for amendment of a Letter of Credit shall be made
by facsimile, confirmed immediately in an original writing, made in the
form of an L/C Amendment Application and shall specify in form and detail
satisfactory to the Issuing Bank: (i) the Letter of Credit to be amended;
(ii) the proposed date of amendment of the Letter of Credit (which shall be
a Business Day); (iii) the nature of the proposed amendment; and (iv) such
other matters as the Issuing Bank may require. The Issuing Bank shall be
under no obligation to amend any Letter of Credit if: (A) the Issuing Bank
would have no obligation at such time to issue such Letter of Credit in its
amended form under the terms of this Agreement; or (B) the beneficiary of
any such letter of Credit does not accept the proposed amendment to the
Letter of Credit. The Agent will promptly notify the Lenders of the
receipt by it of any L/C Application or L/C Amendment Application.
(d) The Issuing Bank and the Lenders agree that, while a Letter of Credit is
outstanding and prior to the Revolving Termination Date, at the option of
the Company and upon the written request of the Company received by the
Issuing Bank (with a copy sent by the Company to the Agent) at least five
days (or such shorter time as the Issuing Bank may agree in a particular
instance in its sole discretion) prior to the proposed date of notification
of renewal, the Issuing Bank shall be entitled to authorize the automatic
renewal of any Letter of Credit issued by it. Each such request for
renewal of a Letter of Credit shall be made by facsimile, confirmed
immediately in an original writing, in the form of an L/C Amendment
Application, and shall specify in form and detail satisfactory to the
Issuing Bank: (i) the Letter of Credit to be renewed; (ii) the proposed
date of notification of renewal of the Letter of Credit (which shall be a
Business Day); (iii) the revised expiry date of the Letter of Credit; and
(iv) such other matters as the Issuing Bank may require. The Issuing Bank
shall be under no obligation so to renew any Letter of Credit if: (A) the
Issuing Bank would have no obligation at such time to issue or amend such
Letter of Credit in its renewed form under the terms of this Agreement; or
(B) the beneficiary of any such Letter of Credit does not accept the
proposed renewal of the Letter of
-33-
<PAGE>
Credit. If any outstanding Letter of Credit shall provide that it shall be
automatically renewed unless the beneficiary thereof receives notice from
the Issuing Bank that such Letter of Credit shall not be renewed, and if at
the time of renewal the Issuing Bank would be entitled to authorize the
automatic renewal of such Letter of Credit in accordance with this
subsection 3.2(e) upon the request of the Company but the Issuing Bank
-----------------
shall not have received any L/C Amendment Application from the Company with
respect to such renewal or other written direction by the Company with
respect thereto, the Issuing Bank shall nonetheless be permitted to allow
such Letter of Credit to renew, and the Company and the Lenders hereby
authorize such renewal, and, accordingly, the Issuing Bank shall be deemed
to have received an L/C Amendment Application from the Company requesting
such renewal.
(e) The Issuing Bank may, at its election (or as required by the Agent at the
direction of the Majority Lenders), deliver any notices of termination or
other communications to any Letter of Credit beneficiary or transferee, and
take any other action as necessary or appropriate, at any time and from
time to time, in order to cause the expiry date of such Letter of Credit to
be a date not later than the Revolving Termination Date.
(f) This Agreement shall control in the event of any conflict with any L/C-
Related Document (other than any Letter of Credit).
(g) The Issuing Bank will also deliver to the Agent, concurrently or promptly
following its delivery of a Letter of Credit, or amendment to or renewal of
a Letter of Credit, to an advising bank or a beneficiary, a true and
complete copy of each such Letter of Credit or amendment to or renewal of a
Letter of Credit.
3.3 Existing BofA Letters of Credit; Risk Participations, Drawings and
-----------------------------------------------------------------
Reimbursements.
- --------------
(a) On and after the Closing Date, the Existing BofA Letters of Credit
shall be deemed for all purposes, including for purposes of the fees to be
collected pursuant to subsections 3.8(a) and 3.8(c), and reimbursement of
------------------ -----
costs and expenses to the extent provided herein, Letters of Credit
outstanding under this Agreement and entitled to the benefits of this
Agreement and the other Loan Documents, and shall be governed by the
applications and agreements pertaining thereto and by this Agreement. Each
Lender shall be deemed to, and hereby irrevocably and unconditionally
agrees to, purchase from the Issuing Bank on the Closing Date a
participation in each such Letter of Credit and each drawing thereunder in
an amount equal to the product of (i) such Lender's Commitment Percentage
times (ii) the maximum amount available to be drawn under such Letter of
Credit and the amount of such drawing, respectively. For purposes of
Section 2.1(b) and Section 2.10(b), the Existing BofA Letters of Credit
------------- ---------------
shall be deemed to utilize pro rata the Commitment of each Lender.
(b) Immediately upon the Issuance of each Letter of Credit in addition to those
described in Section 3.3(a), each Lender shall be deemed to, and hereby
--------------
irrevocably and unconditionally agrees to, purchase from the Issuing Bank a
participation in such Letter of Credit and each drawing thereunder in an
amount equal to the product of (i) the Commitment Percentage of such
Lender, times (ii) the maximum amount available to be drawn under such
Letter of Credit and the amount of such drawing, respectively. For
purposes of Section 2.1(b),
--------------
-34-
<PAGE>
each Issuance of a Letter of Credit shall be deemed to utilize the
Commitment of each Lender by an amount equal to the amount of such
participation.
(c) In the event of any request for a drawing under a Letter of Credit by the
beneficiary or transferee thereof, the Issuing Bank will promptly notify
the Company. The Company shall reimburse the Issuing Bank prior to 10:00
a.m. (Chicago time), on each date that any amount is paid by the Issuing
Bank under any Letter of Credit (each such date, an "Honor Date"), in an
----------
amount equal to the amount so paid by the Issuing Bank. In the event the
Company fails to reimburse the Issuing Bank for the full amount of any
drawing under any Letter of Credit by 10:00 a.m. (Chicago time) on the
Honor Date, the Issuing Bank will promptly notify the Agent and the Agent
will promptly notify each Lender thereof, and the Company shall be deemed
to have requested that Base Rate Loans be made by the Lenders to be
disbursed on the Honor Date under such Letter of Credit, subject to the
amount of the unutilized portion of the Revolving Commitment and subject to
the conditions set forth in Section 5.2. Any notice given by the Issuing
-----------
Bank or the Agent pursuant to this Section 3.3(c) may be oral if
--------------
immediately confirmed in writing (including by facsimile); provided that
the lack of such an immediate confirmation shall not affect the
conclusiveness or binding effect of such notice.
(d) Each Lender shall upon any notice pursuant to Section 3.3(c) make available
--------------
to the Agent for the account of the relevant Issuing Bank an amount in
Dollars and in immediately available funds equal to its Commitment
Percentage of the amount of the drawing, whereupon the participating
Lenders shall (subject to Section 3.3(e)) each be deemed to have made a
--------------
Revolving Loan consisting of a Base Rate Loan to the Company in that
amount. If any Lender so notified fails to make available to the Agent for
the account of the Issuing Bank the amount of such Lender's Commitment
Percentage of the amount of the drawing by no later than 12:00 noon
(Chicago time) on the Honor Date, then interest shall accrue on such
Lender's obligation to make such payment, from the Honor Date to the date
such Lender makes such payment, at a rate per annum equal to the Federal
Funds Rate in effect from time to time during such period. The Agent will
promptly give notice of the occurrence of the Honor Date, but failure of
the Agent to give any such notice on the Honor Date or in sufficient time
to enable any Lender to effect such payment on such date shall not relieve
such Lender from its obligations under this Section 3.3.
-----------
(e) With respect to any unreimbursed drawing that is not converted into
Revolving Loans consisting of Base Rate Loans to the Company in whole or in
part, because of the Company's failure to satisfy the conditions set forth
in Section 5.2 or for any other reason, the Company shall be deemed to have
-----------
incurred from the Issuing Bank an L/C Borrowing in the amount of such
drawing, which L/C Borrowing shall be due and payable on demand (together
with interest) and shall bear interest at a rate per annum equal to the
Base Rate plus 2% per annum, and each Lender's payment to the Issuing Bank
pursuant to Section 3.3(d) shall be deemed payment in respect of its
--------------
participation in such L/C Borrowing and shall constitute an L/C Advance
from such Lender in satisfaction of its participation obligation under this
Section 3.3.
-----------
(f) Each Lender's obligation in accordance with this Agreement to make the
Revolving Loans or L/C Advances, as contemplated by this Section 3.3, as a
-----------
result of a drawing under a Letter of Credit, shall be absolute and
unconditional and without recourse to the Issuing Bank and shall not be
affected by any circumstance, including (i) any set-off, counterclaim,
-35-
<PAGE>
recoupment, defense or other right which such Lender may have against the
Issuing Bank, the Company or any other Person for any reason whatsoever;
(ii) the occurrence or continuance of a Default, an Event of Default or a
Material Adverse Effect; or (iii) any other circumstance, happening or
event whatsoever, whether or not similar to any of the foregoing; provided,
--------
that each Lender's obligation to make Revolving Loans under this Section
-------
3.3 is subject to the conditions set forth in Section 5.2.
--- -----------
3.4 Repayment of Participations.
---------------------------
(a) Upon (and only upon) receipt by the Agent for the account of the Issuing
Bank of immediately available funds from the Company (i) in reimbursement
of any payment made by the Issuing Bank under the Letter of Credit with
respect to which any Lender has paid the Agent for the account of the
Issuing Bank for such Lender's participation in the Letter of Credit
pursuant to Section 3.3 or (ii) in payment of interest thereon, the Agent
-----------
will pay to each Lender, in the same funds as those received by the Agent
for the account of the Issuing Bank, the amount of such Lender's Commitment
Percentage of such funds, and the Issuing Bank shall receive the amount of
the Commitment Percentage of such funds of any Lender that did not so pay
the Agent for the account of the Issuing Bank.
(b) If the Agent or the Issuing Bank is required at any time to return to the
Company, or to a trustee, receiver, liquidator, custodian, or any official
in any Insolvency Proceeding, any portion of the payments made by the
Company to the Agent for the account of the Issuing Bank pursuant to
Section 3.4(a) in reimbursement of a payment made under the Letter of
--------------
Credit or interest or fee thereon, each Lender shall, on demand of the
Agent, forthwith return to the Agent or the Issuing Bank the amount of its
Commitment Percentage of any amounts so returned by the Agent or the
Issuing Bank plus interest thereon from the date such demand is made to the
date such amounts are returned by such Lender to the Agent or the Issuing
Bank, at a rate per annum equal to the Federal Funds Rate in effect from
time to time.
3.5 Role of the Issuing Bank.
------------------------
(a) Each Lender and the Company agree that, in paying any drawing under a
Letter of Credit, the Issuing Bank shall not have any responsibility to
obtain any document (other than any sight draft and certificates expressly
required by the Letter of Credit) or to ascertain or inquire as to the
validity or accuracy of any such document or the authority of the Person
executing or delivering any such document.
(b) No Agent-Related Person nor any of the respective correspondents,
participants or assignees of the Issuing Bank shall be liable to any Lender
for: (i) any action taken or omitted in connection herewith at the request
or with the approval of the Lenders (including the Majority Lenders, as
applicable); (ii) any action taken or omitted in the absence of gross
negligence or willful misconduct; or (iii) the due execution,
effectiveness, validity or enforceability of any L/C-Related Document.
(c) The Company hereby assumes all risks of the acts or omissions of any
beneficiary or transferee with respect to its use of any Letter of Credit;
provided, that this assumption is not intended to, and shall not, preclude
--------
the Company's pursuing such rights and remedies
-36-
<PAGE>
as it may have against the beneficiary or transferee at law or under any
other agreement. No Agent-Related Person, nor any of the respective
correspondents, participants or assignees of the Issuing Bank, shall be
liable or responsible for any of the matters described in clauses (i)
through (vii) of Section 3.6; provided, however, anything in such clauses
----------- --------
to the contrary notwithstanding, that the Company may have a claim against
the Issuing Bank, and the Issuing Bank may be liable to the Company, to the
extent, but only to the extent, of any direct, as opposed to consequential
or exemplary, damages suffered by the Company which the Company proves were
caused by the Issuing Bank's willful misconduct or gross negligence or the
Issuing Bank's willful failure to pay under any Letter of Credit after the
presentation to it by the beneficiary of a sight draft and certificate(s)
strictly complying with the terms and conditions of a Letter of Credit. In
furtherance and not in limitation of the foregoing: (i) the Issuing Bank
may accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary; and (ii) the Issuing Bank shall not be
responsible for the validity or sufficiency of any instrument transferring
or assigning or purporting to transfer or assign a Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part,
which may prove to be invalid or ineffective for any reason.
3.6 Obligations Absolute. The obligations of the Company under this Agreement
--------------------
and any L/C-Related Document to reimburse the Issuing Bank for a drawing
under a Letter of Credit, and to repay any L/C Borrowing and any drawing
under a Letter of Credit converted into Revolving Loans, shall be
unconditional and irrevocable, and shall be paid strictly in accordance
with the terms of this Agreement and each such other L/C-Related Document
under all circumstances, including the following:
(i) any lack of validity or enforceability of this Agreement or any
L/C-Related Document;
(ii) any change in the time, manner or place of payment of, or in any
other term of, all or any of the obligations of the Company in respect of
any Letter of Credit or any other amendment or waiver of or any consent to
departure from all or any of the L/C-Related Documents;
(iii) the existence of any claim, set-off, defense or other right that
the Company may have at any time against any beneficiary or any transferee
of any Letter of Credit (or any Person for whom any such beneficiary or any
such transferee may be acting), the Issuing Bank or any other Person,
whether in connection with this Agreement, the transactions contemplated
hereby or by the L/C-Related Documents or any unrelated transaction;
(iv) any draft, demand, certificate or 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 or inaccurate in any respect; or any loss or delay in the
transmission or otherwise of any document required in order to make a
drawing under any Letter of Credit;
-37-
<PAGE>
(v) any payment by the Issuing Bank under any Letter of Credit against
presentation of a draft or certificate that does not strictly comply with
the terms of any Letter of Credit; or any payment made by the Issuing Bank
under any Letter of Credit to any Person purporting to be a trustee in
bankruptcy, debtor-in-possession, assignee for the benefit of creditors,
liquidator, receiver or other representative of or successor to any
beneficiary or any transferee of any Letter of Credit, including any
arising in connection with any Insolvency Proceeding;
(vi) any exchange, release or non-perfection of any collateral, or any
release or amendment or waiver of or consent to departure from any other
guarantee, for all or any of the obligations of the Company in respect of
any Letter of Credit; or
(vii) any other circumstance or happening whatsoever, whether or not
similar to any of the foregoing, including any other circumstance that
might otherwise constitute a defense available to, or a discharge of, the
Company or a guarantor;
provided, however, that the Company shall not be obligated to reimburse the
Issuing Bank for any wrongful payment made by the Issuing Bank under any
Letter of Credit as a result of acts or omissions constituting gross
negligence or willful misconduct on the part of the Issuing Bank or any of
its officers, employees or agents.
3.7 Cash Collateral Pledge. Upon (i) the request of the Agent, (A) if the
----------------------
Issuing Bank has honored any full or partial drawing request on any Letter
of Credit and such drawing has resulted in an L/C Borrowing hereunder, or
(B) if, as of the Revolving Termination Date, any Letters of Credit may for
any reason remain outstanding and partially or wholly undrawn, or (ii) the
occurrence of the circumstances described in Section 2.7(a) requiring the
--------------
Company to Cash Collateralize Letters of Credit, then, the Company shall
immediately Cash Collateralize the Obligations in an amount equal to the
L/C Obligations.
3.8 Letter of Credit Fees.
---------------------
(a) The Company shall pay to the Agent for the account of each of the Lenders a
letter of credit fee with respect to the Letters of Credit at a rate per
annum equal to the Offshore Rate Applicable Margin in effect from time to
time of the average daily maximum amount available to be drawn of the
outstanding Letters of Credit, computed on a quarterly basis in arrears on
the last Business Day of each calendar quarter based upon Letters of Credit
outstanding for that quarter as calculated by the Agent. Such letter of
credit fees shall be due and payable quarterly in arrears on the last
Business Day of each calendar quarter during which Letters of Credit are
outstanding, commencing on the first such quarterly date to occur after the
Closing Date, through the Revolving Termination Date (or such later date
upon which the outstanding Letters of Credit shall expire), with the final
payment to be made on the Revolving Termination Date (or such later
expiration date).
(b) The Company shall pay to the Issuing Bank from time to time on demand the
normal issuance, presentation, amendment and other processing fees, and
other standard costs and charges, of the Issuing Bank relating to letters
of credit as from time to time in effect.
-38-
<PAGE>
3.9 Uniform Customs and Practice. The Uniform Customs and Practice for
----------------------------
Documentary Credits as published by the International Chamber of Commerce
("UCP") most recently at the time of issuance of any Letter of Credit shall
---
(unless otherwise expressly provided in the Letters of Credit) apply to the
Letters of Credit.
ARTICLE IV
TAXES, YIELD PROTECTION AND ILLEGALITY
--------------------------------------
4.1 Taxes.
-----
(a) Any and all payments by the Company to each Lender or the Agent under this
Agreement and any other Loan Document shall be made free and clear of, and
without deduction or withholding for, any Taxes; provided, that the Lender
--------
has complied with the requirements of Section 10.10. In addition, the
-------------
Company shall pay all Other Taxes.
(b) If the Company 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 any Lender or the Agent, then:
(i) the sum payable shall be increased as necessary so that, after
making all required deductions and withholdings (including deductions and
withholdings applicable to additional sums payable under this Section),
such Lender or the Agent, as the case may be, 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 Company shall make such deductions and withholdings;
(iii) the Company shall pay the full amount deducted or withheld to the
relevant taxing authority or other authority in accordance with applicable
law; and
(iv) the Company shall also pay to each Lender or the Agent for the
account of such Lender, at the time interest is paid, Further Taxes in the
amount that the respective Lender specifies in good faith as necessary to
preserve the after-tax yield the Lender would have received if such Taxes,
Other Taxes or Further Taxes had not been imposed.
(c) The Company agrees to indemnify and hold harmless each Lender and the Agent
for the full amount of (i) Taxes, (ii) Other Taxes, and (iii) Further Taxes
in the amount that the respective Lender specifies in good faith as
necessary to preserve the after-tax yield the Lender 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. Payment under
this indemnification shall be made within 30 days after the date the Lender
or the Agent makes written demand therefor. Any refund or rebate actually
received, or the amount of any credit of which such Lender or Agent
actually makes use by a Lender or the Agent of Taxes, Other Taxes or
Further Taxes for which such Lender or the Agent, as the case may be, has
received indemnification from the Company shall be credited to the
Company's
-39-
<PAGE>
account with such Lender or the Agent to be applied against Obligation then
existing or thereafter arising or if no such Obligation exists, shall be
paid over to the Company within 60 days after receipt thereof or actual use
of any credit with respect thereto.
(d) Within 30 days after the date of any payment by the Company of Taxes, Other
Taxes or Further Taxes, the Company shall furnish to each Lender or the
Agent the original or a certified copy of a receipt evidencing payment
thereof, or other evidence of payment satisfactory to such Lender or the
Agent.
(e) If the Company is required to pay any amount to any Lender or the Agent
pursuant to subsection (b) or (c) of this Section, then such Lender 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 Company which may thereafter accrue, if such
change in the sole judgment of such Lender is not otherwise disadvantageous
to such Lender.
4.2 Illegality.
----------
(a) If any Lender determines that the introduction of any Requirement of Law,
or any change in any Requirement of Law, or in the interpretation or
administration of any Requirement of Law, has made it unlawful, or that any
central bank or other Governmental Authority has asserted that it is
unlawful, for any Lender or its applicable Lending Office to make Offshore
Rate Loans, then, on notice thereof by the Lender to the Company through
the Agent, any obligation of that Lender to make Offshore Rate Loans shall
be suspended until the Lender notifies the Agent and the Company that the
circumstances giving rise to such determination no longer exist.
(b) If a Lender determines that it is unlawful to maintain any Offshore Rate
Loan, the Company shall, upon its receipt of notice of such fact and demand
from such Lender (with a copy to the Agent), prepay in full such Offshore
Rate Loans of that Lender then outstanding, together with interest accrued
thereon and amounts required under Section 4.4, either on the last day of
-----------
the Interest Period thereof, if the Lender may lawfully continue to
maintain such Offshore Rate Loans to such day, or immediately, if the
Lender may not lawfully continue to maintain such Offshore Rate Loan. If
the Company is required to so prepay any Offshore Rate Loan, then
concurrently with such prepayment, the Company shall borrow from the
affected Lender, in the amount of such repayment, a Base Rate Loan.
(c) If the obligation of any Lender to make or maintain Offshore Rate Loans has
been so terminated or suspended, the Company may elect, by giving notice to
the Lender through the Agent that all Loans which would otherwise be made
by the Lender as Offshore Rate Loans shall be instead Base Rate Loans.
(d) Before giving any notice to the Agent under this Section, the affected
Lender shall designate a different Lending Office with respect to its
Offshore Rate Loans if such designation will avoid the need for giving such
notice or making such demand and will not, in the judgment of the Lender,
be illegal or otherwise disadvantageous to the Lender.
40
<PAGE>
4.3 Increased Costs and Reduction of Return.
---------------------------------------
(a) If any Lender 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 any Lender to the FDIC for
insuring U.S. deposits) in or in the interpretation of any law or
regulation (other than those relating to Taxes for which provision is made
under Section 4.1) or (ii) the compliance by that Lender 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
such Lender of agreeing to make or making, funding or maintaining any
Offshore Rate Loans or participating in Letters of Credit, or, in the case
of the Issuing Bank, any increase in the cost to the Issuing 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 Company shall be liable for, and shall from
time to time, upon demand (with a copy of such demand to be sent to the
Agent), pay to the Agent for the account of such Lender, additional amounts
as are sufficient to compensate such Lender for such increased costs.
(b) If any Lender shall have determined that (i) the introduction of any
Capital Adequacy Regulation, (ii) any change in any Capital Adequacy
Regulation, (iii) any change in the interpretation or administration of any
Capital Adequacy Regulation by any central bank or other Governmental
Authority charged with the interpretation or administration thereof, or
(iv) compliance by the Lender (or its Lending Office) or any corporation
controlling the Lender with any Capital Adequacy Regulation, affects or
would affect the amount of capital required or expected to be maintained by
the Lender or any corporation controlling the Lender and (taking into
consideration such Lender's or such corporation's policies with respect to
capital adequacy and such Lender's desired return on capital) determines
that the amount of such capital is increased as a consequence of its
Commitment, Loans, credits or obligations under this Agreement, then, upon
demand of such Lender to the Company through the Agent, the Company shall
pay to the Lender, from time to time as specified by the Lender, additional
amounts sufficient to compensate the Lender for such increase.
4.4 Funding Losses. The Company shall reimburse each Lender and hold each
--------------
Lender harmless from any loss or expense which the Lender may sustain or incur
as a consequence of:
(a) the failure of the Company to make on a timely basis any payment of
principal of any Offshore Rate Loan;
(b) the failure of the Company to borrow, continue or convert a Loan after the
Company has given (or is deemed to have given) a Notice of Borrowing or a
Notice of Conversion/ Continuation;
(c) the failure of the Company to make any prepayment in accordance with any
notice delivered under Section 2.6;
-----------
41
<PAGE>
(d) the prepayment (including pursuant to Section 2.7) 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 which such funds were obtained. For purposes of
calculating amounts payable by the Company to the Lenders under this Section and
under Section 4.3(a), each Offshore Rate Loan made by a Lender (and each related
--------------
reserve, special deposit or similar requirement) shall be conclusively deemed to
have been funded at the IBOR 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.
4.5 Inability to Determine Rates. If any Lender or the Agent 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 for any requested
Interest Period with respect to a proposed Offshore Rate Loan does not
adequately and fairly reflect the cost to such party of funding such Loan, the
Agent will promptly so notify the Company and each Lender. Thereafter, the
obligation of the Lenders to make or maintain Offshore Rate Loans, as the case
may be, hereunder shall be suspended until the Agent upon the instruction of the
Majority Lenders revokes such notice in writing. Upon receipt of such notice,
the Company may revoke any Notice of Borrowing or Notice of
Conversion/Continuation then submitted by it. If the Company does not revoke
such Notice, the Lenders shall make, convert or continue the Loans, as proposed
by the Company, in the amount specified in the applicable notice submitted by
the Company, but such Loans shall be made, converted or continued as Base Rate
Loans instead of Offshore Rate Loans, as the case may be.
4.6 Certificates of Lenders. Any Lender claiming reimbursement or compensation
-----------------------
under this Article IV shall deliver to the Company (with a copy to the Agent) a
----------
certificate setting forth in reasonable detail the amount payable to the Lender
hereunder and such certificate shall be conclusive and binding on the Company in
the absence of manifest error.
4.7 Substitution of Lenders. Upon the receipt by the Company from any Lender (an
------------------------
"Affected Lender") of a claim for compensation under Section 4.1 or 4.3, the
----------- ---
Company may: (i) request the Affected Lender to use its best efforts to obtain a
replacement bank or financial institution satisfactory to the Company to acquire
and assume all or a ratable part of all of such Affected Lender's Loans and
Commitment (a "Replacement Lender"); (ii) request one more of the other Lenders
to acquire and assume all or part of such Affected Lender's Loans and
Commitment; or (iii) designate a Replacement Lender. Any such designation of a
Replacement Lender under clause (i) or (iii) shall be subject to the prior
written consent of the Agent (which consent shall not be unreasonably withheld).
42
<PAGE>
4.8 Survival. The agreements and obligations of the Company in this Article IV
-------- ----------
shall survive the payment of all other Obligations.
ARTICLE V
CONDITIONS PRECEDENT
--------------------
5.1 Conditions of Initial Credit Extensions. The obligation of each Lender to
---------------------------------------
make its initial Credit Extension hereunder is subject to the condition that the
Agent have received on or before the Closing Date all of the following, in form
and substance satisfactory to the Agent and each Lender, and in sufficient
copies for each Lender:
(a) Credit Agreement. This Agreement duly executed by the Company and the
----------------
Parent;
(b) Notes. The respective Notes duly executed by the Company to the order of
-----
each Lender;
(c) Security Agreements. Security Agreements duly executed by the Company and
-------------------
Stuart Hall, respectively, together with all schedules thereto;
(d) Trademark Security Agreements. Trademark Security Agreements duly executed
-----------------------------
by the Company and Stuart Hall, respectively, together with all schedules
thereto;
(e) Mortgage. The Mortgage duly executed by the Company, together with an ALTA
--------
Loan Policy of Title Insurance with such endorsements as the Agent may
reasonably request, insuring the Agent in an amount reasonably acceptable
to the Agent and specifying the Mortgage as a first lien or charge subject
only to Permitted Liens;
(f) Leasehold Mortgage. The Leasehold Mortgage duly executed by Stuart Hall
------------------
encumbering Stuart Hall's leasehold estate created pursuant to the Kansas
City Lease, together with an ALTA Leasehold Loan Policy of Title Insurance
with such endorsements as the Agent may reasonably request, insuring the
Agent in an amount reasonably acceptable to the Agent and specifying the
Leasehold Mortgage as a first priority lien or charge on Stuart Hall's
interest in the Kansas City Lease, subject only to the standard survey
exception contained therein, Permitted Liens.
(g) Landlord's Consent. A Landlord's Consent executed by the respective
------------------
landlord of each parcel of real property set forth on Schedule 6.18 hereto
-------------
as leased by the Borrower or Stuart Hall, as the case may be (other than
such parcel of real property leased by the Borrower in California);
(h) Guaranty. A Guaranty duly executed by Stuart Hall;
--------
(i) Pledge Agreement. The Pledge Agreements duly executed by the Parent and
----------------
the Company, together with stock certificate(s) pledged thereunder and
related undated blank stock power(s);
43
<PAGE>
(j) 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
Agent to be filed, registered or recorded in order to create, in favor of
the Agent a perfected first Lien on the Collateral (except with respect to
any foreign intellectual property);
(k) Insurance. Evidence that the Company and the Subsidiaries have obtained
---------
the insurance policies required by this Agreement and the Collateral
Documents to which each is a party;
(l) Resolutions; Incumbency.
-----------------------
(i) Copies of the resolutions of the board of directors of the Company,
the Parent and Stuart Hall authorizing the transactions
contemplated hereby, certified as of the Closing Date by the
Secretary or an Assistant Secretary of such Person; and
(ii) A certificate of the Secretary or Assistant Secretary of the
Company, the Parent and Stuart Hall certifying the names and true
signatures of the officers of such Person authorized to execute,
deliver and perform, as applicable, this Agreement, and all other
Loan Documents to be delivered by it hereunder;
(m) Organization Documents; Good Standing. Each of the following documents:
-------------------------------------
(i) the articles or certificate of incorporation and the bylaws of the
Company, the Parent and Stuart Hall as in effect on the Closing
Date, certified by the Secretary or Assistant Secretary of such
Person as of the Closing Date; and
(ii) a good standing certificate for the Company, the Parent and Stuart
Hall from the Secretary of State (or similar, applicable
Governmental Authority) of its state of incorporation and each
state where the Company or Stuart Hall is qualified to do business
as a foreign corporation as of a recent date, together with a
bring-down certificate by facsimile, dated the Closing Date;
(n) Acquisition. A certificate signed by a Responsible Officer of the Company,
-----------
dated as of the Closing Date, to which is attached a true and correct copy
of the Acquisition Agreement and pro forma consolidated financial
statements of the Company and its consolidated Subsidiaries for the period
commencing on January 1, 1998 and ending on the last day of the most
recently completed calendar month calculated as if the Company's
Acquisition of Stuart Hall occurred on January 1, 1998 and stating that the
acquisition by the Company of all of the capital stock of Stuart Hall has
been consummated in accordance with the terms of the Acquisition Agreement;
(o) CMP Debt. A certificate signed by a Responsible Officer of the Parent,
--------
dated as of the Closing Date, to which is attached a true and correct copy
of the CMP Loan Agreement and stating that (i) the Parent is in receipt of
loan proceeds pursuant to the CMP Loan
44
<PAGE>
Agreement of not less than $40,000,000 and (ii) the Parent has made a
capital contribution to the Company of funds in an amount of not less than
$40,000,000;
(p) Subordination Agreement. A Subordination Agreement duly executed by
-----------------------
Citicorp Mezzanine Partners, L.P. and the Agent and acknowledged by the
Parent;
(q) Legal Opinions. An opinion of Kirkland & Ellis, counsel to the Company and
--------------
addressed to the Agent and the Lenders, substantially in the form of
Exhibit D;
---------
(r) Payment of Fees. Evidence of payment by the Company of all accrued and
---------------
unpaid fees, costs and expenses to the extent then due and payable on the
Closing Date, together with Attorney Costs of BofA to the extent invoiced
prior to or on the Closing Date, plus such additional amounts of Attorney
Costs as shall constitute BofA's reasonable estimate of Attorney Costs
incurred or to be incurred by it through the closing proceedings (provided
that such estimate shall not thereafter preclude final settling of accounts
between the Company and BofA); including any such costs, fees and expenses
arising under or referenced in Sections 2.10 and 10.4;
------------- ----
(s) Certificate. A certificate signed by a Responsible Officer of each of the
-----------
Company and the Parent, dated as of the Closing Date, stating that:
(i) the representations and warranties contained in Article VI are
----------
true and correct on and as of such date, as though made on and as
of such date;
(ii) no Default or Event of Default exists or would result from the
Credit Extension; and
(iii) there has occurred since December 31, 1997, no event or
circumstance that has resulted or could reasonably be expected to
result in a Material Adverse Effect;
(t) Borrowing Base. A certificate signed by a Responsible Officer of the
--------------
Company, substantially in the form of Exhibit L attached hereto, containing
---------
a computation of the Borrowing Base as of the last day of the calendar
month immediately preceding the Closing Date; and
(u) Other Documents. Such other approvals, opinions, documents or materials as
---------------
the Agent or any Lender may request.
5.2 Conditions to All Credit Extensions. The obligation of each Lender to make
-----------------------------------
any Loan to be made by it (including its initial Loan) and the obligation of the
Issuing Bank to Issue any Letter of Credit (including the initial Letter of
Credit) is subject to the satisfaction of the following conditions precedent on
the relevant Borrowing Date or Issuance Date:
(a) Notice, Application. The Agent shall have received (with, in the case of
-------------------
the initial Loan only, a copy for each Lender) a Notice of Borrowing or in
the case of any Issuance of any Letter of Credit, the Issuing Bank and the
Agent shall have received an L/C Application or L/C Amendment Application,
as required under Section 3.2;
-----------
45
<PAGE>
(b) Continuation of Representations and Warranties. The representations and
----------------------------------------------
warranties in Article VI shall be true and correct in all material respects
----------
on and as of such Borrowing Date with the same effect as if made on and as
of such Borrowing Date (except to the extent such representations and
warranties expressly refer to an earlier date, in which case they shall be
true and correct as of such earlier date); and
(c) No Existing Default. No Default or Event of Default shall exist or shall
-------------------
result from such Borrowing.
Each Notice of Borrowing and L/C Application or L/C Amendment Application
submitted by the Company hereunder shall constitute a representation and
warranty by the Company hereunder, as of the date of each such notice and as of
each Borrowing Date or Issuance Date, as applicable, that the conditions in
Section 5.2 are satisfied.
- -----------
ARTICLE VI
REPRESENTATIONS AND WARRANTIES
------------------------------
Each of the Company and the Parent represents and warrants to the Agent and
each Lender that:
6.1 Corporate Existence and Power. The Company, the Parent and each
-----------------------------
Subsidiary:
(a) is a corporation duly organized, validly existing and in good standing
under the laws of the jurisdiction of its incorporation;
(b) has the power and authority and all material governmental licenses,
authorizations, consents and approvals necessary to own its assets, carry
on its business and to execute, deliver, and perform its obligations under
the Loan Documents to which each is a party;
(c) is duly qualified as a foreign corporation and is in good standing under
the laws of each jurisdiction where its ownership, lease or operation of
property or the conduct of its business requires such qualification or
license; and
(d) is in compliance with all Requirements of Law; except, in each case
referred to in clause (c) or clause (d), to the extent that the failure to
do so could not reasonably be expected to have a Material Adverse Effect.
6.2 Corporate Authorization; No Contravention. The execution, delivery and
-----------------------------------------
performance by each of the Company, the Parent and the Subsidiaries of this
Agreement and/or any other Loan Document or Transaction Document to which such
Person is party, have been duly authorized by all necessary corporate action,
and do not and will not:
(a) contravene the terms of any of that Person's Organization Documents;
(b) conflict with or result in any breach or contravention of, or the creation
of any Lien (other than Permitted Liens) under, any document evidencing any
material Contractual
46
<PAGE>
Obligation to which such Person is a party or any order, injunction, writ
or decree of any Governmental Authority to which such Person or its
property is subject; or
(c) violate any Requirement of Law.
6.3 Governmental Authorization. No approval, consent, exemption,
--------------------------
authorization, or other action by, or notice to, or filing with, any
Governmental Authority is necessary or required in connection with the
execution, delivery or performance by, or enforcement against, the Company, the
Parent or any Subsidiaries of the Agreement or any other Loan Document or
Transaction Document to which each is a party which shall not have been obtained
prior to closing.
6.4 Binding Effect. This Agreement and/or each other Loan Document or
--------------
Transaction Document to which the Company, the Parent or any Subsidiaries is a
party constitutes the legal, valid and binding obligations of such Person to the
extent it is a party thereto, enforceable against such Person in accordance with
their respective terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting the enforcement of creditors'
rights generally or by equitable principles relating to enforceability.
6.5 Litigation. There are no actions, suits, proceedings, claims or disputes
----------
pending, or to the best knowledge of the Company and the Parent, threatened or
contemplated, at law, in equity, in arbitration or before any Governmental
Authority, against the Company, the Parent or the Subsidiaries or any of their
respective properties which:
(a) specifically purport to affect or pertain to this Agreement or any other
Loan Document or Transaction Document, or any of the transactions
contemplated hereby or thereby; or
(b) in any one case or in the aggregate, if determined adversely to the Parent,
the Company or its Subsidiaries, would reasonably be expected to have a
Material Adverse Effect. No injunction, writ, temporary restraining order
or any order of any nature has been issued by any court or other
Governmental Authority purporting to enjoin or restrain the execution,
delivery or performance of this Agreement or any other Loan Document, or
directing that the transactions provided for herein or therein not be
consummated as herein or therein provided.
6.6 No Default. No Default or Event of Default exists or would result from the
----------
incurring of any Obligations by the Company. As of the Closing Date, neither
the Company nor any Subsidiary is in default under or with respect to any
Contractual Obligation in any respect which, individually or together with all
such defaults, could reasonably be expected to have a Material Adverse Effect,
or that would, if such default had occurred after the Closing Date, create an
Event of Default under Section 9.1(e).
--------------
47
<PAGE>
6.7 ERISA Compliance.
----------------
(a) Except as specifically disclosed in Schedule 6.7, each Plan is in
------------
compliance in all material respects with the applicable provisions of
ERISA, the Code and other federal or state law. Each Plan which is
intended to qualify under Section 401(a) of the Code has received a
favorable determination letter from the IRS and to the best knowledge of
the Company and the Parent, nothing has occurred which would cause the loss
of such qualification.
(b) There are no pending, or to the best knowledge of Company and the Parent,
threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan which has resulted or could reasonably
be expected to result in a Material Adverse Effect. There has been no
prohibited transaction or other violation of the fiduciary responsibility
rule with respect to any Plan which could reasonably result in a Material
Adverse Effect.
(c) Except as specifically disclosed in Schedule 6.7, no ERISA Event has
------------
occurred or is reasonably expected to occur with respect to any Pension
Plan.
(d) Except as specifically disclosed in Schedule 6.7, no Pension Plan has any
------------
Unfunded Pension Liability. The aggregate Unfunded Pension Liability for
all Pension Plans does not exceed $250,000.
(e) Except as specifically disclosed in Schedule 6.7, the Company has not
------------
incurred, nor does it reasonably expect to incur, any liability under Title
IV of ERISA with respect to any Pension Plan (other than premiums due and
not delinquent under Section 4007 of ERISA).
(f) Except as specifically disclosed in Schedule 6.7, neither the Company, the
------------
Parent nor any Subsidiary has transferred any Unfunded Pension Liability to
any Person or otherwise engaged in a transaction that could be subject to
Section 4069 of ERISA.
(g) No trade or business (whether or not incorporated under common control with
the Company within the meaning of Section 414(b), (c), (m) or (o) of the
Code) maintains or contributes to any Pension Plan or other Plan subject to
Section 412 of the Code. Except as specifically disclosed in Schedule 6.7,
------------
neither the Company nor any Person under common control with the Company
(as defined in the preceding sentence) has ever contributed to any
multiemployer plan within the meaning of Section 4001(a)(3) of ERISA.
6.8 Use of Proceeds; Margin Regulations. The proceeds of the Loans are to be
-----------------------------------
used solely for the purposes set forth in and permitted by Section 7.11 and
------------
Section 8.7. Neither the Company, the Parent nor any Subsidiary is generally
- -----------
engaged in the business of purchasing or selling Margin Stock or extending
credit for the purpose of purchasing or carrying Margin Stock.
6.9 Title to Properties. The Company and each Subsidiary have good record and
-------------------
marketable title in fee simple to, or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of their respective
businesses, except for such defects in title as could not, individually or in
the aggregate, have a Material Adverse Effect. As of the Closing
48
<PAGE>
Date, the property of the Company, the Parent and each Subsidiary is subject to
no Liens, other than Permitted Liens.
6.10 Taxes. The Company, the Parent and each Subsidiary have filed all Federal
-----
and other material tax returns and reports required to be filed, and have paid
all Federal and other material taxes, assessments, fees and other governmental
charges levied or imposed upon them or their properties, income or assets
otherwise due and payable, except those which are being contested in good faith
by appropriate proceedings and for which adequate reserves have been provided in
accordance with GAAP or for which appropriate extensions have been received. The
Company has no actual knowledge of any tax assessment against the Company, the
Parent or any Subsidiary that would, if made, have a Material Adverse Effect.
6.11 Financial Condition.
-------------------
(a) The audited consolidated financial statements of the Company and its
Subsidiaries dated December 31, 1997, the unaudited financial statements of
the Company and its Subsidiaries dated June 30, 1998 and the related
consolidated statements of income or operations, shareholders' equity and
cash flows for the respective fiscal periods ended on such dates:
(i) were prepared in accordance with GAAP consistently applied
throughout the period covered thereby, except as otherwise
expressly noted therein, subject, in the case of the unaudited
statements, to ordinary, good faith year end audit adjustments;
(ii) fairly present the financial condition of the Company and its
Subsidiaries as of the dates thereof and results of operations for
the periods covered thereby; and
(iii) except as specifically disclosed in Schedule 6.11, show all
-------------
material Indebtedness and other material liabilities, direct or
contingent, of the Parent and its consolidated Subsidiaries as of
the date thereof, including liabilities for taxes, material
commitments and Contingent Obligations.
(b) Since December 31, 1997 there has been no Material Adverse Effect.
6.12 Environmental Matters. Each of the Company, the Parent and each
---------------------
Subsidiary conducts in the ordinary course of business a review of the effect of
existing Environmental Laws and existing Environmental Claims on its business,
operations and properties, and as a result thereof each such Person has
reasonably concluded that, except as specifically disclosed in Schedule 6.12,
-------------
such Environmental Laws and Environmental Claims could not, individually or in
the aggregate, reasonably be expected to have a Material Adverse Effect.
6.13 Regulated Entities. None of the Parent, any Person controlling the
------------------
Parent, or any Subsidiary of the Parent, is an "Investment Company" within the
meaning of the Investment Company Act of 1940, as amended. None of the Company,
the Parent or any Subsidiary of the Parent is a "holding company" or an
"affiliate" of a "holding company" or a "subsidiary
49
<PAGE>
company" of a "holding company" within the meaning of the Public Utility Holding
Company Act of 1935.material
6.14 No Burdensome Restrictions. Neither the Company nor the Parent nor any
--------------------------
Subsidiary is a party to or bound by any Contractual Obligation, or subject to
any restriction in any Organization Document, or any Requirement of Law, which
could reasonably be expected to have a Material Adverse Effect.
6.15 Copyrights, Patents, Trademarks and Licenses, etc. The Company, the Parent
--------------------------------------------------
or the Subsidiaries own or are licensed or otherwise have the right to use all
of the material patents, trademarks, service marks, trade names, copyrights and
contractual franchises that are reasonably necessary for the operation of their
respective businesses, without conflict with the rights of any other Person. To
the best knowledge of the Company and the Parent, no slogan or other advertising
device, product, process, method, substance, part or other material now
employed, or now contemplated to be employed, by the Company, the Parent or any
Subsidiary infringes in any material respect upon any rights held by any other
Person except to the extent any such infringement could not reasonably be
expected to have a Material Adverse Effect. Except as specifically disclosed in
Schedule 6.5, no claim or litigation regarding any of the foregoing is pending
- ------------
or threatened, and no statute, law, rule, regulation, standard or code is
pending or, to the knowledge of the Company, proposed, which, in either case,
could reasonably be expected to have a Material Adverse Effect.
6.16 Subsidiaries. The Company is a Wholly-Owned Subsidiary of the Parent and
------------
the Parent has no other Subsidiaries. The Company has no Subsidiaries other
than those specifically disclosed in part (a) of Schedule 6.16 hereto and has no
-------------
equity investments in any other corporation or entity other than those
specifically disclosed in part (b) of Schedule 6.16.
-------------
6.17 Insurance. Except as specifically disclosed in Schedule 6.17, the
--------- -------------
properties of the Company, the Parent and the Subsidiaries are insured with
insurance companies not Affiliates of the Parent, in such amounts, with such
deductibles and covering such risks as are customarily carried by companies
engaged in similar businesses and owning similar properties in localities where
the Company, the Parent or such Subsidiary operates.
6.18 Real Property. Schedule 6.18 hereto sets forth, as of the Closing Date, a
------------- -------------
complete and accurate list of the address and legal descriptions of any real
property owned or leased by the Company and each Subsidiary. The Parent does
not own or lease any real property.
6.19 Transaction Documents. As of the Closing Date, all representations and
---------------------
warranties of the Parent or the Company set forth in any of the Transaction
Documents are true and correct in all material respects.
6.20 Solvency. As of the Closing Date, each of the Company, the Parent and
--------
each Subsidiary is Solvent.
6.21 Year 2000. On the basis of a comprehensive review and assessment of the
---------
Company's systems and equipment and inquiry made of Company's material
suppliers, vendors and customers, the Company reasonably believes that the "Year
2000 problem" (that is, the inability of computers, as well as embedded
microchips in non-computing devices, to perform
50
<PAGE>
properly date-sensitive functions with respect to certain dates prior to and
after December 31, 1999), including costs of remediation, will not result in a
Material Adverse Effect. The Company has developed feasible contingency plans
which it believes are adequate to address on a timely basis the Year 2000
problem.
6.22 Full Disclosure. None of the representations or warranties made by the
---------------
Company, the Parent or any Subsidiary in the Loan Documents as of the date such
representations and warranties are made or deemed made, and none of the
statements contained in any exhibit, report, statement or certificate furnished
by or on behalf of the Company, the Parent or any Subsidiary in connection with
the Loan Documents (including the offering and disclosure materials delivered by
or on behalf of the Company to the Lenders prior to the Closing Date), contains
any untrue statement of a material fact or omits any material fact required to
be stated therein or necessary to make the statements made therein, in light of
the circumstances under which they are made, not misleading as of the time when
made or delivered.
ARTICLE VII
AFFIRMATIVE COVENANTS
---------------------
So long as any Lender shall have any Commitment hereunder, or any Loan or
other Obligation (other than wholly contingent indemnification obligations)
shall remain unpaid or unsatisfied, or any Letter of Credit shall remain
outstanding, unless the Majority Lenders waive compliance in writing:
7.1 Financial Statements. The Company shall deliver to the Agent, in form and
--------------------
detail satisfactory to the Agent and the Majority Lenders, with sufficient
copies for each Lender:
(a) as soon as available, but not later than 90 days after the end of each
fiscal year, a copy of the audited consolidated balance sheets of each of
the Company and its Subsidiaries and the Parent and its Subsidiaries as at
the end of such year and the related consolidated statements of income or
operations, shareholders' equity and cash flows for such year, setting
forth in each case in comparative form the figures for the previous fiscal
year, and accompanied by the opinion of Ernst & Young, L.L.P. or another
nationally-recognized independent public accounting firm ("Independent
-----------
Auditor") which reports shall state that such consolidated financial
-------
statements present fairly the financial position for the periods indicated
in conformity with GAAP applied on a basis consistent with prior years.
Such opinion shall not be qualified or limited because of a restricted or
limited examination by the Independent Auditor of any material portion of
the Company's, the Parent's or any Subsidiary's records;
(b) as soon as available, but not later than 45 days after the end of each of
the first three fiscal quarters of each fiscal year, a copy of the
unaudited consolidated balance sheet of the Company and its Subsidiaries as
of the end of such quarter and the related consolidated statements of
income, shareholders' equity and cash flows for the period commencing on
the first day and ending on the last day of such quarter, and certified by
a Responsible Officer of the Company as fairly presenting, in accordance
with GAAP (subject to ordinary, good faith year-end audit adjustments), the
financial position and the results of operations of the Company and the
Subsidiaries;
51
<PAGE>
(c) as soon as available, but not later than 30 days after the end of each of
the first two calendar months in each fiscal quarter, a copy of the
unaudited consolidated balance sheet of the Company and its Subsidiaries as
of the end of such calendar month and the related consolidated statements
of income, shareholders' equity and cash flows for the period commencing on
the first day and ending on the last day of such calendar month, and
certified by a Responsible Officer of the Company as fairly presenting, in
accordance with GAAP (subject to ordinary, good faith year-end audit
adjustments), the financial position and the results of operations of the
Company and the Subsidiaries;
(d) as soon as available, but not later than 90 days after the end of each
fiscal year, a copy of an unaudited consolidating balance sheet of each of
the Company and its Subsidiaries and the Parent and its Subsidiaries as at
the end of such year and the related consolidating statement of income,
shareholders' equity and cash flows for such year, certified by a
Responsible Officer of such Person as having been developed and used in
connection with the preparation of the financial statements referred to in
Section 7.1(a);
--------------
(e) as soon as available, but not later than 45 days after the end of each of
the first three fiscal quarters of each fiscal year, a copy of the
unaudited consolidating balance sheets of the Company and its Subsidiaries,
and the related consolidating statements of income, shareholders' equity
and cash flows for such quarter, all certified by a Responsible Officer of
the Company as having been developed and used in connection with the
preparation of the financial statements referred to in Section 7.1(b).
--------------
7.2 Certificates; Other Information. The Company shall furnish to the Agent,
-------------------------------
with sufficient copies for each Lender:
(a) concurrently with the delivery of the financial statements referred to in
Section 7.1(a), a certificate of the Independent Auditor stating that in
--------------
making the examination necessary therefor no knowledge was obtained of any
Default or Event of Default, except as specified in such certificate;
(b) concurrently with the delivery of the financial statements referred to in
Sections 7.1(a) and (b), a Compliance Certificate executed by a Responsible
--------------- ---
Officer of the Company;
(c) promptly, copies of all financial statements and reports that the Company
or the Parent sends to its shareholders, and copies of all financial
statements and regular, periodical or special reports (including Forms 10K,
10Q and 8K) that the Company, the Parent or any Subsidiary may make to, or
file with, the SEC;
(d) as soon as available, but in any event within 45 days after the beginning
of each fiscal year of the Company, a copy of the plan and forecast
(including a projected closing consolidated and consolidating balance
sheet, income statement and funds flow statements) of the Company for such
fiscal year;
(e) 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
certified by a Responsible Officer of the Company, in form and content
acceptable to the Agent;
52
<PAGE>
(f) within fifteen (15) days after the end of each month, an Inventory report
as of the end of such month for all Inventory locations certified by a
Responsible Officer of the Company, in form and content acceptable to the
Agent;
(g) 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 signed by a Responsible Officer of the Company,
substantially in the form of Exhibit L attached hereto, containing a
---------
computation of the Borrowing Base as of the last day of the immediately
preceding month; and
(h) promptly, such additional information regarding the business, financial or
corporate affairs of the Company, the Parent or any Subsidiary as the
Agent, at the request of any Lender, may from time to time reasonably
request.
7.3 Notices. The Company and the Parent shall promptly (but in any event
-------
within three (3) Business Days after any Responsible Officer of such Person
becomes aware) notify the Agent and each Lender:
(a) of the occurrence of any Default or Event of Default, together with a
description in reasonable detail of the circumstances relating to such
incurrence;
(b) of any matter that has resulted in a Material Adverse Effect, including (i)
breach or non-performance of, or any default under, a Contractual
Obligation of the Company, the Parent or any Subsidiary; (ii) any dispute,
litigation, investigation, proceeding or suspension between the Company,
the Parent or any Subsidiary and any Governmental Authority; or (iii) the
commencement of, or any material development in, any litigation or
proceeding affecting the Company, the Parent or any Subsidiary; including
pursuant to any applicable Environmental Laws;
(c) of any of the following events affecting the Company, the Parent or any
Subsidiary, together with a copy of any notice with respect to such event
that may be required to be filed with a Governmental Authority and any
notice delivered by a Governmental Authority to the Company or the Parent
with respect to such event:
(i) an ERISA Event which could reasonably be expected to result in
liability to the Company or the Parent on a consolidated basis in
excess of $100,000;
(ii) if any of the representations and warranties in Section 6.7
-----------
ceases to be true and correct;
(iii) the adoption of any new Pension Plan or other Plan subject to
Section 412 of the Code or the agreement to make contributions to
any new Pension Plan or other Plan subject to the Section 412 of
the Code which could reasonably be expected to result in
liability to the Company or the Parent on a consolidated basis in
excess of $100,000;
(iv) the adoption of any amendment to a Pension Plan or other Plan subject to
Section 412 of the Code, if such amendment results in a material increase
in
53
<PAGE>
contributions or Unfunded Pension Liability which could reasonably be
expected to result in liability to the Company or the Parent on a
consolidated basis in excess of $100,000; and
(d) of any material change in accounting policies or financial reporting
practices by the Company, the Parent or any of its consolidated
Subsidiaries.
Each notice under this Section shall be accompanied by a written
statement by a Responsible Officer of the Person giving such notice setting
forth details of the occurrence referred to therein, and stating what action the
Company, the Parent or any affected Subsidiary proposes to take with respect
thereto and at what time.
7.4 Preservation of Corporate Existence, Etc. The Company and the Parent
----------------------------------------
shall, and shall cause each Subsidiary to:
(a) preserve and maintain in full force and effect its corporate existence and
good standing under the laws of its state or jurisdiction of incorporation;
(b) preserve and maintain in full force and effect all governmental rights,
privileges, qualifications, permits, licenses and franchises necessary or
desirable in the normal conduct of its business; and
(c) preserve or renew all of its registered patents, trademarks, trade names
and service marks, the non-preservation of which could reasonably be
expected to have a Material Adverse Effect.
7.5 Maintenance of Property. Subject to the provisions of Section 8.2, the
----------------------- -----------
Company and the Parent shall maintain, and shall cause each Subsidiary to
maintain, and preserve all its property which is used or useful in its business
in good working order and condition, ordinary wear and tear excepted and make
all necessary repairs thereto and renewals and replacements thereof except where
the failure to do so could not reasonably be expected to have a Material Adverse
Effect. The Company and each Subsidiary shall use the standard of care typical
in the industry in the operation and maintenance of its facilities.
7.6 Insurance. The Company shall maintain, and shall cause each Subsidiary to
---------
maintain, with financially sound and reputable independent insurers, insurance
with respect to its properties and business against loss or damage of the kinds
customarily insured against by Persons engaged in the same or similar business,
of such types and in such amounts as are customarily carried under similar
circumstances by such other Persons.
7.7 Payment of Obligations. The Company and the Parent shall, and shall cause
----------------------
each Subsidiary to, pay and discharge as the same shall become due and payable,
all their respective obligations and liabilities, including:
(a) all tax liabilities, assessments and governmental charges or levies upon it
or its properties or assets, unless the same are being contested in good
faith by appropriate proceedings and adequate reserves in accordance with
GAAP are being maintained by the Company, the Parent or such Subsidiary, as
the case may be;
54
<PAGE>
(b) all other lawful claims which, if unpaid, would by law become a Lien upon
its property; and
(c) all indebtedness, as and when due and payable, but subject to any
subordination provisions contained in any instrument or agreement
evidencing such Indebtedness.
7.8 Compliance with Laws. The Company and the Parent shall comply, and shall
--------------------
cause each Subsidiary to comply, in all material respects with all Requirements
of Law of any Governmental Authority having jurisdiction over it or its business
(including the Federal Fair Labor Standards Act), except such as may be
contested in good faith or as to which a bona fide dispute may exist.
7.9 Inspection of Property and Books and Records. The Company and the Parent
--------------------------------------------
shall maintain, and shall cause each Subsidiary to maintain, proper books of
record and account, in which full, true and correct entries in conformity with
GAAP consistently applied shall be made of all financial transactions and
matters involving the assets and business of the Company, the Parent and such
Subsidiary. The Company and the Parent shall permit, and shall cause each
Subsidiary to permit, representatives and independent contractors of the Agent
or any Lender to visit and inspect any of their respective properties, to
examine their respective corporate, financial and operating records, and make
copies thereof or abstracts therefrom, and to discuss their respective affairs,
finances and accounts with their respective directors, officers, and independent
public accountants, all at such reasonable times during normal business hours
and as often as may be reasonably desired, upon reasonable advance notice to the
Company; provided, when an Event of Default exists the Agent or any Lender may
--------
do any of the foregoing at the expense of the Company at any time during normal
business hours and without advance notice; provided, further, that prior to the
-------- -------
occurrence of an Event of Default, such examinations shall be limited to not
more than four separate examinations per calendar year. For the avoidance of
doubt, prior to the occurrence of an Event of Default, neither the Agent nor any
Lender shall contact customers of the Company or any of its Subsidiaries in
connection with this Agreement or any other Loan Document.
7.10 Environmental Laws. The Company and the Parent shall, and shall cause
------------------
each Subsidiary to, conduct its operations and keep and maintain its property in
material compliance with all Environmental Laws.
7.11 Use of Proceeds. The Company shall use the proceeds of (a) the Term Loans
---------------
to consummate the Acquisition Agreement and (b) the Revolving Loans for working
capital and other general corporate (including, without limitation, consummation
of the Acquisition Agreement) purposes not in contravention of any Requirement
of Law or of any Loan Document.
7.12 Maintenance of Bank Accounts Maintain all bank accounts of the Parent,
----------------------------
the Company and each Subsidiary with the Agent which accounts shall be subject
to the customary fees of the Agent; provided, that the Company and its
--------
Subsidiaries may maintain in the ordinary course of business one or more payroll
and other operating accounts with parties other than the
55
<PAGE>
Agent, provided, further, that the aggregate deposit balances in all such
-------- -------
accounts shall at no time exceed $500,000.
7.13 Annual Clean-Up. For a period of not less than thirty (30) consecutive
---------------
days occurring between September 30 and November 15 of each fiscal year, reduce
the aggregate outstanding principal amount of Revolving Loans plus accrued
interest thereon to $25,000,000 or less.
ARTICLE VIII
NEGATIVE COVENANTS
------------------
So long as any Lender shall have any Commitment hereunder, or any Loan or
other Obligation (other than wholly contingent indemnification obligations)
shall remain unpaid or unsatisfied, or any Letter of Credit shall remain
outstanding, unless the Majority Lenders waive compliance in writing:
8.1 Limitation on Liens. The Company and the Parent shall not, and shall not
-------------------
suffer or permit any Subsidiary to, directly or indirectly, make, create, incur,
assume or suffer to exist any Lien upon or with respect to any part of its
property, whether now owned or hereafter acquired, other than the following
("Permitted Liens"):
- -----------------
(a) any Lien existing on property of the Company or any Subsidiary on the
Closing Date and set forth in Schedule 8.1;
------------
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental charges which are
not delinquent or remain payable without penalty, or to the extent that
non-payment thereof is permitted by Section 7.7, provided that no notice of
-----------
lien has been filed or recorded under the Code;
(d) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of
business which are not delinquent or remain payable without penalty or
which are being contested in good faith and by appropriate proceedings,
which proceedings have the effect of preventing the forfeiture or sale of
the property subject thereto;
(e) Liens (other than any Lien imposed by ERISA) consisting of pledges or
deposits required in the ordinary course of business in connection with
workers' compensation, unemployment insurance and other social security
legislation;
(f) Liens on the property of the Company or its Subsidiary securing (i) the
non-delinquent performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, (ii) contingent obligations
on surety and appeal bonds, and (iii) other non-delinquent obligations of a
like nature; in each case, incurred in the ordinary course of business,
provided all such Liens in the aggregate would not (even if enforced) cause
a Material Adverse Effect;
56
<PAGE>
(g) Liens consisting of judgment or judicial attachment liens, provided that
the enforcement of such Liens is effectively stayed and all such liens in
the aggregate at any time outstanding for the Company and its Subsidiaries
do not exceed $250,000;
(h) easements, encroachments, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount, and which do not in any case
materially detract from the value of the property subject thereto or
interfere with the ordinary conduct of the businesses of the Company and
its Subsidiaries;
(i) Liens arising solely by virtue of any statutory or common law provision
relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution; provided that (i) such deposit account is not a
-------- ----
dedicated cash collateral account and is not subject to restrictions
against access by the Company in excess of those set forth by regulations
promulgated by the FRB, and (ii) such deposit account is not intended by
the Company or any Subsidiary to provide collateral to the depository
institution;
(j) purchase money security interests on any property acquired or held by the
Company or its Subsidiaries in the ordinary course of business, securing
Indebtedness incurred or assume for the purpose of financing all or any
part of the cost of acquiring such property; provided that (i) any such
-------- ----
Lien attaches to such property concurrently with or within 20 days after
the acquisition thereof, (ii) such Lien attaches solely to the property so
acquired in such transaction, and (iii) the principal amount of the debt
secured thereby does not exceed 100% of the cost of such property,
provided, that such Indebtedness is otherwise permitted hereunder;
-------- ----
(k) Liens securing Capitalized Lease Liabilities, provided, that such
--------
Indebtedness is otherwise permitted; and
(l) other Liens securing Indebtedness the aggregate principal amount of which
shall not at any time exceed $100,000.
8.2 Disposition of Assets. The Company and the Parent shall not, and shall not
---------------------
suffer or permit any Subsidiary to, directly or indirectly, sell, assign, lease,
convey, transfer or otherwise voluntarily dispose of (whether in one or a series
of transactions) any property (including accounts and notes receivable, with or
without recourse) or enter into any agreement to do any of the foregoing,
except:
(a) dispositions of inventory, or used, worn-out or surplus equipment or
equipment that is no longer used by or useful to such Person in the conduct
of its business, all in the ordinary course of business;
(b) the sale of equipment to the extent that such equipment is exchanged for
credit against the purchase price of replacement equipment, or the proceeds
of such sale are reasonably promptly applied to the purchase price of such
replacement equipment;
(c) dispositions of assets by any Subsidiary to the Company or any Wholly-Owned
Subsidiary pursuant to reasonable business requirements;
57
<PAGE>
(d) dispositions of other assets by the Company or any Subsidiary in an
aggregate amount not to exceed $250,000, provided, that both before and
--------
after giving effect to such disposition no Default or Event of Default
shall have occurred and be continuing;
(e) licensing for fair consideration of intellectual property of the Company or
any Subsidiary in the ordinary course of business; and
(f) leases and subleases for fair consideration of real property owned or
leased by the Company or its Subsidiaries which is no longer used or useful
in the conduct of their respective businesses.
8.3 Consolidations and Mergers. The Company and the Parent shall not, and
--------------------------
shall not suffer or permit any Subsidiary to, merge, consolidate with or into,
or convey, transfer, lease 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 or in favor of any Person, except:
(a) any Subsidiary may merge with the Company, provided that the Company shall
be the continuing or surviving corporation, or with any one or more
Subsidiaries, provided that if any transaction shall be between a
Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall
be the continuing or surviving corporation; and
(b) any Subsidiary may sell all or substantially all of its assets (upon
voluntary liquidation or otherwise), to the Company or another Wholly-Owned
Subsidiary.
8.4 Loans and Investments. The Company and the Parent shall not purchase or
---------------------
acquire, or suffer or permit any Subsidiary to purchase or acquire, or make any
commitment therefor, any capital stock, equity interest, or any obligations or
other securities of, or any interest in, any Person, or make or commit to make
any Acquisitions, or make or commit to make any advance, loan, extension of
credit or capital contribution to or any other investment in, any Person
including any Affiliate of the Company, except for:
(a) investments in cash equivalents and short term marketable securities
maintained with, or pledged to, the Agent;
(b) extensions of credit in the nature of accounts receivable or notes
receivable arising from the sale or lease of goods or services in the
ordinary course of business;
(c) loans, advances and capital contributions by the Company to any of its
Wholly-Owned Subsidiaries or by any of its Wholly-Owned Subsidiaries to
another of its Wholly-Owned Subsidiaries;
(d) loans, advances and capital contributions by the Company to Vinylweld;
provided, that (i) the aggregate amount of all such investments actually
--------
made by the Company to Vinylweld (including the fair market value of all
tangible assets transferred by the Company to Vinylweld as a capital
contribution or otherwise) at any time outstanding shall in no event exceed
$4,000,000 and (ii) at all times during which such investments remain
outstanding
58
<PAGE>
Vinylweld shall be a Subsidiary of the Company, provided, further, that the
-------- -------
Company may accept from Vinylweld a promissory note issued by Vinylweld in the
principal amount of up to $5,000,000 if the consideration for the issuance of
such note does not include the transfer of funds or tangible assets from the
Company to Vinylweld; and
(e) loans and advances made by the Company 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 $100,000 with respect to such employee or of $500,000 with respect to
all employees of the Company.
8.5 Limitation on Indebtedness. The Company and the Parent shall not, and
--------------------------
shall not suffer or permit any Subsidiary to, create, incur, assume, suffer to
exist, or otherwise become or remain directly or indirectly liable with respect
to, any Indebtedness, except:
(a) Indebtedness incurred pursuant to this Agreement or any other Loan
Document;
(b) Indebtedness consisting of Contingent Obligations permitted pursuant to
Section 8.8 and Indebtedness of Subsidiaries permitted pursuant to Section
----------- -------
8.4(c) and (d);
------ ---
(c) Indebtedness existing on the Closing Date and set forth in Schedule 8.5 but
------------
no renewals, extensions or refinancings thereof;
(d) Indebtedness under the IRB Bonds;
(e) Indebtedness secured by Liens of the type permitted by Section 8.1(j) and
--------------
(k) in an aggregate amount outstanding not to exceed $15,000,000;
---
(f) the Subordinated Debt; provided, that (i) the aggregate principal amount
--------
outstanding under the 1997 Debt Indenture shall at no time exceed
$75,000,000 and (ii) the aggregate principal amount outstanding under the
CMP Loan Agreement shall at no time exceed $40,000,000; and
(g) other unsecured Indebtedness of a type not otherwise permitted pursuant to
the preceding clauses (a) through (f) in an aggregate amount not to exceed
----------- ---
$500,000.
8.6 Transactions with Affiliates. The Company shall not, and shall not suffer
----------------------------
or permit any Subsidiary to, enter into any transaction with any Affiliate of
the Company, except upon fair and reasonable terms no less favorable to the
Company or such Subsidiary than would obtain in a comparable arm's-length
transaction with a Person not an Affiliate of the Company or such Subsidiary;
provided, to the extent that any such transaction involves aggregate
- --------
consideration in excess of $1,500,000 then a majority of the disinterested
directors of the Board of Directors of the Company 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 Agent, that the terms of such
transaction are at least as favorable as the terms that could be obtained by the
Company or such Subsidiary, as the case 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 Company shall also
obtain, prior to the consummation of the
59
<PAGE>
transaction, the favorable opinion as to the fairness of the transaction to the
Company or such Subsidiary, from a financial point of view from an independent
financial advisor.
8.7 Use of Proceeds. The Company shall not, and shall not suffer or permit any
---------------
Subsidiary to, use any portion of the Loan proceeds or any Letter of Credit,
directly or indirectly, (i) to purchase or carry Margin Stock, (ii) to repay or
otherwise refinance indebtedness of the Company or others incurred to purchase
or carry Margin Stock, (iii) to extend credit for the purpose of purchasing or
carrying any Margin Stock, or (iv) to acquire any security in any transaction
that is subject to Section 13 or 14 of the Exchange Act.
8.8 Contingent Obligations. The Company and the Parent shall not, and shall
----------------------
not suffer or permit any Subsidiary to, create, incur, assume or suffer to exist
any Contingent Obligations except:
(a) endorsements for collection or deposit in the ordinary course of
business;
(b) indemnification obligations and any contingent purchase price adjustments
contained in the Transaction Documents;
(c) Contingent Obligations existing on the Closing Date and set forth in
Schedule 8.8;
------------
(d) Contingent Obligations in respect of interest rate Swap Contracts;
provided, that, the aggregate notional amount of all such Swap Contracts
--------
shall not exceed the aggregate principal amount of the Term Loan from time
to time outstanding; and
(e) other Contingent Obligations in an aggregate amount outstanding not to
exceed $250,000.
8.9 Joint Ventures. The Company and the Parent shall not, and shall not suffer
--------------
or permit any Subsidiary to enter into any Joint Venture, other than in the
ordinary course of business.
8.10 Lease Obligations. The Company and the Parent shall not, and shall not
-----------------
suffer or permit any Subsidiary to, create or suffer to exist any obligations as
lessee for the payment of rent for any real or personal property under leases or
agreements to lease (other than capital leases), except for:
(a) leases between the Company and one or more Subsidiaries; and
(b) other leases; provided that the aggregate annual rental payments for all
--------
such other leases shall not exceed in any fiscal year $2,500,000.
8.11 Restricted Payments. The Company shall not, and shall not suffer or
-------------------
permit any Subsidiary to, 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 Company; or allocate or otherwise
set apart any sum for the payment of any dividend or distribution on, or for the
60
<PAGE>
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 Company or any Subsidiary;
provided, that:
- --------
(a) the Company may declare and deliver dividends and make distributions
payable solely in its common stock;
(b) the Company 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 imposed on or measured by income or capital actually
owed by the Parent with respect to the consolidated net income or capital
of the Parent;
(c) so long as no Default or Event of Default shall have occurred and be
continuing or will result therefrom, (i) the Company may pay other
dividends provided that the aggregate amount of such other dividends paid
out from February 1, 1997 through the date of payment of such other
dividends shall not exceed 50% of the Company's cumulative consolidated net
income measured from the February 1, 1997 until the end of the most recent
fiscal quarter for which the Company delivered financial statements to the
Agent in accordance with Section 7.1, (ii) the Company 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 Company 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;
(d) (4) any Subsidiary may make distributions to the Company.
8.12 Subsidiary, Etc. The Company and the Parent shall not 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.
8.13 Assets of the Parent The Parent shall not acquire any assets other than its
--------
ownership of the stock of the Company and funds representing proceeds from the
CMP Loan Agreement or dividends from the Company.
8.14 Modification of Certain Agreements The Company and the Parent shall not,
-----------------------------------
and shall not suffer or permit any Subsidiary to, consent to any amendment,
supplement or other modification of any of the terms or provisions contained in,
or applicable to, such Person's Organizational Documents or any document or
agreement evidencing or governing Subordinated Debt, except to the extent that
such amendment, supplement or other modification (a) with respect to any
Organizational Document would not reasonably be expected to have a Material
Adverse Effect, or (b) with respect to any document or agreement evidencing or
governing Subordinated Debt, 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
61
<PAGE>
interest, amortization or subordination in a manner not adverse to the Lenders.
8.15 Subordinated Debt. The Company and the Parent shall not make (a) 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 document or agreement evidencing or governing such Subordinated
Debt, or (b) make any payment or voluntary or mandatory prepayment of principal
of, or redeem, purchase or defease, any Subordinated Debt other than with
proceeds of dividends paid to the Parent pursuant to Section 8.11(c).
---------------
8.16 Change in Business. The Company and the Parent shall not, and shall not
------------------
suffer or permit any Subsidiary to, engage in any material line of business
substantially different from those lines of business carried on by the Company,
the Parent and its Subsidiaries on the date hereof.
8.17 Accounting Changes. The Company and the Parent shall not, and shall not
------------------
suffer or permit any Subsidiary to, make any significant change in accounting
treatment or reporting practices, except as required by GAAP, or change the
fiscal year of the Company, the Parent or of any Subsidiary.
ARTICLE VIII A
--------------
FINANCIAL COVENANTS
-------------------
So long as any Lender shall have any Commitment hereunder, or any Loan or
other Obligation (other than wholly contingent indemnification obligations)
shall remain unpaid or unsatisfied, or any Letter of Credit shall remaining
outstanding, unless the Majority Lenders waive compliance in writing:
8A.1 Fixed Charge Coverage Ratio. The Company shall not permit, as of the
---------------------------
last day of any fiscal quarter occurring during the periods set forth below, for
the four consecutive fiscal quarter period then ended, the ratio of (a)
Consolidated EBITDA to (b) Consolidated Fixed Charges (the "Fixed Charge
Coverage Ratio") to be less than the minimum amount set forth below opposite
such period:
Period Ratio Level
------ -----------
December 31, 1998 through
December 31, 2000 1.50:1
Thereafter 1.75:1
8A.2 Net Worth. The Company shall not permit Consolidated Net Worth, at
---------
any time, to be less than the Minimum Consolidated Net Worth.
8A.3 Capital Expenditures. The Company shall not permit Consolidated
--------------------
Capital Expenditures during any fiscal year of the Company to exceed $5,000,000
plus any Rollover Amount. For purposes of this section "Rollover Amount" shall
mean for any fiscal year
62
<PAGE>
beginning after December 31, 1998, the amount by which $5,000,000 exceeds the
Consolidated Capital Expenditures during the prior fiscal year.
ARTICLE IX
EVENTS OF DEFAULT
-----------------
9.1 Event of Default. Any of the following shall constitute an "Event of
---------------- --------
Default":
- -------
(a) Non-Payment. The Company fails to pay, (i) when and as required to be paid
-----------
herein, any amount of principal of any Loan, (ii) within two (2) Business
Days after the same becomes due, any reimbursement obligations with respect
to any LC Obligation, or (iii) within five (5) Business Days after the same
becomes due, any interest, fee or any other amount payable hereunder or
under any other Loan Document; or
(b) Representation or Warranty. Any representation or warranty by the Company,
--------------------------
the Parent or any Subsidiary made or deemed made herein, in any Loan
Document, or which is contained in any certificate, document or financial
or other statement by the Company, the Parent or any Subsidiary, or any
Responsible Officer, furnished at any time under this Agreement, or in or
under any Loan Document, is incorrect in any material respect on or as of
the date made or deemed made; or
(c) Specific Defaults. The Company fails to perform or observe (i) any term,
-----------------
covenant or agreement contained in any of Section 7.1, 7.2, 7.3 or 7.9,
----------- --- --- ---
Article VIII (other than Section 8.1 thereof), or Article VIIIA or (ii) any
------------ ----------- -------------
term, covenant or agreement contained in Section 8.1 and such default shall
-----------
continue unremedied for a period of seven (7) Business Days; or
(d) Other Defaults. The Company, the Parent or any Subsidiary party thereto
--------------
fails to perform or observe any other term or covenant contained in this
Agreement or any other Loan Document, and such default shall continue
unremedied for a period of fifteen (15) Business Days after the date upon
which written notice thereof is given to the Company by the Agent or any
Lender; or
(e) Cross-Default. The Company, the Parent or any Subsidiary (i) fails to make
-------------
any payment in respect of any Indebtedness or Contingent Obligation having
an aggregate principal amount (including undrawn committed or available
amounts and including amounts owing to all creditors under any combined or
syndicated credit arrangement) of more than $500,000 when due (whether by
scheduled maturity, required prepayment, acceleration, demand, or
otherwise) and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such
failure; or (ii) fails to perform or observe any other condition or
covenant, or any other event shall occur or condition exist, under any
agreement or instrument relating to any such Indebtedness or Contingent
Obligation, and such failure continues after the applicable grace or notice
period, if any, specified in the relevant document on the date of such
failure if the effect of such failure, event or condition is to cause, or
to permit the holder or holders of such Indebtedness or beneficiary or
63
<PAGE>
beneficiaries of such Indebtedness (or a trustee or agent on behalf of such
holder or holders or beneficiary or beneficiaries) to cause such
Indebtedness to be declared to be due and payable prior to its stated
maturity, or such Contingent Obligation to become payable or cash
collateral in respect thereof to be demanded; or
(f) Insolvency; Voluntary Proceedings. The Company, the Parent or any
---------------------------------
Subsidiary (i) ceases or fails to be solvent, or generally fails to pay, or
admits in writing its inability to pay, its debts as they become due,
subject to applicable grace periods, if any, whether at stated maturity or
otherwise; (ii) voluntarily ceases to conduct its business in the ordinary
course; (iii) commences any Insolvency Proceeding with respect to itself;
or (iv) takes any action to effectuate or authorize any of the foregoing;
or
(g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is
-----------------------
commenced or filed against the Company, the Parent or any Subsidiary, or
any writ, judgment, warrant of attachment, execution or similar process, is
issued or levied against a substantial part of the Company's, the Parent's
or any Subsidiary's properties, and any such proceeding or petition shall
not be dismissed, or such writ, judgment, warrant of attachment, execution
or similar process shall not be released, vacated or fully bonded within 60
days after commencement, filing or levy; (ii) the Company, the Parent or
any Subsidiary admits the material allegations of a petition against it in
any Insolvency Proceeding, or an order for relief (or similar order under
non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the
Company, the Parent or any Subsidiary acquiesces in the appointment of a
receiver, trustee, custodian, conservator, liquidator, mortgagee in
possession (or agent therefor), or other similar Person for itself or a
substantial portion of its property or business; or
(h) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan which has
-----
resulted or could reasonably be expected to result in liability of the
Company, the Parent or any Subsidiary under Title IV of ERISA to the
Pension Plan or the PBGC in an aggregate amount in excess of $500,000; or
(ii) the commencement or increase of contributions to, or the adoption of
or the amendment of a Pension Plan by the Company, the Parent or any
Subsidiary which has resulted or could reasonably be expected to result in
an increase in Unfunded Pension Liability among all Pension Plans in an
aggregate amount in excess of $500,000; or
(i) Monetary Judgments. One or more non-interlocutory judgments, non-
------------------
interlocutory orders, decrees or arbitration awards is entered against the
Company, the Parent or any Subsidiary involving in the aggregate a
liability (to the extent not covered by independent third-party insurance
as to which the insurer does not dispute coverage) as to any single or
related series of transactions, incidents or conditions, of $500,000 or
more, and the same shall remain unsatisfied, unvacated and unstayed pending
appeal for a period of 30 days after the entry thereof; or
(j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is
----------------------
entered against the Company, the Parent or any Subsidiary which does or
would reasonably be expected to have a Material Adverse Effect, and there
shall be any period of 10 Business Days during which a stay of enforcement
of such judgment or order, by reason of a pending appeal or otherwise,
shall not be in effect; or
(k) Change of Control. There occurs any Change of Control; or
----------------
64
<PAGE>
(l) Collateral Matters. The Collateral Documents shall at any time after their
------------------
execution and delivery and for any reason (other than as a result of the
Agent's failure to file financing statements or any extensions or renewals
thereof) cease (A) to create a valid security interest (subject only to
Permitted Liens) in and to the property purported to be subject thereto, 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 Company,
the Parent 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
thereunder (subject to any applicable grace periods set forth therein), or
(ii) the Agent's Lien granted under any of the Collateral Documents shall
cease to be a first-priority Lien subject only to Permitted Liens; or
(m) Guaranty. Any 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 guaranty
under such Guaranty 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).
9.2 Remedies. If any Event of Default occurs and is continuing, the Agent
--------
shall, at the request of, or may, with the consent of, the Majority Lenders,
(a) declare the commitment of each Lender to make Loans and any obligation of
the Issuing Bank to Issue Letters of Credit to be terminated, whereupon
such commitments and obligation shall be terminated;
(b) declare an amount equal to the maximum aggregate amount that is or at any
time thereafter may become available for drawing under any outstanding
Letters of Credit (whether or not any beneficiary shall have presented, or
shall be entitled at such time to present, the drafts or other documents
required to draw under such Letters of Credit) to be immediately due and
payable, and declare the unpaid principal amount of all outstanding Loans,
all interest accrued and unpaid thereon, and all other amounts owing or
payable hereunder or under any other Loan Document to be immediately due
and payable, without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived by the Company;
(c) exercise on behalf of itself and the Lenders all rights and remedies
available to it and the Lenders under the Loan Documents or applicable law;
and
(d) if the IRB Letter of Credit shall then be issued and outstanding, give
notice to the trustee under the IRB Indenture directing such trustee to
declare the principal of all the IRB Bonds then outstanding and the
interest accrued thereon and any premium thereon and thereby owing to be
immediately due and payable;
provided, however, that upon the occurrence of any event specified in subsection
- -------- -------
(f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the
-----------
expiration of the 60-day period mentioned therein), the obligation of each
Lender to make Loans and any obligation of the Issuing Bank to Issue Letters of
Credit shall automatically terminate and the unpaid principal
65
<PAGE>
amount of all outstanding Loans and all interest and other amounts as aforesaid
shall automatically become due and payable without further act of the Agent, the
Issuing Bank or any Lender.
9.3 Rights Not Exclusive. The rights provided for in this Agreement and the
--------------------
other Loan Documents are cumulative and are not exclusive of any other rights,
powers, privileges or remedies provided by law or in equity, or under any other
instrument, document or agreement now existing or hereafter arising.
ARTICLE X
THE AGENT
---------
10.1 Appointment and Authorization.
-----------------------------
(a) Each Lender hereby irrevocably appoints, designates and authorizes the
Agent to take such action on its behalf under the provisions of this
Agreement and each other Loan Document and to exercise such powers and
perform such duties as are expressly delegated to it by the terms of this
Agreement or any other Loan Document, together with such powers as are
reasonably incidental thereto. Notwithstanding any provision to the
contrary contained elsewhere in this Agreement or in any other Loan
Document, the Agent shall not have any duties or responsibilities, except
those expressly set forth herein, nor shall the Agent have or be deemed to
have any fiduciary relationship with any Lender, and no implied covenants,
functions, responsibilities, duties, obligations or liabilities shall be
read into this Agreement or any other Loan Document or otherwise exist
against the Agent.
(b) The Issuing Bank shall act on behalf of the Lenders with respect to any
Letters of Credit Issued by it and the documents associated therewith until
such time and except for so long as the Agent may agree at the request of
the Majority Lenders to act for such Issuing Bank with respect thereto;
provided, that the Issuing Bank shall have all of the benefits and
--------
immunities (i) provided to the Agent in this Article X with respect to any
---------
acts taken or omissions suffered by the Issuing Bank in connection with
Letters of Credit Issued by it or proposed to be Issued by it and the
application and agreements for letters of credit pertaining to the Letters
of Credit as fully as if the term "Agent", as used in this Article X,
---------
included the Issuing Bank with respect to such acts or omissions, and (ii)
as additionally provided in this Agreement with respect to the Issuing
Bank.
10.2 Delegation of Duties. The Agent may execute any of its duties under this
--------------------
Agreement or any other Loan Document by or through agents, employees or
attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agent or attorney-in-fact that it selects with
reasonable care.
10.3 Liability of Agent. None of the Agent-Related Persons shall (i) be liable
------------------
for any action taken or omitted to be taken by any of them under or in
connection with this Agreement or any other Loan Document or the transactions
contemplated hereby (except for its own gross negligence or willful misconduct),
or (ii) be responsible in any manner to any of the Lenders for
66
<PAGE>
any recital, statement, representation or warranty made by the Company or any
Subsidiary or Affiliate of the Company, or any officer thereof, contained in
this Agreement or in any other Loan Document, or in any certificate, report,
statement or other document referred to or provided for in, or received by the
Agent under or in connection with, this Agreement or any other Loan Document, or
the validity, effectiveness, genuineness, enforceability or sufficiency of this
Agreement or any other Loan Document, or for any failure of the Company or any
other party to any Loan Document to perform its obligations hereunder or
thereunder. No Agent-Related Person shall be under any obligation to any Lender
to ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Company or any
of the Company's Subsidiaries or Affiliates.
10.4 Reliance by Agent.
-----------------
(a) The Agent shall be entitled to rely, and shall be fully protected in
relying, upon any writing, resolution, notice, consent, certificate,
affidavit, letter, telegram, facsimile, telex or telephone message,
statement or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons, and upon advice and statements of legal counsel (including counsel
to the Company), independent accountants and other experts selected by the
Agent. The Agent shall be fully justified in failing or refusing to take
any action under this Agreement or any other Loan Document unless it shall
first receive such advice or concurrence of the Majority Lenders as it
deems appropriate and, if it so requests, it shall first be indemnified to
its satisfaction by the Lenders against any and all liability and expense
which may be incurred by it by reason of taking or continuing to take any
such action. The Agent shall in all cases be fully protected in acting, or
in refraining from acting, under this Agreement or any other Loan Document
in accordance with a request or consent of the Majority Lenders and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all of the Lenders.
(b) For purposes of determining compliance with the conditions specified in
Section 4.1, each Lender that has executed this Agreement shall be deemed
-----------
to have consented to, approved or accepted or to be satisfied with, each
document or other matter either sent by the Agent to such Lender for
consent, approval, acceptance or satisfaction, or required thereunder to be
consented to or approved by or acceptable or satisfactory to the Lender.
10.5 Notice of Default. The Agent shall not be deemed to have knowledge or
-----------------
notice of the occurrence of any Default or Event of Default, except with respect
to defaults in the payment of principal, interest and fees required to be paid
to the Agent for the account of the Lenders, unless the Agent shall have
received written notice from a Lender or the Company referring to this
Agreement, describing such Default or Event of Default and stating that such
notice is a "notice of default". The Agent will notify the Lenders of its
receipt of any such notice. The Agent shall take such action with respect to
such Default or Event of Default as may be requested by the Majority Lenders in
accordance with Article IX; provided, that unless and until the Agent has
---------- --------
received any such request, the Agent may (but shall not be obligated to) take
such action, or refrain from taking such action, with respect to such Default or
Event of Default as it shall deem advisable or in the best interest of the
Lenders.
67
<PAGE>
10.6 Credit Decision. Each Lender acknowledges that none of the Agent-Related
---------------
Persons has made any representation or warranty to it, and that no act by the
Agent hereinafter taken, including any review of the affairs of the Company and
its Subsidiaries, shall be deemed to constitute any representation or warranty
by any Agent-Related Person to any Lender. Each Lender represents to the Agent
that it has, independently and without reliance upon any Agent-Related Person
and based on such documents and information as it has deemed appropriate, made
its own appraisal of and investigation into the business, prospects, operations,
property, financial and other condition and creditworthiness of the Company and
its Subsidiaries, and all applicable bank regulatory laws relating to the
transactions contemplated hereby, and made its own decision to enter into this
Agreement and to extend credit to the Company hereunder. Each Lender also
represents that it will, independently and without reliance upon any Agent-
Related Person and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement and the other
Loan Documents, and to make such investigations as it deems necessary to inform
itself as to the business, prospects, operations, property, financial and other
condition and creditworthiness of the Company. Except for notices, reports and
other documents expressly herein required to be furnished to the Lenders by the
Agent, the Agent shall not have any duty or responsibility to provide any Lender
with any credit or other information concerning the business, prospects,
operations, property, financial and other condition or creditworthiness of the
Company which may come into the possession of any of the Agent-Related Persons.
10.7 Indemnification. Whether or not the transactions contemplated hereby are
---------------
consummated, the Lenders shall indemnify upon demand the Agent-Related Persons
(to the extent not reimbursed by or on behalf of the Company and without
limiting the obligation of the Company to do so), pro rata, from and against any
and all Indemnified Liabilities; provided, that no Lender shall be liable for
--------
the payment to the Agent-Related Persons of any portion of such Indemnified
Liabilities resulting solely from such Person's gross negligence or willful
misconduct. Without limitation of the foregoing, each Lender shall reimburse
the Agent upon demand for its ratable share of any costs or out-of-pocket
expenses (including Attorney Costs) incurred by the Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement,
any other Loan Document, or any document contemplated by or referred to herein,
to the extent that the Agent is not reimbursed for such expenses by or on behalf
of the Company. The undertaking in this Section shall survive the payment of
all Obligations hereunder and the resignation or replacement of the Agent.
10.8 Agent in Individual Capacity. BofA and its Affiliates may make loans to,
----------------------------
issue letters of credit for the account of, accept deposits from, acquire equity
interests in and generally engage in any kind of banking, trust, financial
advisory, underwriting or other business with the Company and its Subsidiaries
and Affiliates as though BofA were not the Agent or the Issuing Bank hereunder
and without notice to or consent of the Lenders. The Lenders acknowledge that,
pursuant to such activities, BofA or its Affiliates may receive information
regarding the Company or its Affiliates (including information that may be
subject to confidentiality obligations in favor of the Company or such
Subsidiary) and acknowledge that the Agent shall be under no obligation to
provide such information to them. With respect to its Loans, BofA
68
<PAGE>
shall have the same rights and powers under this Agreement as any other Lender
and may exercise the same as though it were not the Agent or the Issuing Bank.
10.9 Successor Agent. The Agent may, and at the request of the Majority
---------------
Lenders shall, resign as Agent upon 30 days' notice to the Lenders. If the
Agent resigns under this Agreement, the Majority Lenders shall appoint from
among the Lenders a successor agent for the Lenders which successor agent shall
be approved by the Company. If no successor agent is appointed prior to the
effective date of the resignation of the Agent, the Agent may appoint, after
consulting with the Lenders and the Company, a successor agent from among the
Lenders. Upon the acceptance of its appointment as successor agent hereunder,
such successor agent shall succeed to all the rights, powers and duties of the
retiring Agent and the term "Agent" shall mean such successor agent and the
retiring Agent's appointment, powers and duties as Agent shall be terminated.
After any retiring Agent's resignation hereunder as Agent, the provisions of
this Article X and Sections 11.4 and 11.5 shall inure to its benefit as to any
--------- ------------- ----
actions taken or omitted to be taken by it while it was Agent under this
Agreement. If no successor agent has accepted appointment as Agent by the date
which is 30 days following a retiring Agent's notice of resignation, the
retiring Agent's resignation shall nevertheless thereupon become effective and
the Lenders shall perform all of the duties of the Agent hereunder until such
time, if any, as the Majority Lenders appoint a successor agent as provided for
above. Notwithstanding the foregoing, however, BofA may not be removed as the
Agent at the request of the Majority Lenders unless BofA shall also
simultaneously be replaced as "Issuing Bank" hereunder pursuant to documentation
in form and substance reasonably satisfactory to BofA.
10.10 Withholding Tax.
---------------
(a) If any Lender is a "foreign corporation, partnership or trust" within the
meaning of the Code and such Lender claims exemption from U.S. withholding
tax under Section 1441 or 1442 of the Code, such Lender agrees with and in
favor of the Agent, to deliver to the Agent: (i) if such Lender claims an
exemption from, or a reduction of, withholding tax under a United States
tax treaty, properly completed IRS Forms 1001 and W-8 before the payment of
any interest in the first calendar year and before the payment of any
interest in each third succeeding calendar year during which interest may
be paid under this Agreement; (ii) if such Lender claims that interest paid
under this Agreement is exempt from United States withholding tax because
it is effectively connected with a United States trade or business of such
Lender, two properly completed and executed copies of IRS Form 4224 before
the payment of any interest is due in the first taxable year of such Lender
and in each succeeding taxable year of such Lender during which interest
may be paid under this Agreement, and IRS Form W-9; and (iii) such other
form or forms as may be required under the Code or other laws of the United
States as a condition to exemption from, or reduction of, United States
withholding tax. Such Lender agrees to promptly notify Agent of any change
in circumstances which would modify or render invalid any claimed exemption
or reduction. In addition, in the event any Lender claims exemption from,
or reduction of, withholding tax under a United States tax treaty by
providing IRS Form 1001 and such Lender sells, assigns, grants a
participation in, or otherwise transfers all or part of the obligations of
the Company to such Lender under this Agreement, such Lender agrees to
notify Agent of the percentage amount in which it is no longer the
beneficial owner of obligations of the Company to such Lender under this
Agreement. To the extent of such percentage amount, the Agent will treat
such Lender's IRS Form 1001 as no longer valid. In the
69
<PAGE>
event any Lender claiming exemption from United States withholding tax by
filing IRS Form 4224 with the Agent sells, assigns, grants a participation
in, or otherwise transfers all or part of the obligations of the Company to
such Lender under this Agreement, such Lender agrees to undertake sole
responsibility for complying with the withholding tax requirements imposed
by Sections 1441 and 1442 of the Code.
(b) If any Lender is entitled to a reduction in the applicable withholding tax,
the Agent may withhold from any interest payment to such Lender an amount
equivalent to the applicable withholding tax after taking into account such
reduction. If the forms or other documentation required by subsection (a)
are not delivered to the Agent, then the Agent may withhold from any
interest payment to such Lender not providing such forms or other
documentation an amount equivalent to the applicable withholding tax.
(c) If the IRS or any other Governmental Authority of the United States or
other jurisdiction asserts a claim that the Agent did not properly withhold
tax from amounts paid to or for the account of any Lender (because the
appropriate form was not delivered, was not properly executed, or because
such Lender failed to notify the Agent of a change in circumstances which
rendered the exemption from, or reduction of, withholding tax ineffective,
or for any other reason) such Lender shall indemnify the Agent fully for
all amounts paid, directly or indirectly, by the Agent as tax or otherwise,
including penalties and interest, and including any taxes imposed by any
jurisdiction on the amounts payable to the Agent under this Section,
together with all costs and expenses (including Attorney Costs). The
obligation of the Lenders in this subsection shall survive the payment of
all Obligations hereunder and the resignation or replacement of the Agent.
ARTICLE XI
MISCELLANEOUS
-------------
11.1 Amendments, Waivers and Collateral Releases.
-------------------------------------------
(a) No amendment or waiver of any provision of this Agreement or any other
Loan Document, and no consent with respect to any departure by the
Company, the Parent or any applicable Subsidiary therefrom, shall be
effective unless the same shall be in writing and signed by the Majority
Lenders and the Company and acknowledged by the Agent, and then such
waiver shall be effective only in the specific instance and for the
specific purpose for which given; provided, however, that no such waiver,
----- --------
amendment, or consent shall, unless in writing and signed by all the
Lenders and the Company and acknowledged by the Agent, do any of the
following:
(i) increase or extend the Commitment of any Lender (or
reinstate any Commitment terminated pursuant to Section
8.2(a)) or subject any Lender to any additional
obligations;
(ii) postpone or delay any date fixed for any payment of
principal, interest, fees or other amounts due to the
Lenders (or any of them) hereunder or under any Loan
Document;
70
<PAGE>
(iii) reduce the principal of, or the rate of interest
specified herein on any Loan, or (subject to clause (ii)
below) any fees or other amounts payable hereunder or
under any other Loan Document;
(iv) change the percentage of the Commitments or of the
aggregate unpaid principal amount of the Loans which is
required for all of the Lenders or any of them to take
any action hereunder; or
(v) amend this Section, or Section 2.14, or any provision
------------
herein providing for consent or other action by all
Lenders;
and, provided further, that (1) no amendment, waiver or consent shall, unless in
-------- -------
writing and signed by the Issuing Bank in addition to the Majority Lenders or
all the Lenders, as the case may be, affect the rights or duties of the Issuing
Bank under this Agreement or any L/C-Related Document relating to any Letter of
Credit Issued or to be Issued by it, (2) no amendment, waiver or consent shall,
unless in writing and signed by the Agent in addition to the Majority Lenders or
all the Lenders, as the case may be, affect the rights or duties of the Agent
under this Agreement or any other Loan Document, and (3) the Fee Letters may be
amended, or rights or privileges thereunder waived, in a writing executed by the
parties thereto.
(b) The Lenders irrevocably authorize the Agent to, and the Agent shall, release
any Lien granted to or held by the Agent upon any Collateral (i) upon
termination of the Commitment and payment in full of all Obligations other
than wholly contingent indemnification obligations or (ii) with respect to
any assets or other property disposed of in accordance with the terms of
this Agreement or any of the other Loan Documents.
11.2 Notices.
-------
(a) All notices, requests and other communications shall be in writing
(including, unless the context expressly otherwise provides, by facsimile
transmission, provided that any matter transmitted by the Company by
facsimile (i) shall be immediately confirmed by a telephone call to the
recipient at the number specified on the applicable signature page hereof,
and (ii) shall be followed promptly by delivery of a hard copy original
thereof) and mailed (including by overnight courier), faxed or delivered,
to the address or facsimile number specified for notices on the applicable
signature page hereof; or, as directed to the Company or the Agent, to such
other address as shall be designated by such party in a written notice to
the other parties, and as directed to any other party, at such other
address as shall be designated by such party in a written notice to the
Company and the Agent.
(b) All such notices, requests and communications shall, when transmitted by
overnight delivery, or faxed, be effective when delivered for overnight
(next-day) delivery, or transmitted in legible form by facsimile machine,
respectively, or if mailed, upon the third Business Day after the date
deposited into the U.S. mail, or if delivered, upon delivery; except that
notices pursuant to Article II, III or X shall not be effective until
---------- --- -
actually received by the Agent, and notices pursuant to Article III to the
-----------
Issuing Bank shall not be effective until actually received by the Issuing
Bank at the address specified for the "Issuing Bank" on the applicable
signature page hereof.
71
<PAGE>
(c) Any agreement of the Agent and the Lenders herein to receive certain
notices by telephone or facsimile is solely for the convenience and at the
request of the Company. The Agent and the Lenders shall be entitled to
rely on the authority of any Person purporting to be a Person authorized by
the Company to give such notice and the Agent and the Lenders shall not
have any liability to the Company or other Person on account of any action
taken or not taken by the Agent or the Lenders in reliance upon such
telephonic or facsimile notice. The obligation of the Company to repay the
Loans and L/C Obligations shall not be affected in any way or to any extent
by any failure by the Agent and the Lenders to receive written confirmation
of any telephonic or facsimile notice or the receipt by the Agent and the
Lenders of a confirmation which is at variance with the terms understood by
the Agent and the Lenders to be contained in the telephonic or facsimile
notice.
11.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in
------------------------------
exercising, on the part of the Agent or any Lender, any right, remedy, power or
privilege hereunder, shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, remedy, power or privilege hereunder preclude any
other or further exercise thereof or the exercise of any other right, remedy,
power or privilege.
11.4 Costs and Expenses. The Company shall:
------------------
(a) whether or not the transactions contemplated hereby are consummated, pay or
reimburse BofA (including in its capacity as Agent and Issuing Bank) within
five Business Days after demand (subject to Section 5.1(r)) for all costs
--------------
and expenses incurred by BofA (including in its capacity as Agent and
Issuing Bank) in connection with the development, preparation, delivery,
administration and execution of, and any amendment, supplement, waiver or
modification to (in each case, whether or not consummated), this Agreement,
any Loan Document and any other documents prepared in connection herewith
or therewith, and the consummation of the transactions contemplated hereby
and thereby, including reasonable Attorney Costs incurred by BofA
(including in its capacity as Agent and Issuing Bank) with respect thereto;
and
(b) pay or reimburse the Agent and each Lender within five Business Days after
demand (subject to subsection 5.1(r)) for all costs and expenses (including
-----------------
Attorney Costs) incurred by them in connection with the enforcement,
attempted enforcement, or preservation of any rights or remedies under this
Agreement or any other Loan Document during the existence of an Event of
Default or after acceleration of the Loans (including in connection with
any "workout" or restructuring regarding the Loans, and including in any
Insolvency Proceeding or appellate proceeding).
11.5 Indemnity. Whether or not the transactions contemplated hereby are
---------
consummated, the Company shall indemnify and hold the Agent-Related Persons, and
each Lender and each of its respective officers, directors, employees, counsel,
agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and
------------------
against any and all liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, charges, expenses and disbursements (including
Attorney Costs) of any kind or nature whatsoever which may at any time
(including at any time following repayment of the Loans, the termination of the
Letters of Credit and the termination, resignation or replacement of the Agent
or replacement of
72
<PAGE>
any Lender) be imposed on, incurred by or asserted against any such Person in
any way relating to or arising out of this Agreement or any document
contemplated by or referred to herein, or the transactions contemplated hereby,
or any action taken or omitted by any such Person under or in connection with
any of the foregoing, including with respect to any investigation, litigation or
proceeding (including any Insolvency Proceeding or appellate proceeding) related
to or arising out of this Agreement or the Loans or Letters of Credit or the use
of the proceeds thereof, whether or not any Indemnified Person is a party
thereto (all the foregoing, collectively, the "Indemnified Liabilities");
------------------------
provided, that the Company shall have no obligation hereunder to any Indemnified
- --------
Person with respect to Indemnified Liabilities resulting solely from the gross
negligence or willful misconduct of such Indemnified Person. The agreements in
this Section shall survive payment of all other Obligations.
11.6 Payments Set Aside. To the extent that the Company makes a payment to the
------------------
Agent or the Lenders, or the Agent or the Lenders exercise their right of set-
off, and such payment or the proceeds of such set-off or any part thereof are
subsequently invalidated, declared to be fraudulent or preferential, set aside
or required (including pursuant to any settlement entered into by the Agent or
such Lender in its discretion) to be repaid to a trustee, receiver or any other
party, in connection with any Insolvency Proceeding or otherwise, then (a) to
the extent of such recovery the obligation or part thereof originally intended
to be satisfied shall be revived and continued in full force and effect as if
such payment had not been made or such set-off had not occurred, and (b) each
Lender severally agrees to pay to the Agent upon demand its pro rata share of
any amount so recovered from or repaid by the Agent.
11.7 Successors and Assigns. The provisions of this Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and assigns, except that the Company may not assign or transfer any
of its rights or obligations under this Agreement without the prior written
consent of the Agent and each Lender.
11.8 Assignments, Participations, etc.
---------------------------------
(a) Any Lender may, with the written consent of the Company at all times other
than during the existence of an Event of Default and the Agent and the
Issuing Bank, which consents shall not be unreasonably withheld, at any
time assign and delegate to one or more Eligible Assignees (provided that
no written consent of the Company, the Agent or the Issuing Bank shall be
required in connection with any assignment and delegation by a Lender to an
Eligible Assignee that is an Affiliate of such Lender) (each an "Assignee")
--------
all, or any ratable part of all, of the Loans, the Commitments, the L/C
Obligations and the other rights and obligations of such Lender hereunder,
in a minimum amount of $5,000,000 or, if less, the Commitment of such
Lender; provided, that the Company and the Agent may continue to deal
--------
solely and directly with such Lender in connection with the interest so
assigned to an Assignee until (i) written notice of such assignment,
together with payment instructions, addresses and related information with
respect to the Assignee, shall have been given to the Company and the Agent
by such Lender and the Assignee; (ii) such Lender and its Assignee shall
have delivered to the Company and the Agent an Assignment and Acceptance in
the form of Exhibit E ("Assignment and Acceptance") together with any Note
--------- -------------------------
or Notes subject to such assignment and (iii) the assignor Lender or
Assignee has paid to the Agent a processing fee in the amount of $3,500.
73
<PAGE>
(b) From and after the date that the Agent notifies the assignor Lender that it
has received an executed Assignment and Acceptance and payment of the
above-referenced processing fee, (i) the Assignee thereunder shall be a
party hereto and, to the extent that rights and obligations hereunder have
been assigned to it pursuant to such Assignment and Acceptance, shall have
the rights and obligations of a Lender under the Loan Documents, and (ii)
the assignor Lender shall, to the extent that rights and obligations
hereunder and under the other Loan Documents have been assigned by it
pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Loan Documents.
(c) Within five Business Days after its receipt of notice by the Agent that it
has received an executed Assignment and Acceptance and payment of the
processing fee, (and provided that it consents to such assignment in
accordance with subsection 11.8(a)), the Company shall execute and deliver
------------------
to the Agent, new Notes evidencing such Assignee's assigned Loans and
Commitment and, if the assignor Lender has retained a portion of its Loans
and its Commitment, replacement Notes in the principal amount of the Loans
retained by the assignor Lender (such Notes to be in exchange for, but not
in payment of, the Notes held by such Lender). Immediately upon each
Assignee's making its processing fee payment under the Assignment and
Acceptance, this Agreement, shall be deemed to be amended to the extent,
but only to the extent, necessary to reflect the addition of the Assignee
and the resulting adjustment of the Commitments arising therefrom. The
Commitment allocated to each Assignee shall reduce such Commitments of the
assigning Lender pro tanto.
--- -----
(d) Any Lender may at any time sell to one or more commercial banks or other
Persons not Affiliates of the Company (a "Participant") participating
-----------
interests in any Loans, the Commitment of that Lender and the other
interests of that Lender (the "originating Lender") hereunder and under the
other Loan Documents; provided, however, that (i) the originating Lender's
-------- -------
obligations under this Agreement shall remain unchanged, (ii) the
originating Lender shall remain solely responsible for the performance of
such obligations, (iii) the Company, the Issuing Bank and the Agent shall
continue to deal solely and directly with the originating Lender in
connection with the originating Lender's rights and obligations under this
Agreement and the other Loan Documents, and (iv) no Lender shall transfer
or grant any participating interest under which the Participant has rights
to approve any amendment to, or any consent or waiver with respect to, this
Agreement or any other Loan Document, except to the extent such amendment,
consent or waiver would require unanimous consent of the Lenders as
described in the first proviso to Section 11.1. In the case of any such
----- ------- ------------
participation, the Participant shall be entitled to the benefit of Sections
--------
4.1, 4.3 and 11.5 as though it were also a Lender hereunder, and if amounts
--- --- ----
outstanding under this Agreement are due and unpaid, or shall have been
declared or shall have become due and payable upon the occurrence of an
Event of Default, each Participant shall be deemed to have the right of
set-off in respect of its participating interest in amounts owing under
this Agreement to the same extent as if the amount of its participating
interest were owing directly to it as a Lender under this Agreement.
(e) Each Lender agrees to take normal and reasonable precautions and exercise
due care to maintain the confidentiality of all information identified as
"confidential" or "secret" by the Company and provided to it by the
Company or any Subsidiary, or by the Agent on such Company's or
Subsidiary's behalf, under this Agreement or any other Loan Document, and
neither it nor any of its Affiliates shall use any such information other
than in connection
74
<PAGE>
with or in enforcement of this Agreement and the other Loan Documents;
except to the extent such information (i) was or becomes generally
available to the public other than as a result of disclosure by the Lender,
or (ii) was or becomes available on a non-confidential basis from a source
other than the Company, provided that such source is not bound by a
confidentiality agreement with the Company known to the Lender;
provided, however, that any Lender may disclose such information (A) at the
-------- -------
request or pursuant to any requirement of any Governmental Authority to
which the Lender is subject or in connection with an examination of such
Lender by any such authority; (B) pursuant to subpoena or other court
process; (C) when required to do so in accordance with the provisions of
any applicable Requirement of Law; (D) to the extent reasonably required in
connection with any litigation or proceeding to which the Agent, any Lender
or their respective Affiliates may be party; (E) to the extent reasonably
required in connection with the exercise of any remedy hereunder or under
any other Loan Document; (F) to such Lender's independent auditors and
other professional advisors, and (G) to any Affiliate of such Lender, or to
any Participant or Assignee, actual or potential, provided that such
Affiliate, Participant or Assignee agrees to keep such information
confidential to the same extent required of the Lenders hereunder.
(f) Notwithstanding any other provision in this Agreement, any Lender may at
any time create a security interest in, or pledge, all or any portion of
its rights under this Agreement and the Notes held by it in favor of any
Federal Reserve Bank in accordance with Regulation A of the FRB.
11.9 Set-off. In addition to any rights and remedies of the Lenders provided
-------
by law, if an Event of Default exists or the Loans have been accelerated, each
Lender is authorized at any time and from time to time, without prior notice to
the Company, any such notice being waived by the Company to the fullest extent
permitted by law, to set off and apply any and all deposits (general or special,
time or demand, provisional or final) at any time held by, and other
indebtedness at any time owing to, such Lender to or for the credit or the
account of the Company against any and all Obligations owing to such Lender, now
or hereafter existing, irrespective of whether or not the Agent or such Lender
shall have made demand under this Agreement or any Loan Document and although
such Obligations may be contingent or unmatured. Each Lender agrees promptly to
notify the Company and the Agent after any such set-off and application made by
such Lender; provided, however, that the failure to give such notice shall not
-------- -------
affect the validity of such set-off and application.
11.10 Automatic Debits of Fees. With respect to any fee, or any other cost or
------------------------
expense (including Attorney Costs) due and payable to the Agent, the Issuing
Bank, BofA or the Arranger under the Loan Documents, the Company hereby
irrevocably authorizes BofA to debit any deposit account of the Company with
BofA in an amount such that the aggregate amount debited from all such deposit
accounts does not exceed such fee or other cost or expense. If there are
insufficient funds in such deposit accounts to cover the amount of the fee or
other cost or expense then due, such debits will be reversed (in whole or in
part, in BofA's sole discretion) and such amount not debited shall be deemed to
be unpaid. No such debit under this Section shall be deemed a setoff.
11.11 Notification of Addresses, Lending Offices, Etc. Each Lender shall notify
------------------------------------------------
the Agent in writing of any changes in the address to which notices to the
Lender should be directed,
75
<PAGE>
of addresses of any Lending Office, of payment instructions in respect of all
payments to be made to it hereunder and of such other administrative information
as the Agent shall reasonably request.
11.12 Counterparts. This Agreement may be executed in any number of separate
------------
counterparts, each of which, when so executed, shall be deemed an original, and
all of said counterparts taken together shall be deemed to constitute but one
and the same instrument.
11.13 Severability. The illegality or unenforceability of any provision of
------------
this Agreement or any instrument or agreement required hereunder shall not in
any way affect or impair the legality or enforceability of the remaining
provisions of this Agreement or any instrument or agreement required hereunder.
11.14 No Third Parties Benefited. This Agreement is made and entered into for
--------------------------
the sole protection and legal benefit of the Company, the Lenders, the Agent and
the Agent-Related Persons, and their permitted successors and assigns, and no
other Person shall be a direct or indirect legal beneficiary of, or have any
direct or indirect cause of action or claim in connection with, this Agreement
or any of the other Loan Documents.
11.15 Governing Law and Jurisdiction.
------------------------------
(a) THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF ILLINOIS; PROVIDED THAT THE AGENT
AND THE LENDERS SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.
(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER
LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS OR OF
THE UNITED STATES FOR THE NORTHERN DISTRICT OF ILLINOIS, AND BY EXECUTION
AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY, THE AGENT AND THE
LENDERS CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-
EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY, THE AGENT AND
THE LENDERS IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO
THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH
--------------------
IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN
SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED
HERETO. THE COMPANY, THE AGENT AND THE LENDERS EACH WAIVE PERSONAL SERVICE
OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER
MEANS PERMITTED BY ILLINOIS LAW.
11.16 Waiver of Jury Trial. THE COMPANY, THE LENDERS AND THE AGENT EACH WAIVE
--------------------
THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS,
OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR
OTHER
76
<PAGE>
LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR
ANY AGENT-RELATED PERSON, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO
CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY, THE LENDERS AND THE
AGENT EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A
COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER
AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF
THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN
WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT
OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER
SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS
TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.
11.17 Entire Agreement. This Agreement, together with the other Loan
----------------
Documents, embodies the entire agreement and understanding among the Company,
the Lenders and the Agent, and supersedes all prior or contemporaneous
agreements and understandings of such Persons, verbal or written, relating to
the subject matter hereof and thereof.
11.18 Replacement. The Indebtedness incurred pursuant to this Agreement replaces
-----------
Indebtedness of the Company incurred pursuant to that certain Second Amended and
Restated Loan and Security Agreement dated as of February 4, 1997 among the
Company, the Parent and BofA
77
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered in Chicago, Illinois by their proper and duly
authorized officers as of the day and year first above written.
PEN-TAB INDUSTRIES, INC, a Delaware
corporation
By:
--------------------------------------
Title:
------------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION,
as Agent
By:
---------------------------------------
Title:
------------------------------------
Address for Notices:
Bank of America National Trust and
Savings Association
Agency Management Services #33499
231 South LaSalle Street, Eighth Floor
Chicago, IL 60697
Address for payments:
Bank of America National Trust and
Savings Association
Agency Management Services #33499
231 South LaSalle Street, Eighth Floor
Chicago, IL 60697
78
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Issuing Bank
By:
---------------------------------------
Title:
------------------------------------
Address for Notices:
Bank of America National Trust and
Savings Association
Agency Management Services #33499
231 South LaSalle Street, Eighth Floor
Chicago, IL 60697
Copies to:
Commitment: $100,000,000 BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as a Lender
By:
---------------------------------------
Title:
------------------------------------
Address for Notices:
Bank of America National Trust and
Savings Association
Agency Management Services #33499
231 South LaSalle Street, Eighth Floor
Chicago, IL 60697
Phone number: (312) 828-7933
Facsimile number: (312) 974-9102
79
<PAGE>
ACCEPTANCE AND ACKNOWLEDGMENT
-----------------------------
PEN-TAB HOLDINGS, 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., a Virginia
corporation
By:
---------------------------------------
Title:
------------------------------------
80
<PAGE>
Exhibit 21.1
Subsidiaries
1. Subsidiaries as of January 2, 1999, which are consolidated in the
financial statements of the Company:
<TABLE>
<CAPTION>
Subsidiary State of Incorporation Ownership
------------------------- ---------------------- ---------
<S> <C> <C>
Stuart Hall Company, Inc. Missouri 100%
Vinylweld L.L.C. Delaware 80%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-02-1999 JAN-03-1998
<PERIOD-START> JAN-04-1998 DEC-29-1996
<PERIOD-END> JAN-02-1999 JAN-03-1998
<CASH> 20 13,676
<SECURITIES> 0 0
<RECEIVABLES> 18,095 9,696
<ALLOWANCES> 2,325 1,375
<INVENTORY> 41,801 21,787
<CURRENT-ASSETS> 59,586 44,777
<PP&E> 61,760 28,313
<DEPRECIATION> 16,222 12,538
<TOTAL-ASSETS> 181,943 63,792
<CURRENT-LIABILITIES> 41,708 7,704
<BONDS> 119,339 82,100
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 10,517 (28,005)
<TOTAL-LIABILITY-AND-EQUITY> 181,943 63,792
<SALES> 124,082 96,637
<TOTAL-REVENUES> 124,082 96,637
<CGS> 91,105 71,701
<TOTAL-COSTS> 22,030 16,838
<OTHER-EXPENSES> 0 804
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 11,527 8,422
<INCOME-PRETAX> (1,016) (900)
<INCOME-TAX> (335) 1945
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (681) (2,845)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
<PAGE>
EXHIBIT 99
Pen-Tab Safe Harbor Statement
Information provided by the Company may contain certain forward-looking
information, which, as defined by the Private Securities Litigation Reform Act
of 1995 (the "Act"), may relate to such matters as sales, income, return on
equity, capital expenditures, dividends, capital structure, free cash flow,
debt to capitalization ratios, internal growth rates, future economic
performance, management's plans and objectives for future operations or the
assumptions relating to any of the forward-looking information. This Safe
Harbor Statement is being made pursuant to the Act and with the intention of
obtaining the benefits of the so-called "safe harbor" provisions of the Act.
The Company cautions that forward-looking statements are not guarantees since
there are inherent difficulties in predicting future results, and that actual
results could differ materially from those expressed or implied in the forward-
looking statements. Factors that could cause actual results to differ include,
but are not limited to, the following:
Retail Economy. The Company's business depends on the strength of the retail
economies primarily in the U.S. and to a lesser extent in Canada by such
factors as consumer demand, the condition of the retail industry, currency
exchange rates and weather conditions. Recently, the retail industry has been
characterized by intense competition and consolidation.
Nature of the Marketplace. The Company competes with numerous other
manufacturers and distributors, many of which are large and well-established.
In addition, the Company's principal customers are volume purchasers, many of
which are much larger than the Company and have significant bargaining power.
The combination of these market influences creates a very competitive
marketplace, resulting in difficulty in raising prices and the need to provide
superior services to the customers. These competitive pressures increase the
risk of losing substantial customers.
Growth by Acquisition. The acquisition of companies is one of the
foundations of the Company's growth strategy. The Company's ability to make
strategic acquisitions at reasonable prices and to integrate the acquired
businesses within a reasonable period of time are important factors in the
Company's future earnings growth potential.
