<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 1, 2000
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 March 31, 2000, 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.
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Pen-Tab Industries, Inc.
Form 10-K
For the Fiscal Year Ended January 1, 2000
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
Part I.
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 8
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 11
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 18
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures 18
Part III.
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 20
Item 12. Security Ownership of Certain Beneficial Owners and
Management 21
Item 13. Certain Relationships and Related Transactions 21
Part IV.
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 21
Signature 24
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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 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") expanded the Company's
product line into the market of licensed products. The acquisition broadened the
Company's product offerings by adding licensed products to Pen-Tab's proprietary
styles and brands. Stuart Hall's license portfolio includes Dragonball Z(R),
Seventeen(R), Looney Tunes, Coca-Cola(R) brand, Nickelodeon(TM), Rugrats(R),
MTV: Music Television(TM) and Disney's Winnie the Pooh. For fiscal 1999, core
products represented an estimated 50.0% of revenue and differentiated products
represented an estimated 50.0% of revenue. For fiscal 1999, school-related
products represented an estimated 63.9% of revenue and office-related products
represented an estimated 36.1% of revenue.
The Company's move into differentiated products and the acquisition of
Stuart Hall are the primary reasons for the increase in sales and profitability.
From 1995 to 1999, the Company's sales have grown from $84.3 million to $155.4
million and EBITDA (as defined herein) has grown from $10.5 million to $23.9
million. During the same period, the Company's EBITDA margin increased from
12.5% to 15.4%. 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 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.
Recent Developments
Management change. On June 29, 1999, the Company appointed Marc English as
Chief Executive Officer. Mr. English was previously President and Chief
Executive Officer of CSS Industries' Cleo unit, a consumer products company
primarily engaged in the manufacturing and sale to mass-market retailers of
seasonal gift-wrap products. In addition, Mr. English has held marketing and
sales management positions with other companies, including CPS Corp., also in
the gift-wrap industry. Mr. English replaced Mr. Hodes who resigned from the
position as Chief Executive Officer of the Company.
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Company Initiatives/Reorganization. Under the leadership of Marc English,
the Company performed a review of all operations with the goals of increasing
market share, streamlining operations, reducing debt and increasing
profitability.
On December 30, 1999, the Company approved a plan to rationalize its
manufacturing operations. The plan includes a plant consolidation, equipment
moves, plant/product changes, and warehouse consolidation. The rationalization
is expected to result in an approximate 20% reduction in manufacturing space.
The fourth quarter reorganization charge of $6.1 million represents the
Company's rationalization plan and includes employee termination costs,
including benefits, costs to exit facilities, lease termination costs, and
property taxes after ceasing operations. The major undertakings of the
rationalization plan are expected to be completed in 2000. Upon full
implementation, the plan is expected to have a significant positive effect on
the Company's financial performance, resulting in an estimated annualized cost
savings of approximately $3 million.
On March 31, 2000, the Company decided to divest its vinyl packaging
business segment, which operates as Vinylweld L.L.C. The divestiture is
anticipated to occur by the end of the first quarter of 2001.
Covenant Violations/Amendments to Credit Facility/Note Holder Consent. As a
result of insufficient third quarter 1999 earnings, the Company was in default
of a covenant based on EBITDA (earnings before interest, taxes, depreciation,
amortization, and certain non-cash charges, as defined in the agreement) and
cash interest and principal payments (fixed charge coverage ratio) for the
twelve months ended October 2, 1999. On November 16, 1999, the Company amended
its credit facility to waive the fixed charge coverage ratio covenant default.
This amendment also provided that the interest rate increase by 0.625%.
As a result of insufficient fourth quarter 1999 earnings, the Company was
in default of the fixed charge coverage ratio covenant and the minimum net worth
covenant, as defined in the agreement, at and for the twelve months ended
January 1, 2000. In addition, due to the earnings shortfall and Enterprise
Resource Planning ("ERP") system implementation issues which led to higher than
expected inventories and accounts receivable collection delays, the Company was
in default of the annual revolver clean up provision. The clean up provision
requires the Company, for a period of not less than thirty days between
September 30 and November 15, to reduce the outstanding balance on the revolver
to $25 million or less. The Company was also in default of the borrowing base
formula, as defined in the agreement, whereby the balance outstanding on the
revolver was in excess of the borrowing base formula computed amount. On March
13, 2000, the Company amended its credit facility. The amendment (i) waived the
defaults, (ii) revised the borrowing base definition to provide for an over
advance of up to $16.5 million for the period of March 1, 2000 through July 15,
2000, (iii) increased the interest rate by 0.875% plus another 0.50% during the
over advance period, (iv) revised the annual clean up provision amount to $27
million from $25 million and revised the clean up period to be between October
15 and January 15 from between September 30 and November 15, (v) revised the
fixed charge coverage ratio to 1.00:1 (from 1.50:1) for the twelve month periods
ended March 31, 2000 and June 30, 2000 and to 1.50:1 (from 1.75:1) thereafter,
(vi) limits capital expenditures to $2 million for fiscal 2000 and (vii)
requires total debt, as defined in the agreement, not to exceed $153 million at
June 30, 2000. The Company paid a fee of $0.5 million in conjunction with the
Credit Facility amendment and will amortize such fee over the remaining life of
the Credit Facility (March 2000 through August 2001).
Prior to the amendment discussed in the preceding paragraph and as a result
of the covenant violations described above, the Company was not allowed to make
the required interest payment of approximately $4 million due on February 1,
2000 to the holders of the Company's $75 million 10.875% Senior Subordinated
Notes due 2007. As a condition of the aforementioned amendment, the Company
obtained consent from substantially all of the note holders to accept the
February 1, 2000 interest payment in the form of new notes, in aggregate
principal amount substantially equal to such interest payment, in lieu of a cash
payment. As a result, the Company will be deemed to have made the cash interest
payment and simultaneously issued new notes to existing noteholders in exchange
for such cash payment.
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Subsequent to January 1, 2000, a major stockholder of Pen-Tab Holdings,
Inc. ("Holdings") purchased approximately $60 million of the $75 million 10.875%
Senior Subordinated Notes in the secondary market.
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.
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 Dragonball Z(R), Seventeen(R),
Looney Tunes, Coca-Cola(R) brand, Nickelodeon(TM), Rugrats(R), MTV: Music
Television(TM), X Games(TM), and Disney's Winnie the Pooh.
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.
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 ("ERP") 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 to management. The Company uses electronic data interchange programs
with most of its large customers.
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 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 retail 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
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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, 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.
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. The Company's core products include binders, pads,
filler paper, wirebound notebooks, and envelopes. The Company manufactures over
1,000 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
50.0 percent of the Company's 1999 sales are derived from differentiated
products, which have been developed over the last six years.
School-related products (63.9% of 1999 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
been incorporated into core products to differentiate its line. 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 Dragonball Z(R), Seventeen(R), 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
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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 (36.1% of 1999 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.
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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 22.8% and 12.0%, respectively of the Company's net sales for
fiscal 1999.
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), Attitude(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.
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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 and foreign 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.
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), Attitude(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 760 employees as of January 1, 2000.
Approximately 500 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 November 30, 2001. 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 Company enjoys an amicable relationship
with unionized labor. The following table provides information on the Company's
employees by operating function:
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Employees Categorized by Function
---------------------------------
Manufacturing 675
Sales, Marketing and Creative 30
Administrative 40
Executive 15
--------
Total 760
========
As of January 1, 2000, the Company's manufacturing employees numbered 180 in the
Virginia facility, 150 in the California facility, 165 in the Chicago facility
and 180 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 Vinyl Packaging 2004
</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.
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Item 4. Submission of Matters to a Vote of Security Holders.
None
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 year 1995
represents 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 14 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 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.
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 1, 2000, January 2, 1999, January 3,
1998, December 28, 1996, December 30, 1995, and for the fiscal years then ended
were derived from the Audited Financial Statements of the Company.
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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
-------------------------------------------------------------------
1999 1998 1997 1996 1995
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data
Net sales $ 155,403 $114,791 $88,014 $ 96,402 $ 84,280
Cost of goods sold 110,631 83,228 65,071 67,313 64,664
Gross profit 44,772 31,563 22,943 29,089 19,616
Selling, general and administrative expenses 26,681 20,469 15,234 15,108 11,388
Amortization of goodwill 1,892 578 - - -
Relocation and reorganization expenses (a) 6,112 - 804 - 1,906
Interest expense, net 17,427 11,425 8,192 2,346 2,883
Other income, net (21) (28) - (4) (55)
Income (loss) from continuing operations
before income taxes (7,319) (881) (1,287) 11,639 3,494
Income tax (benefit) provision (b), (e) (1,492) (290) 1,774 (168) (263)
Income (loss) from continuing operations (5,827) (591) (3,061) 11,807 3,757
Income (loss) from discontinued operations,
net of taxes (750) (90) 216 1,602 1,151
Net income (loss) $ (6,577) $ (681) $ (2,845) $ 13,409 $ 4,908
Other Financial Data
Net cash provided by (used in)operating
activities $ (7,115) 24,880 $ (768) $ 13,356 $ 10,926
Net cash (used in) investing activities (2,854) (116,086) (1,562) (890) (8,521)
Net cash provided by (used in) financing
activities 10,124 77,550 15,895 (13,191) (2,291)
Adjusted EBITDA from continuing operations (c) 23,921 14,529 10,065 16,119 10,543
Adjusted EBITDA margin from continuing
operations (c) 15.4% 12.7% 11.4% 16.7% 12.5%
Depreciation and amortization 8,862 4,892 2,968 2,364 2,760
Capital expenditures $ 2,854 $ 2,854 $ 1,562 $ 890 $ 9,322
Ratio of earnings to fixed charges (d) --(d) --(d) --(d) 5.8x 2.4x
<CAPTION>
At
------------------------------------------------------------------
Jan. 1 Jan. 2 Jan. 3 Dec. 28 Dec. 30
2000 1999 1998 1996 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $193,722 $181,943 $ 63,792 $43,504 $43,805
Long-term debt (including current portion) 163,169 132,460 82,754 24,210 28,000
Stockholder's equity (deficit) $ 3,850 $ 10,517 $(28,005) $15,052 $11,044
</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 $1.9 million associated therewith are reported as
relocation expense in the statement of operations. During fiscal 1997, the
10
<PAGE>
Company reorganized its sales and marketing functions. The non-recurring charges
of $0.8 million 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. During 1999,
the Company approved a plan to rationalize its manufacturing operations. The
plan includes a plant consolidation, equipment moves, plant/product changes and
warehouse consolidation. The non-recurring charges of $6.1 million associated
therewith are reported as reorganization expenses in the statement of
operations.
(b) For fiscal years 1995 and until the period ended February 3, 1997, the
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 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 1999 have been
adjusted for reorganization expenses of $6.1 million related to the
rationalizing of the Company's manufacturing operations. Adjusted EBITDA amounts
for fiscal 1997 has been adjusted for reorganization expenses of $0.8 million,
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 $1.7
million, 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 years ended January 1, 2000, January 2, 1999 and
January 3,1998 were insufficient to cover fixed charges by $8.3 million, $1.0
million and $0.9 million, respectively.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------------------------------
1999 1998 1997 1996 1995
------------------------------------------ --------------------------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes $(8,261) $ (1,016) $(900) $13,218 $ 4,565
Add back Fixed Charges;
Interest Expense 17,382 11,413 8,194 2,346 2,883
Operating Lease Expense 572 531 400 400 375
------------------------------------------ --------------------------
Earnings before Fixed Charges 9,693 10,928 7,694 15,964 7,823
Fixed Charges 17,954 11,944 8,594 2,746 3,258
Ratio of Earnings to Fixed Charges - - - 5.8x 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.
11
<PAGE>
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 $133.8 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 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. Certain commodity grades of paper have shown considerable price
volatility during recent years. 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. 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.
Recent Developments
Management change. On June 29, 1999, the Company appointed Marc English as
Chief Executive Officer. Mr. English was previously President and Chief
Executive Officer of CSS Industries' Cleo unit, a consumer products company
primarily engaged in the manufacturing and sale to mass-market retailers of
seasonal gift-wrap products. In addition, he has held marketing and sales
management positions with other companies, including CPS Corp., also in the
gift-wrap industry. Mr. English replaced Mr. Hodes who resigned from the
position as Chief Executive Officer of the Company.
Company Initiatives/Reorganization. Under the leadership of Marc English,
the Company performed a review of all operations with the goals of increasing
market share, streamlining operations, reducing debt and increasing
profitability.
12
<PAGE>
On December 30, 1999, the Company approved a plan to rationalize its
manufacturing operations. The plan includes a plant consolidation, equipment
moves, plant/product changes, and warehouse consolidation. The rationalization
is expected to result in an approximate 20% reduction in manufacturing space.
The fourth quarter reorganization charge of $6.1 million represents the
Company's rationalization plan and includes employee termination costs,
including benefits, costs to exit facilities, lease termination costs, and
property taxes after ceasing operations. The major undertakings of the
rationalization plan are expected to be completed in 2000. Upon full
implementation, the plan is expected to have a significant positive effect on
the Company's financial performance, resulting in an estimated annualized cost
savings of approximately $3 million.
In March 2000, the company decided to divest its vinyl packaging business
segment, which operates as Vinylweld L.L.C. The divestiture is anticipated to
occur by the end of the first quarter of 2001.
Covenant Violations/Amendments to Credit Facility/Note Holder Consent. As a
result of insufficient third quarter 1999 earnings, the Company was in default
of a covenant based on EBITDA (earnings before interest, taxes, depreciation,
amortization, and certain non-cash charges, as defined in the agreement) and
cash interest and principal payments (fixed charge coverage ratio) for the
twelve months ended October 2, 1999. On November 16, 1999, the Company amended
its credit facility to waive the fixed charge coverage ratio covenant default.
This amendment also provided that the interest rate increase by 0.625%.
As a result of insufficient fourth quarter 1999 earnings, the Company was
in default of the fixed charge coverage ratio covenant and the minimum net worth
covenant, as defined in the agreement, at and for the twelve months ended
January 1, 2000. In addition, due to the earnings shortfall and ERP system
implementation issues which led to higher than expected inventories and accounts
receivable collection delays, the Company was in default of the annual revolver
clean up provision. The clean up provision requires the Company, for a period of
not less than thirty days between September 30 and November 15, to reduce the
outstanding balance on the revolver to $25 million or less. The Company was also
in default of the borrowing base formula, as defined in the agreement, whereby
the balance outstanding on the revolver was in excess of the borrowing base
formula computed amount. On March 13, 2000, the Company amended its credit
facility. The amendment (i) waived the defaults, (ii) revised the borrowing base
definition to provide for an over advance of up to $16.5 million for the period
of March 1, 2000 through July 15, 2000, (iii) increased the interest rate by
0.875% plus another 0.50% during the over advance period, (iv) revised the
annual clean up provision amount to $27 million from $25 million and revised the
clean up period to be between October 15 and January 15 from between September
30 and November 15, (v) revised the fixed charge coverage ratio to 1.00:1 (from
1.50:1) for the twelve month periods ended March 31, 2000 and June 30, 2000 and
to 1.50:1 (from 1.75:1) thereafter, (vi) limits capital expenditures to $2
million for fiscal 2000 and (vii) requires total debt, as defined in the
agreement, not to exceed $153 million at June 30, 2000. The Company paid a fee
of $0.5 million in conjunction with the Credit Facility amendment and will
amortize such fee over the remaining life of the Credit Facility.
Prior to the amendment discussed in the preceding paragraph and as a result
of the covenant violations described above, the Company was not allowed to
make the required interest payment of approximately $4 million due on February
1, 2000 to the holders of the Company's $75 million 10.875% Senior Subordinated
Notes due 2007. As a condition of the aforementioned amendment, the Company
obtained consent from substantially all of the note holders to accept the
February 1, 2000 interest payment in the form of new notes, in aggregate
principal amount substantially equal to such interest payment, in lieu of a cash
payment. As a result, the Company will be deemed to have made the cash interest
payment and simultaneously issued new notes to existing noteholders in exchange
for such cash payments.
Results of Operations
The following table sets forth the fiscal years 1997 through 1999, certain
income and expense items of the Company as a percentage of net sales.
13
<PAGE>
Fiscal Year
--------------------------------
1999 1998 1997
------ ------ ------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 71.2% 72.5% 73.9%
------ ------ ------
Gross profit 28.8% 27.5% 26.1%
Selling, general, and administrative
expenses 17.2% 17.8% 17.3%
Amortization of goodwill 1.2% 0.5% -
Reorganization expenses 3.9% - 0.9%
------ ------ ------
Income from continuing operations 6.5% 9.2% 7.9%
====== ====== ======
Fiscal 1999 Compared to Fiscal 1998
Net sales for the year ended January 1, 2000 increased by $40.6 million, or
35.4%, to $155.4 million from $114.8 million for the year ended January 2, 1999.
The increase in sales is primarily attributable to the purchase of Stuart Hall
on August 20, 1998. The increase in sales related to the Stuart Hall acquisition
is partially offset and impacted by (i) an approximate 10% decrease in selling
prices in 1999 from 1998 resulting from a decrease in the cost of paper, (ii)
loss of sales volume to foreign competition, and (iii) an increase in sales
deductions and allowances related to ERP implementation and merger integration
difficulties. For the Pen-Tab segment, which includes Stuart Hall,
differentiated product and core product sales increased by $20.3 million and
$20.3 million, respectively, for the year ended January 1, 2000 as compared to
the year ended January 2, 1999.
Gross profit for the year ended January 1, 2000 increased by $13.2 million
or 41.8% to $44.8 million from $31.6 million for the year ended January 2, 1999.
The gross profit percentage for year ended January 1, 2000 was 28.8% compared to
27.5% for the year ended January 2, 1999. The 1.3% increase in the gross profit
percentage is principally related to (i) a LIFO adjustment increasing gross
profit for the year ended January 1,2000 by $1.5 million due to significant
decrease in the cost of paper versus a LIFO adjustment increasing gross profit
for the year ended January 2, 1999 by $0.7 million, (ii) the increase in
differentiated higher margin product sales in the Pen-Tab segment as a result of
the acquisition of Stuart Hall, and (iii) the difficulties encountered in
integrating Stuart Hall operations into Pen-Tab. Differentiated products
represent approximately 50.0% of net sales in 1999 versus approximately 37.4% in
1998. The increase in gross profit was partially offset by margin erosion on
certain maturing differentiated product lines, lower selling prices due to the
reduction in the cost of paper in 1999, and foreign competition causing lower
selling prices and margins on certain product lines.
SG&A expenses for the year ended January 1, 2000 increased $6.2 million or
30.2% to $26.7 million from $20.5 million for the year ended January 2, 1999. As
a percentage of net sales, SG&A expenses decreased to 17.2% for the year ended
January 1, 2000 from 17.8% for the year ended January 2, 1999. This increase is
primarily the result of (i) a full year of Stuart Hall activity in 1999 versus
four months in 1998 and (ii) increased distribution and commission expenses on
the $40.6 million increase in net sales.
Reorganization expense for the year ended January 1, 2000 is $6.1 million.
The reorganization charges represent a plant consolidation plan that includes
employee termination costs, including benefits, costs to exit facilities, lease
termination costs, and property taxes after ceasing operations.
Discontinued Operations includes the operations of the Company's vinyl
packaging segment. In March 2000, the Company decided to divest this business.
The divestiture is anticipated to occur by the end of the first quarter of 2001.
Net sales for the vinyl packaging segment for the year ended January 1, 2000
decreased by $1.1 million or 11.8% to $8.2 million from $9.3 million for the
year ended January 2, 1999. Loss from discontinued operations, net of income tax
benefits, for the year ended January 1, 2000 was $0.8 million compared to a loss
of $0.1 million for the year ended January 2, 1999.
Interest expense, net for the year ended January 1, 2000 increased $6.0
million to $17.4 million from $11.4 million for the year ended January 2, 1999.
The increase is principally due to the interest on the debt incurred to acquire
Stuart Hall on August 20, 1998, coupled with interest rate increases.
14
<PAGE>
Fiscal 1998 Compared to Fiscal 1997
Net sales for the year ended January 2, 1999 increased by $26.8 million, or
30.5%, to $114.8 million from $88.0 million for the year ended January 3, 1998.
The Company's acquisition of Stuart Hall on August 20, 1998 contributed $11.8
million or 13.4% of the increase. For the Pen-Tab segment, which includes Stuart
Hall, differentiated product and core product sales increased by $10.8 million
and $16.0 million, respectively, for the year ended January 2, 1999 as compared
to the year ended January 3, 1998.
Gross profit for the year ended January 2, 1999 increased by $8.7 million
or 38.0% to $31.6 million from $22.9 million for the year ended January 3, 1998.
The gross profit percentage for year ended January 2, 1999 was 27.5% compared to
26.1% for the year ended January 3, 1998. The 1.4% increase in the gross profit
percentage is principally related to (i) the growth in high margin
differentiated product sales which increased to 37.4% of net sales for the year
ended January 2, 1999 from 36.7% 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 $5.3 million or
34.9% to $20.5 million from $15.2 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 17.3% for the year ended January 3, 1998. This increase is
principally the result of (i) shipping expenses (primarily freight out)
increased to 8.9% of net sales for the year ended January 2, 1999 from 7.5% 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 0.9%.
Discontinued operations includes the operations of the Company's vinyl
packaging segment. Net sales for the vinyl packaging segment for the year ended
January 2, 1999 increased by $0.7 million or 8.1% to $9.3 million from $8.6
million for the year ended January 3, 1998. Loss from discontinued operations,
net of income tax benefits, for the year ended January 2, 1999 was $0.1 million
compared to an income of $0.2 million for the year ended January 3, 1998.
Interest expense, net for the year ended January 2, 1999 increased $3.2
million to $11.4 million from $8.2 million for the year ended January 3, 1998.
The increase is principally due to the interest on the debt incurred to acquire
Stuart Hall on August 20, 1998.
Liquidity and Capital Resources
Net cash used in operating activities for the year ended January 1, 2000
was $7.1 million as compared to net cash provided by operating activities of
$24.9 million for the year ended January 2, 1999. The decrease was primarily
attributable to the timing of the purchase of Stuart Hall as the acquisition
occurred at the seasonal peak in accounts receivable. Hence the 1998 cash
provided by operating activities was benefited by acquired accounts receivable
collections. In addition, merger integration and ERP system implementation
issues led to higher than normal accounts receivable at January 1, 2000.
Net cash used in investing activities for the year ended January 1,
2000 was $2.9 million as compared to $116.1 million for the year ended January
2, 1999. Substantially all of the cash used in investing activities in 1998 was
used to purchase Stuart Hall.
Net cash provided by financing activities for the year ended January 1,
2000 was $10.1 million as compared to $77.6 million for the year ended January
2, 1999. The activity in both years was mainly due to the Stuart Hall
acquisition. During 1999 the Company paid a post closing working capital
purchase price adjustment of approximately $19.9 million which was funded by
proceeds from revolver borrowings.
Net cash provided by operating activities for the year ended January 2,
1999 was $24.9 million as compared to net cash used in operating activities of
$0.8 million for the year ended January 3, 1998. The increase was primarily
attributable to the acquisition of Stuart Hall. The timing of which generated a
$16.4 million decrease in accounts receivable.
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
attributable to a $39.2 million equity contribution from Pen-Tab Holdings and
the proceeds of long-term debt used to acquire Stuart Hall.
Capital expenditures in the fiscal years 1999, 1998, and 1997 were $2.9
million, $2.9 million, and $1.6 million, respectively. The Company expects that
capital expenditure requirements will not exceed $2.0 million for 2000 as
required in the Credit Facility. The Company believes capital expenditure levels
are sufficient to
15
<PAGE>
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 1.75% or, at the Company's option, the Eurodollar rate plus 3.5%. The
Company is required to pay a commitment fee of 0.65% 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 Agreement
and Credit Facility, since August 20, 1998, for the fiscal years 1999, 1998, and
1997 were $52.8 million, $7.6 million, and $2.5 million, respectively. The
Company's maximum working capital borrowings outstanding were $78.5 million,
$35.3 million, and $10.9 million, respectively for the same fiscal years.
As a result of insufficient third quarter 1999 earnings, the Company was in
default of a covenant based on EBITDA (earnings before interest, taxes,
depreciation, amortization, and certain non-cash charges, as defined in the
agreement) and cash interest and principal payments (fixed charge coverage
ratio) for the twelve months ended October 2, 1999. On November 16, 1999, the
Company amended its credit facility to waive the fixed charge coverage ratio
covenant default. This amendment also provided that the interest rate increase
by 0.625%.
As a result of insufficient fourth quarter 1999 earnings, the Company was
in default of the fixed charge coverage ratio covenant and the minimum net worth
covenant, as defined in the agreement, at and for the twelve months ended
January 1, 2000. In addition, due to the earnings shortfall and ERP system
implementation issues which led to higher than expected inventories and accounts
receivable collection delays, the Company was in default of the annual clean up
provision. The clean up provision requires the Company, for a period of not less
than thirty days between September 30 and November 15, to reduce the outstanding
balance on the revolver to $25 million or less. The Company was also in default
of the borrowing base formula, as defined in the agreement, whereby the balance
outstanding on the revolver was in excess of the borrowing base formula computed
amount. On March 13, 2000, the Company amended its credit facility. The
amendment (i) waived the defaults, (ii) revised the borrowing base definition to
provide for an over advance of up to $16.5 million for the period of March 1,
2000 through July 15, 2000, (iii) increased the interest rate by 0.875% plus
another 0.50% during the over advance period, (iv) revised the annual clean up
provision amount to $27 million from $25 million and revised the clean up period
to be between October 15 and January 15 from between September 30 and November
15, (v) revised the fixed charge coverage ratio to 1.00:1 (from 1.50:1) for the
twelve month periods ended March 31, 2000 and June 30, 2000 and to 1.50:1 (from
1.75:1) thereafter, (vi) limits capital
16
<PAGE>
expenditures to $2 million for fiscal 2000 and (vii) requires total debt, as
defined in the agreement, not to exceed $153 million at June 30, 2000. The
Company paid a fee of $0.5 million in conjunction with the Credit Facility
amendment and will amortize such fee over the remaining life of the Credit
Facility (March 2000 through August 2001).
Prior to the amendment discussed in the preceding paragraph and as a result
of the covenant violations described above, the Company was not allowed to
make the required interest payment of approximately $4 million due on February
1, 2000 to the holders of the Company's $75 million 10.875% Senior Subordinated
Notes due 2007. As a condition of the aforementioned amendment, the Company
obtained consent from substantially all of the note holders to accept the
February 1, 2000 interest payment in the form of new notes, in aggregate
principal amount substantially equal to such interest payment, in lieu of a cash
payment. As a result, the Company will be deemed to have made the cash interest
payment and simultaneously issued new notes to existing note holders in exchange
for such cash payment.
Subsequent to January 1, 2000, a major stockholder of Pen-Tab Holdings,
Inc. ("Holdings") purchased approximately $60 million of the $75 million 10.875%
Senior Subordinated Notes in the secondary market.
The Company is currently engaged in discussions with the note holders of
the $75 million 10.875% Senior Subordinated Notes regarding a conversion of
such notes to non-cash interest bearing securities or equity. Such conversion is
required to take place on or before June 30, 2000 in order for the Company to
meet the total debt, as defined in the Credit Facility, covenant threshold.
Management believes that it will be able to accomplish such a conversion and
therefore meet the Credit Facility covenant regarding total debt at June 30,
2000.
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 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. The majority 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 1, 2000 was 10.04%. The
Company can terminate the transaction on any interest reset date at the then
current fair market value of the swap instrument. At January 1, 2000, the
agreement could have been terminated at a loss of $0.7 million.
Inflation
The Company believes that inflation has not had a material impact on its
results of operations for the three years ended January 1, 2000.
Year 2000 compliance.
The company did not experience any significant Year 2000 issues in its
information technology systems nor non-information technology systems through
January 31, 2000. No major business processes, operations or customer deliveries
were disrupted as a result of the Year 2000 issue.
The company had a contingency plan to address the greatest areas of risk of
noncompliance or threats to business operations or company assets related to the
Year 2000 issue.
17
<PAGE>
Disclosures Regarding Accounting Standards Issued But Not Yet Adopted
The Financial Accounting Standards Board has issued three new statements
including Statement No. 135 (Recision of Statement No. 75), Statement No. 136
(Transfer of Assets Involving a Not-for-Profit Organization That Raises or Holds
Contributions for Others) and Statement No. 137 (Deferral of Effective Date of
Statement No. 133). Statements No. 135 and 136 have no applicability to the
Company. Statement No. 137, which deferred the effective date of Statement No.
133 (Accounting for Derivative Instruments and Hedging Activities) is not
effective until fiscal year 2001 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.
The American Institute of Certified Public Accountants has issued three new
statements including SOP 98-9 (Modification of SOP 97-2 on Software Revenue
Recognition), SOP 99-2 (Accounting for and Reporting of Postretirement Medical
Benefit (401(h)) Features of Defined Benefit Pension Plans) and SOP 99-3
(Accounting for and Reporting of Certain Defined Contribution Plan Investments
and Other Disclosure Matters). The aforementioned statements do not have a
material effect on the financial position, results of operations or cash flows
of the Company.
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, except for the swap disclosed in Note 2, 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 1, 2000, 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.
Financial Statements of Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors.......................... F1
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
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.
Part III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names, ages as of December 1999, and a
brief account of the business experience of each person who is a director or
executive officer of the Company.
Name Age Position
- ---- --- --------
Marc English 47 Chief Executive Officer
Michael Greenberg 59 Executive Vice President
William Leary 40 Vice President, Chief Financial and
Administrative Officer
Deborah Hodes 47 Senior Vice President/Creative Director and Director
Alan Hodes 56 Director
Thomas McWilliams 56 Director
David Howe 35 Director
James Stevens 63 Director
18
<PAGE>
Marc English joined the Company as Chief Executive Office in July 1999.
Mr. English was previously the President and Chief Executive Officer of CSS's
Cleo unit, a consumer products company primarily engaged in the manufacturer and
sale to mass-market retailers of seasonal gift-wrap products. Mr. English's
employment at Cleo spanned 1994 through 1999 and included holding the position
of Senior Vice President of Sales and Marketing. Prior to joining Cleo, Mr.
English spent 15 years at CPS Corp., also in the gift-wrap industry, in various
roles, the most recent of which was Senior Vice President of Marketing and
Sales. Mr. English has a Bachelors degree from the University of Wisconsin.
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.
Alan Hodes has been affiliated with Pen-Tab since 1966. Mr. Hodes and Mr.
Greenberg purchased Pen-Tab in 1982. Mr. Hodes was Chief Executive Officer of
Pen-Tab from 1982 to 1999. Mr. Hodes received his B.S. degree in Accounting from
Brooklyn College. Mr. Hodes is married to Deborah 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.
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
19
<PAGE>
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
$100,000 for fiscal 1999. The compensation set forth below fully reflects
compensation for work performed on behalf of the Company.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
--------------------
Salary Bonus
Name and Principal Position Fiscal Year ($) ($)
- --------------------------- ----------- ------ -----
<S> <C> <C> <C>
Marc English 1999 330,000 161,000
Chief Executive Officer
Michael Greenberg 1999 235,847 -
Executive Vice President 1998 231,964 -
1997 228,800 -
William Leary 1999 150,000 -
Vice President, Chief Financial and 1998 128,700 50,000
Administrative Officer 1997 117,000 50,000
Deborah Hodes 1999 118,960 -
Senior Vice President, Creative Director 1998 113,300 50,000
1997 103,000 50,000
Alan Hodes 1999 309,239 -
Former Chief Executive Officer 1998 304,148 -
1997 300,000 -
Dan Gallo 1999 231,000 -
Former President 1998 220,000 50,000
1997 220,000 118,000
</TABLE>
20
<PAGE>
Employment Agreements
Currently, Pen-Tab Holdings, Inc. has an employment agreement with Mr.
Greenberg. The employment agreement 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
(iii) certain fringe benefits. The employment agreement provides that the
executive may be terminated by the Company only with cause, and provides that
the executive will not compete with Holdings or its subsidiaries during the
period of employment and for the three years thereafter. The 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.
Pen-Tab Industries, Inc. has an employment agreement with Mr. English. The
employment agreement provides for (i) payment of a base salary, (ii) payment of
an annual bonus based upon the executive's performance and the Company's
operating results, and (iii) certain fringe benefits. The employment agreement
provides that the executive will not compete with the Company during the period
of employment and for eighteen months thereafter.
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
Subsequent to January 1, 2000, a major stockholder of Pen-Tab Holdings,
Inc. ("Holdings") purchased approximately $60 million of the $75 million 10.875%
Senior Subordinated Notes in the secondary market.
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
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
2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
Financial data schedule
21
<PAGE>
3) Exhibits: the exhibits listed on the accompanying exhibit index are filed
as part of this form 10-K.
EXHIBIT INDEX
Exhibit
No. Description
- -------
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.**
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.**
10.19 First Amendment and Waiver to the Secured Credit Agreement dated March 31,
1999.*
10.20 Second Amendment and Waiver to the Secured Credit Agreement dated November
16, 1999.*
10.21 Third Amendment and Waiver to the Secured Credit Agreement date March 13,
2000.*
10.22 Bond Holders Consent and Waiver Agreement dated March 13, 2000.*
22
<PAGE>
10.23 Employment Agreement by and among Pen-Tab Holdings, Inc., Pen-Tab
Industries, Inc., and Marc English.*
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.*
Earnings to Fixed Charge Exhibit.***
*Filed herewith.
**Incorporated by reference
***Included in management discussion and analysis
(b) Reports of form 8-K
Form 8-K filed on June 3, 1999, announcing the retirement of Alan
Hodes as Chief Executive Officer and the appointment of Marc English
as the new Chief Executive Officer.
23
<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.
Pen-Tab Industries, Inc.
(Registrant)
Date: April 15, 2000 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>
<CAPTION>
<S> <C> <C> <C>
Marc English /s/ Marc English Chief Executive Officer April 15, 2000
------------------------
William Leary /s/ William Leary Chief Financial Officer April 15, 2000
------------------------
Deborah Hodes /s/ Deborah Hodes Senior Vice President April 15, 2000
------------------------ And Director
Alan Hodes /s/ Alan Hodes Director April 15, 2000
------------------------
Thomas McWilliams /s/ Thomas McWilliams Director April 15, 2000
------------------------
David Howe /s/ David Howe Director April 15, 2000
------------------------
James Stevens /s/ James Stevens Director April 15, 2000
------------------------
</TABLE>
24
<PAGE>
Schedule II - Valuation and Qualifying Accounts
Pen-Tab Industries, Inc.
<TABLE>
<CAPTION>
Balance at
Beginning Bad Debts Charge-off Balance at
Description of period Expense Deductions End of period
- ------------------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Allowance for
doubtful accounts
for the years ended:
January 1, 2000 $ 306 $ 340 $ (289) $ 357
January 2, 1999 $ 186 $ 286 $ (166) $ 306
January 3, 1998 $ 76 $ 144 $ (34) $ 186
Balance at
Beginning Allowances Charge-off Balance at
Description of period and Credits Deductions End of period
- ------------------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Reserve for
allowances and
credits for the
years ended:
January 1, 2000 $1,429 $6,586 $(4,816) $3,199
January 2, 1999 $ 217 $3,041 $(1,829) $1,429
January 3, 1998 $1,299 $ -- $(1,082) $ 217
Balance at
Beginning Balance at
Description of period Additions Subtractions End of period
- ------------------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Reserve for lower of
cost or market
inventory adjustments
for the years ended:
January 1, 2000 $2,036 $ - $(2,036) $ -
January 2, 1999 $ - $2,036 $ - $2,036
January 3, 1998 $ - $ - $ - $ -
Balance at
Beginning Balance at
Description of period Additions Subtractions End of period
- ------------------------ --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Reserved for excess
and obsolete
inventory for the
years ended:
January 1, 2000 $1,121 $ 879 $ - $2,000
January 2, 1999 $ - $1,121 $ - $1,121
January 3, 1998 $ - $ - $ - $ -
</TABLE>
25
<PAGE>
Index to Financial Statements and Schedules
Financial Statements of Pen-Tab Industries, Inc.
Report of Ernst & Young LLP, Independent Auditors ...........................F1
Consolidated Balance Sheets as of January 1, 2000 and January 2, 1999 .......F2
Consolidated Statements of Operations for the three years in the period
ended January 1, 2000....................................................F4
Consolidated Statements of Stockholder's Equity for the three years in the
period ended January 1, 2000.............................................F5
Consolidated Statements of Cash Flows for the three years in the period
ended January 1, 2000....................................................F6
Notes to Consolidated Financial Statements...................................F7
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.
F
<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 1, 2000 and January 2, 1999, and the related
consolidated statements of operations, stockholder's equity and cash flows for
each of the three years in the period ended January 1, 2000. 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 in the United States. 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 1, 2000 and January 2, 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended January 1, 2000, in conformity with generally accepted accounting
principles in the United States. 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
April 14, 2000
McLean, Virginia
F1
<PAGE>
Pen-Tab Industries, Inc.
Consolidated Balance Sheets
(Dollars in Thousands)
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
---------- ----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 175 $ 20
Accounts receivable (less allowances for discounts,
credits and doubtful accounts of $3,794 & $2,325) 21,353 15,770
Inventories, net 45,015 40,601
Prepaid expenses and other current assets 810 611
Deferred income taxes 6,871 1,384
-------- --------
Total current assets 74,224 58,386
-------- --------
Property, plant and equipment, at cost:
Land and buildings 16,244 16,206
Machinery and equipment 42,601 42,746
Furniture and fixtures 3,279 1,332
Leasehold improvements 1,504 1,476
-------- --------
64,078 61,760
Less: accumulated depreciation and amortization 21,771 16,222
-------- --------
Total property, plant and equipment 42,307 45,538
-------- --------
Intangibles:
Goodwill, net 73,737 73,680
Debt issue costs, net 3,454 4,339
-------- --------
Total intangibles 77,191 78,019
-------- --------
Total assets $193,722 $181,943
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F2
<PAGE>
Pen-Tab Industries, Inc.
Consolidated Balance Sheets (Continued)
(Dollars in Thousands, except share data)
<TABLE>
<CAPTION>
January 1, January 2,
2000 1999
-------- ---------
<S> <C> <C>
Liabilities and stockholder's equity
Current liabilities:
Accounts payable $ 6,211 $ 6,646
Accrued expenses and other current liabilities 10,556 7,382
Due to Newell Co. - 18,546
Accrued interest on subordinated notes 3,065 3,324
Current portion of long-term debt 21,431 4,886
Current portion of capitalized lease obligation 809 924
-------- ---------
Total current liabilities 42,072 41,708
-------- ---------
Long-term debt 134,456 119,339
Capitalized lease obligation 6,473 7,311
Deferred income taxes 6,871 3,068
-------- ---------
Total long-term liabilities 147,800 129,718
-------- ---------
Stockholder's equity:
Common Stock $.01 par value, 1,000 shares,
Authorized; 100 shares issued at January 1,
2000 and January 2, 1999 - -
Additional capital 39,209 39,209
Retained deficit (35,359) (28,692)
-------- ---------
Total stockholder's equity 3,850 10,517
-------- ---------
Total liabilities and stockholder's equity $193,722 $181,943
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F3
<PAGE>
Pen-Tab Industries, Inc.
Consolidated Statements of Operations
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year
-------------------------------------------
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Net sales $155,403 $114,791 $88,014
Cost of goods sold 110,631 83,228 65,071
-------- -------- -------
Gross profit 44,772 31,563 22,943
-------- -------- -------
Expenses:
Selling, general and administrative 26,681 20,469 15,234
Amortization of goodwill 1,892 578 -
Other:
Interest income - (102) (228)
Interest expense 17,427 11,527 8,420
Reorganization expenses 6,112 - 804
Other income--net (21) (28) -
-------- -------- -------
Total expenses 52,091 32,444 24,230
-------- -------- -------
Loss from continuing operations before
income tax (benefit) provision (7,319) (881) (1,287)
Income tax (benefit) provision (1,492) (290) 1,774
-------- -------- -------
Loss from continuing operations (5,827) (591) (3,061)
-------- -------- -------
Income (loss) from operations of discontinued
segment, net of taxes (750) (90) 216
-------- -------- -------
Net loss $ (6,577) $ (681) $(2,845)
======== ======== =======
Unaudited Pro Forma Data:
Historical loss before income taxes $ (900)
Pro forma tax benefit (338)
-------
Pro forma net loss $ (562)
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F4
<PAGE>
Pen-Tab Industries, Inc.
Consolidated Statements of Stockholder's Equity
(Dollars in Thousands)
<TABLE>
<CAPTION>
Retained
Common Additional Earnings
Stock Capital (Deficit) Total
-------- -------- -------- --------
<S> <C> <C> <C> <C>
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
Net loss -- -- (6,577) (6,577)
Dividends -- -- (90) (90)
-------- -------- -------- --------
Balance January 1, 2000 $ -- $ 39,209 $(35,359) $ 3,850
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F5
<PAGE>
Pen-Tab Industries, Inc.
Consolidated Statements of Cash Flows
(Dollars in Thousands)
<TABLE>
<CAPTION>
Fiscal Year
-----------------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Operating activities
Net loss $ (6,577) $ (681) $ (2,845)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization 6,085 3,607 2,554
Amortization of goodwill 1,892 578 -
Amortization of debt issue costs 885 707 414
Deferred income taxes (1,492) (290) 1,774
Provision for losses on accounts receivable 340 286 144
Provision for sales allowances and credits 6,586 3,041 -
Provision for reorganization expenses 5,932 - -
Provision for excess and obsolete inventory 879 1,121 -
Changes in operating assets and liabilities:
Accounts receivable (12,509) 16,376 2,232
Inventories (5,293) (3,507) (7,049)
Prepaid expenses and other current assets (199) 461 (507)
Accounts payable (435) 1,230 (103)
Accrued expenses and other liabilities (2,950) 1,957 (712)
Accrued interest on subordinated notes (259) (6) 3,330
--------- --------- ---------
Net cash provided by (used in) operating activities (7,115) 24,880 (768)
--------- --------- ---------
Investing activities
Sale of minority interest in Vinylweld LLC - 125 -
Purchase of property, plant and equipment (2,854) (2,854) (1,562)
Purchase of Stuart Hall, net of cash acquired - (113,357) -
--------- --------- ---------
Net cash used in investing activities (2,854) (116,086) (1,562)
--------- --------- ---------
Financing activities
Proceeds from revolver borrowings 93,500 145,058 18,688
Repayments of revolver borrowings (57,000) (140,058) (35,144)
Proceeds from term loan - 35,000 -
Principal payments on long-term debt (4,838) (1,150) -
Principal payments on capitalized lease obligations (953) (503) -
Proceeds from issuance of senior subordinated notes - - 72,563
Payment to Newell Co. (20,495) - -
Dividends (90) (6) (40,212)
Equity contribution from Holdings - 39,209 -
--------- --------- ---------
Net cash provided by financing activities 10,124 77,550 15,895
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 155 (13,656) 13,565
Cash and cash equivalents at beginning of year 20 13,676 111
--------- --------- ---------
Cash and cash equivalents at end of year $ 175 $ 20 $ 13,676
========= ========= =========
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest $ 16,859 $ 10,028 $ 5,109
--------- --------- ---------
Income taxes $ - $ - $ 512
========= ========= =========
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.
F6
<PAGE>
Pen-Tab Industries, Inc.
Notes to Consolidated Financial Statements
(Dollars in thousands)
1. Description of Business, Recent Developments and Liquidity
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 14 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 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.
F7
<PAGE>
1. Description of Business, Recent Developments and Liquidity (Continued)
Covenant Violations/Amendments to Credit Facility/Note Holder Consent. As a
result of insufficient third quarter 1999 earnings, the Company was in default
of a covenant based on EBITDA (earnings before interest, taxes, depreciation,
amortization, and certain non-cash charges, as defined in the agreement) and
cash interest and principal payments (fixed charge coverage ratio) for the
twelve months ended October 2, 1999. On November 16, 1999, the Company amended
its credit facility to waive the fixed charge coverage ratio covenant default.
This amendment also provided that the interest rate increase by 0.625%.
As a result of insufficient fourth quarter 1999 earnings, the Company was
in default of the fixed charge coverage ratio, annual clean up and the minimum
net worth covenants, as defined in the agreement, at and for the twelve months
ended January 1, 2000. In addition, due to the earnings shortfall and Enterprise
Resource Planning ("ERP") system implementation issues which led to higher than
expected inventories and accounts receivable collection delays, the Company was
in default of the annual revolver clean up provision. The clean up provision
requires the Company, for a period of not less than thirty days between
September 30 and November 15, to reduce the outstanding balance on the revolver
to $25 million or less. The Company was also in default of the borrowing base
formula, as defined in the agreement, whereby the balance outstanding on the
revolver was in excess of the borrowing base formula computed amount. On March
13, 2000, the Company amended its credit facility. The amendment (i) waived the
defaults, (ii) revised the borrowing base definition to provide for an over
advance of up to $16.5 million for the period of March 1, 2000 through July 15,
2000, (iii) increased the interest rate by 0.875% plus another 0.50% during the
over advance period, (iv) revised the annual clean up provision amount to $27
million from $25 million and revised the clean up period to be between October
15 and January 15 from between September 30 and November 15, (v) revised the
fixed charge coverage ratio to 1.00:1 (from 1.50:1) for the twelve month periods
ended March 31, 2000 and June 30, 2000 and to 1.50:1 (from 1.75:1) thereafter,
(vi) limits capital expenditures to $2 million for fiscal 2000 and (vii)
requires total debt, as defined in the agreement, not to exceed $153 million at
June 30, 2000. The Company paid a fee of $0.5 million in conjunction with the
Credit Facility amendment and will amortize such fee over the remaining life of
the Credit Facility (March 2000 through August 2001).
Prior to the amendment discussed in the preceding paragraph and as a result
of the covenant violations described above, the Company was not allowed to make
the required interest payment of approximately $4 million due on February 1,
2000 to the holders of the Company's $75 million 10.875% Senior Subordinated
Notes due 2007. As a condition of the aforementioned amendment, the Company
obtained consent from substantially all of the note holders to accept the
February 1, 2000 interest payment in the form of new notes, in aggregate
principal amount substantially equal to such interest payment, in lieu of a cash
payment. As a result, the Company will be deemed to have made the cash interest
payment and simultaneously issued new notes to existing note holders in exchange
for such cash payment.
Subsequent to January 1, 2000, a majority stockholder of Pen-Tab Holdings,
Inc. ("Holdings") purchased approximately $60 million of the $75 million 10.875%
Senior Subordinated Notes in the secondary market.
Management, in conjunction with its debtors, have reviewed the Company's
fiscal 2000 budget and cash flow forecasts, and believe these plans will allow
the Company to meet the debt covenant requirements of its debt agreements.
F8
<PAGE>
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 1998 and 1999 fiscal years refer to the fifty-two week periods ended January
2, 1999 and January 1, 2000, respectively, and the 1997 fiscal year refers to
the fifty-three week period ended January 3, 1998.
Principles of Consolidation
The consolidated financial statements include the accounts of the company and
its subsidiaries. All significant inter-company 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.
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
F9
<PAGE>
2. Summary of Significant Accounting Policies (Continued)
the lease term. The principal estimated useful lives are: buildings - 15 to 40
years; machinery and equipment - 3 to 10 years; furniture, fixtures and computer
equipment - 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 1, 2000 and January 2, 1999.
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 1, 2000. The related accumulated amortization at January 1,
2000 and January 2, 1999 was $2,470 and $578, respectively.
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 at January 1, 2000 and January 2, 1999 was
$2,025 and $1,140, respectively.
Advertising Costs
The Company expenses the costs of advertising as incurred. Such costs amounted
to approximately $0, $1,596, and $2,658 for fiscal 1999, 1998, and 1997,
respectively.
F10
<PAGE>
2. Summary of Significant Accounting Policies (Continued)
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, net of any valuation allowance,
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 1, 2000 and January 2, 1999.
The fair value of the $75 million Senior Subordinated Notes based on a quoted
market price is 30% of the face value or $22.5 million at January 1, 2000. The
fair value of the swap agreement at January 1, 2000 was a loss of $0.7 million.
The fair value was determined based upon prevailing interest rates at January 1,
2000.
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.
F11
<PAGE>
2. Summary of Significant Accounting Policies (Continued)
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 1, 2000, except as discussed in Note 11.
Reclassification
Certain amounts included in prior years' financial statements have been
reclassified.
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 $126.8 million in cash. 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 $75.8 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 form 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.
For the Year Ended
-------------------------
Jan 2, 1999 Jan 3, 1998
------------- ------------
Pro forma net sales unaudited.................. $ 193,175 $ 187,570
============= ============
Pro forma net income unaudited................. $ 5,098 $ 3,367
============= ============
F12
<PAGE>
4. Unaudited Pro Forma Data
As described further in Note 8, the Company was taxed as an "S" corporation
through February 4, 1997. Upon completion of the recapitalization described in
Note 1, Pen-Tab Industries, Inc. terminated its "S" corporation status. The pro
forma related statement of operations for fiscal 1997 reflects adjustments to
the Company's income tax provision, as if the Company had been taxed as a "C"
corporation for the entire fiscal year of 1997.
5. Inventories
Inventories consist of the following:
January 1, January 2,
2000 1999
------- -------
Raw materials $17,858 $17,242
Work-in-process 1,792 715
Finished goods, net 23,922 22,644
LIFO reserve, net 1,443 -
------- -------
$45,015 $40,601
======= =======
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 1999, 1998, and 1997 by approximately $1,443,
$707, and $257, 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 1, 2000.
6. Dividends
Dividends for fiscal years 1999, 1998, and 1997 of $90, $6, and $40,212,
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.
F13
<PAGE>
7. Long-Term Debt
Long-term debt consisted of the following:
January 1 January 2,
2000 1999
--------- ----------
Credit Facility:
Revolver $ 41,500 $ 5,000
Term Loan 30,750 34,250
Senior Subordinated Notes 75,000 75,000
Industrial development revenue bonds 6,700 7,100
Equipment notes payable 1,937 2,875
Capital lease obligations (see Note 9) 7,282 8,235
-------- --------
163,169 132,460
Less: current portion 22,240 5,810
-------- --------
$140,929 $126,650
======== ========
In conjunction with the acquisition of Stuart Hall on August 20, 1998, the
Company entered into a $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: 1998 $750; 1999 $3,500; 2000 $5,500; 2001
$25,250. 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. During March 1, 2000 through July
15, 2000 the borrowing base includes an overadvance of up to $16,500. The
interest rate per annum applicable to the Credit Facility is the prime rate, as
announced by the Bank plus 1.75% or at the Company's option, the Eurodollar rate
plus 3.5%. During an overadvance period the interest rate is increased by 0.50%.
The Company is required to pay a commitment fee of 0.65% 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
(fixed charge coverage ratio, minimum EBITDA threshold and capital expenditure
limit), annually reduce the principal balance of the revolver to $27 million for
thirty consecutive days during the period between October 15 and January 15,
limit total debt, as defined in the agreement, to $153 million at June 30, 2000
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 7.7%,
7.5% and 7.5% for fiscal year 1999, 1998 and 1997, respectively.
F14
<PAGE>
7. Long-Term Debt (Continued)
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 1, 2000, the Company's effective interest rate under the swap agreement
was 10.04%. 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 (3.82% as of
January 1, 2000 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 in the amount of $6.8
million 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.
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: 2000 $986; 2001 $951.
8. Income Taxes
The Company elected to be treated as an "S" corporation for federal income tax
purposes until February 4, 1997 under which income, losses, deductions and
credits were allocated to and reported by the company's stockholders based on
their respective ownership interests. 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:
F15
<PAGE>
8. Income Taxes (Continued)
January 1, January 2,
2000 1999
------- -------
Current
- -------
Deferred Tax Assets
Accrued expenses $ 115 $ --
Allowance for bad debts 136 110
Inventory capitalization 304 186
Inventory valuation 760 --
Unused net operating loss 4,041 314
Restructure reserve 2,254 --
LIFO reserve -- 774
------- -------
Current Deferred Tax Asset 7,610 1,384
Valuation allowance (739) --
------- -------
Net Current Deferred Tax Asset $ 6,871 $ 1,384
------- -------
Non-current
- -----------
Deferred Tax Liability
Property, plant and equipment $(3,919) $(1,897)
Goodwill (2,952) (1,171)
------- -------
Net Non-Current Deferred Tax Liability $(6,871) $(3,068)
======= =======
Total Net Deferred Tax $ -- $(1,684)
======= =======
The components of income tax (benefit) provision from continuing operations are:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current
Federal $ -- $ -- $ --
State -- -- (30)
------- ------- -------
-- -- (30)
------- ------- -------
Deferred
Federal (1,337) (263) 1,545
State (155) (27) 259
------- ------- -------
(1,492) (290) 1,804
------- ------- -------
Income tax (benefit) provision $(1,492) $ (290) $ 1,774
======= ======= =======
</TABLE>
F16
<PAGE>
8. Income Taxes (Continued)
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>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Income tax benefit computed at the statutory U.S.
federal income tax rates $(2,488) $ (300) $ (438)
State income taxes, net of federal benefit (293) (35) (51)
Valuation allowance 739 -- --
Change in entity status -- -- 2,343
(Income) loss taxed at shareholders level -- -- 108
Other, including permanent differences 550 45 (188)
------- ------- -------
(Benefit) provision for income taxes $(1,492) $ (290) $ 1,774
======= ======= =======
</TABLE>
A deferred tax asset valuation allowance of $739 was recorded in 1999. This
valuation allowance reduced the deferred tax asset to an amount, which the
Company believes, based on the Company's estimates of its future taxable
earnings, is realizable. Therefore, the 1999 income tax benefit was reduced by a
provision of $739 related to the valuation allowance. In future periods, the
Company's provision for income taxes may be impacted by adjustments to the
valuation allowance.
The Company has available for federal income tax purposes $10,634 of net
operating losses, which expire substantially in the years 2012 through 2019.
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 2004, 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:
F17
<PAGE>
9. Leases and Commitments (Continued)
January 1, January 2,
2000 1999
------ ------
Buildings $8,783 $8,783
Less: Accumulated amortization 1,302 304
------ ------
Total $7,481 $8,479
====== ======
Future minimum lease payments under non-cancelable operating and capital leases
are as follows, as of January 1, 2000:
Fiscal year Operating Capital
----------------------- ----------------- -------------------
2000 1,871 1,582
2001 1,629 1,582
2002 982 1,582
2003 482 1,582
2004 430 1,582
Thereafter 126 1,856
------ --------
Total $5,520 $ 9,766
======
Imputed interest (2,484)
--------
Present value $ 7,282
========
Rent expense was approximately $1,717, $1,353, and $1,197 in fiscal 1999, 1998,
and 1997, respectively. Amortization of the capital lease assets are included in
depreciation expense.
At January 1, 2000 and January 2, 1999, 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 1999, the Company approved a plan to rationalize its manufacturing
operations. The plan includes a plant consolidation, equipment moves,
plant/product changes, and warehouse consolidation. The reorganization charge of
$6.1 million represents the Company's rationalization plan and includes employee
termination costs, including severance and benefit, cost to exit facilities,
lease termination costs, and property taxes after ceasing operations.
F18
<PAGE>
10. Reorganization Expenses (Continued)
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 1999, 1998, and 1997 the Company had two customers each in excess
of 10% of revenues as follows:
1999 1998 1997
---- ---- ----
Customer A 22.8% 18.3% 23.8%
Customer B 12.0% 14.4% 19.1%
---- ---- ----
Total 34.8% 32.7% 42.9%
==== ==== ====
Two customers comprised approximately 35.0% and 34.5% of the net accounts
receivable balance at January 1, 2000 and January 2, 1999, respectively.
Employees covered under collective bargaining agreements represent approximately
65% of the Company's work force. Collective bargaining agreements covering
approximately 24% 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 $228, $220, and $136 in
fiscal 1999, 1998, and 1997, 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 $95, $87, and $24 in fiscal 1999, 1998, and
1997, respectively.
13. Discountinued Operations
In March 2000, the Company decided to divest its vinyl packaging business
segment, which operates as Vinylweld L.L.C. The consolidated financial
statements and related footnotes reflect this business as a discontinued
operation. The net sales from this segment amounted to $8,152 in 1999, $9,291 in
1998 and $8,623 in 1997. Income tax (benefits) provisions allocated to this
segment were $(192), $(45) and $171 for the years 1999, 1998 and 1997,
respectively. The assets and liabilities of this segment, consists primarily of
accounts receivable, inventories, property, plant and equipment and accounts
payable.
January 1, January 2,
2000 2000
------------------ ------------------
Net current assets $ 1,088 $ 1,519
================== ==================
Net non-current assets $ 1,139 $ 1,050
================== ==================
14. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consist of the following:
January 1, January 2,
2000 1999
---------- ----------
Accrued compensation and benefits $ 632 $ 1,135
Accrued reorganization costs 5,932 -
Accrued sales programs 2,538 1,562
Accrued acquisition costs - 3,271
Other accrued expenses 1,454 1,414
---------- ----------
$ 10,556 $ 7,382
========== ==========
F19
<PAGE>
15. 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.
School, Home Vinyl
And Office Packaging
Products Products Total
------------ --------- -----
1999
Net sales $155,403 $ 8,152 $163,555
Operating earnings (loss) 10,108 (987) 9,121
Interest expense, net 17,337 45 17,382
Identifiable assets 190,415 3,307 193,722
Depreciation and amortization 8,586 276 8,862
Capital expenditures 2,483 371 2,854
1998
Net sales $114,791 $ 9,291 $124,082
Operating earnings (loss) 10,545 (148) 10,397
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
For the purposes of the segment information provided above, operating earnings
are defined as net sales less related cost of goods sold, selling, general and
administration expenses, amortization of goodwill, restructure and
reorganization expenses and other income-net. Inter-segment sales are
immaterial.
F20
<PAGE>
Exhibit 10.19
FIRST AMENDMENT AND WAIVER
TO
SECURED CREDIT AGREEMENT
THIS FIRST AMENDMENT AND WAIVER dated as of March 31, 1999 is entered into
by and 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 the Credit Agreement referred
to below (the "Lenders") and Bank of America National Trust and Savings
Association as letter of credit issuer and as agent for the Lenders (the
"Agent").
W I T N E S S E T H:
--------------------
WHEREAS, the Company, the Parent, the Lenders and the Agent are parties to
a certain Secured Credit Agreement dated as of August 20, 1998 (herein called
the "Credit Agreement"); and
WHEREAS, subject to the terms and conditions set forth herein the Lenders
are willing to waive non-compliance by the Company with certain provisions of
the Credit Agreement and to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Company, the Parent, the Lenders and the Agent hereby
agree as follows:
SECTION 1. WAIVER. In reliance on the warranties of the Company and the
------
Parent set forth in Section 3 below, the Lenders and the Agent hereby waive the
---------
Company's compliance with the provisions of Section 8A.2 of the Credit Agreement
------------
for the Borrower's fourth fiscal quarter, 1998.
SECTION 2. AMENDMENTS
----------
In reliance on the warranties of the Company and the Parent set forth in
Section 3 below, as of the date hereof the Credit Agreement shall be hereby
- ---------
amended as follows:
(a) Section 1.1 of the Credit Agreement is amended by adding the
-----------
following new definition in appropriate alphabetical order:
"Net Worth Shortfall Period" means (a) initially, a period (i)
commencing on April 1, 1999 and (ii) ending as of any succeeding date
thereafter for which the Agent receives from the Company a certificate
pursuant to Section 7.1(a) or (b) which indicates that the Consolidated Net
-------------- ---
Worth for the fiscal period then most recently ended was equal to or
greater than $11,800,000 and (b) at any time thereafter, a period (i)
commencing as of any date for which the Agent receives from the Company a
certificate pursuant to Section 7.1(a) or (b) which indicates that the
-------------- ---
Consolidated Net Worth for the fiscal period then ended was less than
<PAGE>
$11,800,000 and (ii) ending as of the next succeeding date for which the
Agent receives from the Company such a certificate which indicates that the
Consolidated Net Worth for the fiscal period then ended was equal to or
greater than $11,800,000."
(b) The definitions of "Applicable Margin" and "Minimum Consolidated Net
Worth" set forth in Section 1.1 of the Credit Agreement are amended to read in
-----------
their entirety as follows:
""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 Offshore Rate Base Rate Commitment Fee
Coverage Ratio Applicable Margin Applicable Margin Applicable Margin
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than 2.5:1 2.00% 1.00% 0.50%
- -----------------------------------------------------------------------------------------------
Greater than or 1.75% 0.75% 0.40%
equal to 2.5:1
- -----------------------------------------------------------------------------------------------
</TABLE>
; provided, that at all times during a Net Worth Shortfall Period, the
--------
foregoing Offshore Rate Applicable Margin and Base Rate Applicable Margin
shall be increased by .25%;
The Applicable Margin shall be adjusted on the fifteenth day following
receipts 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%."
""Minimum Consolidated Net Worth" means, as of the last day of the
Company's: (a) first fiscal quarter, 1999, $8,300,000, (b) second fiscal
quarter, 1999, $9,300,000, (c) third or fourth fiscal quarter, 1999 or
first, second or third fiscal quarter, 2000, $11,000,000, and (d) fourth
fiscal quarter, 2000 or first or second fiscal quarter, 2001, the sum of
(i) $11,000,000 plus (ii) 50% of the consolidated net income of the Company
and its consolidated Subsidiaries for fiscal year 2000."
-2-
<PAGE>
(c) The final paragraph of the definition of "Eligible Account" set forth
in Section 1.1 of the Credit Agreement is amended to read in its entirety as
-----------
follows:
"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: (i)
except in the case of Wal-Mart Stores, Inc. and its subsidiary Sam's Clubs,
Kmart Corporation, Costco Companies, Inc. and Dayton Hudson Corporation's
Target Stores, is more than 60 days past due as to any regularly scheduled
due date; or (ii) remains unpaid more than (A) in the case of Wal-Mart
Stores, Inc. and its subsidiary Sam's Clubs, Kmart Corporation, Costco
Companies, Inc. and Dayton Hudson Corporation's Target Stores, 120 days
past the date of its respective invoice or (B) in the case of any other
Account Debtor, 90 days past the date of its respective invoice."
(d) Section 2.11 of the Credit Agreement is amended by adding at the
------------
end of such Section a new clause (b) which reads in its entirety as
follows:
"(b) Each determination of an interest rate by the Agent shall be
conclusive and binding on the Company and the Banks in the absence of
manifest error. The Company and the Banks acknowledge that: (i) at the
commencement and conclusion of any Net Worth Shortfall Period it may be
necessary for the Agent to recalculate interest and/or fees theretofore
paid by the Company to reflect the increase or decrease, as applicable, in
the Applicable Margin during the period of time occurring between the date
as of which such Net Worth Shortfall Period begins or ends, as the case may
be, and the date on which the Agent receives the Company's certificate
pursuant to Section 7.1(a) or (b) indicating the commencement or conclusion
-------------- ---
of such Net Worth Shortfall Period; and (ii) if such recalculation
indicates (x) an amount owing by the Company, the Company shall within
three (3) Business Days of receipt of any invoice therefor pay to the Agent
the amount so owed and (y) an amount due to the Company, such amount shall
be credited to the next payment of interest or fees then due from the
Company, provided, that if the Company terminates the Commitments and pays
--------
in full the outstanding Loans prior to such credit being fully utilized
then the Banks shall pay over to the Company upon such termination their
respective Commitment Percentage of any such remaining credit."
(e) Clause (h) of Section 7.2 of the Credit Agreement is redesignated to
-----------
be clause (i) of Section 7.2 and a new clause (h) is added to Section 7.2
----------- -----------
which reads in its entirety as follows:
-3-
<PAGE>
"(h) during any Net Worth Shortfall Period, at the request of the
Agent or any Lender, bi-weekly sales and collateral reports in a form
acceptable to the Agent and the Majority Lenders."
SECTION 3. WARRANTIES.
----------
To induce the Lenders and the Agent to enter into this Amendment, each of
the Company and the Parent warrant to the Lenders and the Agent as of the date
hereof that:
(a) No Default or Event of Default exists; and
(b) The representations and warranties of the Borrowers contained in
Article VI of the Credit Agreement are true and correct with the same effect as
- ----------
though made on the date hereof, except to the extent such representation and
warranty expressly speaks to an earlier date.
SECTION 4. GENERAL.
-------
(a) Terms used but not otherwise defined herein are used herein as
defined in the Credit Agreement.
(b) As hereby amended or modified, the Credit Agreement shall remain in
full force and effect and is hereby ratified, approved and confirmed in all
respects.
(c) After the date hereof, all references in the Credit Agreement and the
Loan Documents to "Credit Agreement," "Agreement," "hereof" or the like shall
refer to the Credit Agreement as hereby amended or modified.
(d) The Company acknowledges its payment and reimbursement obligations
arising pursuant to Section 11.4 of the Credit Agreement with respect to
------------
reasonable Attorney Costs incurred by BofA in connection with the preparation of
this Amendment.
(e) This Amendment shall be binding upon the Company, the Parent, the
Lenders and the Agent and shall inure to the benefit of the Company, the Parent,
the Lenders and the Agent and the successors and assigns of the Lenders and the
Agent.
(f) This Amendment may be executed in any number of counterparts and by
the different parties on separate counterparts, and each such counterpart shall
be deemed to be an original, but all such counterparts shall together constitute
but one and the same Amendment.
* * * * *
-4-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above
written.
PEN-TAB INDUSTRIES, INC.
By:
---------------------------------
Title:
------------------------------
PEN-TAB HOLDINGS, INC.
By:
---------------------------------
Title:
------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Agent
By:
---------------------------------
Title:
------------------------------
BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, as Lender
By:
---------------------------------
Title:
------------------------------
-5-
<PAGE>
COMERICA BANK, as Lender
By:
---------------------------------
Title:
------------------------------
BAY VIEW FINANCIAL CORPORATION, as Lender
By:
---------------------------------
Title:
------------------------------
UNION BANK OF CALIFORNIA, N.A., as Lender
By:
---------------------------------
Title:
------------------------------
-6-
<PAGE>
BAY VIEW BANK, as Lender
By:
---------------------------------
Title:
------------------------------
-7-
<PAGE>
The undersigned hereby acknowledges the foregoing amendments and reaffirms
its duties and obligations arising under the Loan Documents to which it is a
party.
STUART HALL COMPANY, INC.
By:
---------------------------------
Title:
------------------------------
-8-
<PAGE>
Exhibit 10.20
SECOND AMENDMENT AND WAIVER
TO
SECURED CREDIT AGREEMENT
THIS SECOND AMENDMENT AND WAIVER dated as of November 16, 1999 (this
"Amendment") is entered into by and 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 the
------
Credit Agreement referred to below (the "Lenders") and Bank of America, N.A.
-------
(formerly known as Bank of America National Trust and Savings Association) as
letter of credit issuer and as agent for the Lenders (the "Agent").
-----
W I T N E S S E T H:
--------------------
WHEREAS, the Company, the Parent, the Lenders and the Agent are parties to
a certain Secured Credit Agreement dated as of August 20, 1998 (herein called
the "Credit Agreement"); and
----------------
WHEREAS, subject to the terms and conditions set forth herein the Lenders
are willing to waive non-compliance by the Company with certain provisions of
the Credit Agreement and to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Company, the Parent, the Lenders and the Agent hereby
agree as follows:
SECTION 1. WAIVER. In reliance on the warranties of the Company and the
------
Parent set forth in Section 3 below, the Lenders and the Agent hereby waive the
---------
Company's compliance with the provisions of Section 8A.1 of the Credit Agreement
------------
for the Company's fiscal quarter ended September 30, 1999.
SECTION 2. AMENDMENTS
----------
In reliance on the warranties of the Company and the Parent set forth in
Section 3 below, as of the date hereof the Credit Agreement shall be hereby
- ---------
amended as follows:
(a) The title page and the preamble to the Credit Agreement are hereby
amended by deleting each reference therein to "Bank of America National Trust
and Savings Association" and in its place substituting "Bank of America, N.A.".
(b) The definition of "BofA" set forth in Section 1.1 of the Credit
-----------
Agreement is hereby amended to read in its entirety as follows:
" "BofA" means Bank of America, N.A. "
----
(c) The definition of "Applicable Margin" set forth in Section 1.1 of the
-----------
Credit
<PAGE>
Agreement is hereby amended to read in its entirety as follows:
" "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 Offshore Rate Base Rate Commitment Fee
Coverage Ratio Applicable Margin Applicable Margin Applicable Margin
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than or equal 2.625% 1.50% 0.60%
to 1.75:1
- -----------------------------------------------------------------------------------------------
Greater than 1.75:1 2.00% 1.00% 0.50%
and less than 2.5:1
- -----------------------------------------------------------------------------------------------
Greater than or 1.75% 0.75% 0.40%
equal to 2.5:1
- -----------------------------------------------------------------------------------------------
</TABLE>
; provided, that at all times during a Net Worth Shortfall Period, the
--------
foregoing Offshore Rate Applicable Margin and Base Rate Applicable Margin
shall be increased by .25%;
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 2.625% with respect to Offshore Rate Loans, 1.50% with respect to
Base Rate Loans and 0.60% with respect to the Commitment Fee. "
(d) Section 7.13 of the Credit Agreement is hereby amended to read in its
------------
entirety as follows:
" 7.13 Annual Clean-Up. The Company shall (a) for a period of not less
---------------
than thirty (30) consecutive days occurring between September 30 and November 15
of each fiscal year other than the 1999 fiscal year, reduce the aggregate
outstanding principal amount of Revolving Loans plus accrued interest thereon to
$25,000,000 or less, and (b) for a period of not less thirty (30) consecutive
days occurring between September 30, 1999 and January 15, 2000, reduce the
aggregate outstanding principal amount of Revolving Loans plus accrued interest
thereon to $25,000,000 or less. "
-2-
<PAGE>
SECTION 3. WARRANTIES.
----------
To induce the Lenders and the Agent to enter into this Amendment, each of
the Company and the Parent warrant to the Lenders and the Agent as of the date
hereof that:
(a) No Default or Event of Default exists; and
(b) The representations and warranties of the Borrowers contained in
Article VI of the Credit Agreement are true and correct with the same effect as
- ----------
though made on the date hereof, except to the extent such representation and
warranty expressly speaks to an earlier date.
SECTION 4. GENERAL.
-------
(a) Capitalized terms used but not otherwise defined herein have the
meanings assigned thereto in the Credit Agreement.
(b) As hereby amended or modified, the Credit Agreement shall remain in
full force and effect and is hereby ratified, approved and confirmed in all
respects.
(c) After the date hereof, all references in the Credit Agreement and the
Loan Documents to "Credit Agreement," "Agreement," "hereof" or the like shall
refer to the Credit Agreement as hereby amended or modified.
(d) The Company acknowledges its payment and reimbursement obligations
arising pursuant to Section 11.4 of the Credit Agreement with respect to
------------
reasonable Attorney Costs incurred by BofA in connection with the preparation of
this Amendment.
(e) This Amendment shall be binding upon the Company, the Parent, the
Lenders and the Agent and shall inure to the benefit of the Company, the Parent,
the Lenders and the Agent and the successors and assigns of the Lenders and the
Agent.
(f) This Amendment may be executed in any number of counterparts and by
the different parties on separate counterparts, and each such counterpart shall
be deemed to be an original, but all such counterparts shall together constitute
but one and the same Amendment.
* * * * *
-3-
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above
written.
PEN-TAB INDUSTRIES, INC.
By:
----------------------------------
Title:
-------------------------------
PEN-TAB HOLDINGS, INC.
By:
----------------------------------
Title:
-------------------------------
BANK OF AMERICA, N.A., as Agent
By:
----------------------------------
Title:
-------------------------------
BANK OF AMERICA, N.A., as Lender
By:
----------------------------------
Title:
-------------------------------
-4-
<PAGE>
COMERICA BANK, as Lender
By:
----------------------------------
Title:
-------------------------------
BAY VIEW FINANCIAL CORPORATION, as Lender
By:
----------------------------------
Title:
-------------------------------
UNION BANK OF CALIFORNIA, N.A., as Lender
By:
----------------------------------
Title:
-------------------------------
-5-
<PAGE>
BAY VIEW BANK, as Lender
By:
----------------------------------
Title:
-------------------------------
LASALLE BANK, NATIONAL ASSOCIATION, as Lender
By:
----------------------------------
Title:
-------------------------------
-6-
<PAGE>
The undersigned hereby acknowledges the foregoing amendments and reaffirms
its duties and obligations arising under the Loan Documents to which it is a
party.
STUART HALL COMPANY, INC.
By:
----------------------------------
Title:
-------------------------------
-7-
<PAGE>
Exhibit 10.21
THIRD AMENDMENT AND WAIVER
TO
SECURED CREDIT AGREEMENT
THIS THIRD AMENDMENT AND WAIVER dated as of March 13, 2000 (this
"Amendment") is entered into by and 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 the
------
Credit Agreement referred to below (the "Lenders") and Bank of America, N.A.
-------
(formerly known as Bank of America National Trust and Savings Association) as
letter of credit issuer and as agent for the Lenders (the "Agent").
-----
W I T N E S S E T H:
- - - - - - - - - --
WHEREAS, the Company, the Parent, the Lenders and the Agent are parties to
a certain Secured Credit Agreement dated as of August 20, 1998 (herein called
the "Credit Agreement"); and
----------------
WHEREAS, subject to the terms and conditions set forth herein the Lenders
are willing to waive non-compliance by the Company with certain provisions of
the Credit Agreement and to amend certain provisions of the Credit Agreement.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Company, the Parent, the Lenders and the Agent hereby
agree as follows:
SECTION 1. WAIVER. In reliance on the warranties of the Company and the
------
Parent set forth in Section 3 below, effective on (and subject to the occurrence
---------
of) the Amendment Effective Date (as defined below), the Lenders and the Agent
hereby waive (i) the Company's compliance with the provisions of Sections 8A.1
-------------
and 8A.2 of the Credit Agreement for the Company's fiscal quarter ended December
----
31, 1999, (ii) the Company's compliance with Section 7.13 for the period from
------------
September 30, 1999 through January 15, 2000 and (iii) any Event of Default
caused by reason of the Company's failure to make a mandatory prepayment of the
Revolving Loans pursuant to Section 2.7 of the Credit Agreement during the
-----------
period from September 30, 1999 through the date hereof.
SECTION 2. AMENDMENTS. In reliance on the warranties of the Company and
----------
the Parent set forth in Section 3 below, effective on (and subject to the
---------
occurrence of) the Amendment Effective Date, the Credit Agreement shall be
amended as follows:
<PAGE>
(a) The definition of "Borrowing Base" set forth in Section 1.1 of the
-----------
Credit Agreement shall be amended to read in its entirety as follows:
"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 (including, without limitation,
program allowances), as the Agent may reasonably deem proper and
necessary) of the Eligible Accounts of the Company, Stuart Hall and
Vinylweld as of the date of the most recently delivered Borrowing Base
certificate; plus
----
(ii) an amount equal to the lesser of (x) 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, Stuart Hall and Vinylweld and (y) at all
times from February 1 through June 30 of each year, $45,000,000 and at
all other times, $30,000,000; plus
----
(iii) an amount equal to (1) for the period from March 1, 2000
through April 30, 2000, $16,500,000, (2) for the period from May 1,
2000 through May 31, 2000, $14,500,000, (3) for the period from June
1, 2000 through June 30, 2000, $10,000,000, (4) for the period from
July 1, 2000 through July 15, 2000, $5,000,000 and (5) for the period
from and after July 16, 2000, $0; 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.
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.
<PAGE>
(b) The definition of "Applicable Margin" set forth in Section 1.1 of the
-----------
Credit Agreement shall be amended to read in its entirety as follows:
"Applicable Margin" with respect to any Offshore Rate Loan, Base Rate
-----------------
Loan or the Commitment Fee, means (i) until the first time the Applicable
Margin is adjusted pursuant to the last paragraph of this definition, 3.50%
for Offshore Rate Loans, 1.75% for Base Rate Loans and 0.65% for the
Commitment Fee, and (ii) at all times when clause (i) above does not apply,
----------
a margin based on the Fixed Charge Coverage Ratio, as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Fixed Charge Offshore Rate Base Rate Commitment Fee
Coverage Ratio Applicable Margin Applicable Margin Applicable Margin
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than or equal to 3.50% 1.75% 0.65%
1.5:1
- ----------------------------------------------------------------------------------------------------
Greater than 1.5:1 and 2.625% 1.50% 0.60%
less than or equal to
1.75:1
- ----------------------------------------------------------------------------------------------------
Greater than 1.75:1 2.00% 1.00% 0.50%
- ----------------------------------------------------------------------------------------------------
</TABLE>
; provided, that at all times during each month during which, at any
--------
time during such month, the Effective Amount of all Revolving Loans plus
the Effective Amount of all L/C Obligations (other than with respect to the
IRB Letter of Credit) exceeded the Borrowing Base less any amount set forth
in clause (a)(iii) of the definition of Borrowing Base, the foregoing
---------------
Offshore Rate Applicable Margin and Base Rate Applicable Margin shall be
increased by 0.50%.
The Applicable Margin shall be adjusted on the fifteenth day following
receipt by the Agent of the financial statements required by Section 7.1(a)
--------------
or (b), as applicable, and the related Compliance Certificate required by
---
Section 7.2(b) (provided, that the Applicable Margin shall not be adjusted
-------------- --------
until financial statements in accordance with Section 7.1(b) are delivered
--------------
to the Agent with respect to the Company's fiscal quarter ended September
30, 2000), 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 financial statements required by
Section 7.1(a) or (b), as applicable, and the related Compliance
-------------- ---
Certificate required by Section 7.2(b), then, until receipt of such
--------------
financial statements and certificate by the Agent, the Applicable Margin
shall be 3.50% with respect to Offshore Rate Loans, 1.75% with respect to
Base Rate Loans and 0.65% with respect to the Commitment Fee.
(c) The definition of "Consolidated EBITDA" set forth in Section 1.1 of the
-----------
Credit Agreement shall be amended by (i) deleting the word "and" where it
appears immediately prior to clause (i)(e) of such definition and inserting a
-------------
comma in lieu thereof and (ii) inserting the following immediately after clause
------
(i)(e) and before the semicolon
- ------
<PAGE>
"and (f) restructuring charges related to the Company's 1999-2000 restructuring
in an amount not to exceed $10,000,000 in the aggregate."
(d) The definition of "Eligible Account" set forth in Section 1.1 of the
-----------
Credit Agreement shall be amended by: (i) deleting the words "the Company or
Stuart Hall" where they appear immediately prior to the parenthetical phrase
defining "Person" for purposes of the definition of "Eligible Account" and
inserting in lieu thereof the words "the Company, Stuart Hall or Vinylweld;"
(ii) deleting the percentage "10%" where it appears in clause (n) of such
----------
definition and inserting the following percentage in lieu thereof "25%"; (iii)
deleting the date "October 1" where it appears in clause (c) of such definition
----------
and inserting the following date in lieu thereof "October 10;" and (iv) adding
the following to clause (h) of such definition immediately following the word
----------
"Company", ", Stuart Hall or Vinylweld."
(e) The definition of "Eligible Inventory" set forth in Section 1.1 of the
-----------
Credit Agreement shall be amended by: (i) deleting the words "the Company or
Stuart Hall" where they appear immediately prior to the parenthetical phrase
defining "Person" for purposes of the definition of "Eligible Inventory" and
inserting in lieu thereof the words "the Company, Stuart Hall or Vinylweld; "
and (ii) deleting from clause (g) of such definition the words "the Company or
----------
Stuart Hall" and inserting in lieu thereof the words "the Company, Stuart Hall
or Vinylweld."
(f) The definition of "Interest Payment Date" set forth in Section 1.1 of
-----------
the Credit Agreement shall be amended to read in its entirety as follows:
"Interest Payment Date" means the last Business Day of each month and,
---------------------
with respect to any Loan, each date such Loan is converted into another
Type of Loan and, with respect to any Offshore Rate Loan, on the last day
of each Interest Period with respect thereto.
(g) The definition of "Net Worth Shortfall Period" shall be deleted from
Section 1.1 of the Credit Agreement.
- -----------
(h) The following definitions shall be added to Section 1.1 of the Credit
-----------
Agreement, each in its appropriate alphabetical position:
"Qualified Subordinated Debt" means unsecured indebtedness of the
---------------------------
Company, that has no financial covenants and otherwise has terms and
conditions satisfactory to the Agent, that is subordinated in right of
payment to the Obligations pursuant to terms satisfactory to the Agent and
that has, at a minimum, no right to payment in cash of any interest,
principal, fee, premium or other amount owing with respect thereto until at
least one year after the Term Maturity Date.
<PAGE>
"Total Debt" means for any Person, all Indebtedness of such Person and
----------
its Subsidiaries other than (x) Qualified Subordinated Debt, (y)
obligations with respect to Swap Contracts and (z) Indebtedness under
letters of credit issued in support of trade payables arising in the
ordinary course of business.
(i) Section 2.11(b) of the Credit Agreement shall be amended to read in
---------------
its entirety as follows:
(b) [intentionally left blank].
(j) Section 7.2 of the Credit Agreement shall be amended by deleting
-----------
clauses (g) and (h) and inserting the following in lieu thereof:
- ----------- ---
(g) not later than the third Business Day of each week, a certificate
of a Responsible Officer of the Company, substantially in the form of
Exhibit L attached hereto, containing a calculation of the Borrowing Base
---------
as of the last Business Day of the immediately preceding week;
(h) for the period from March 1, 2000 through July 15, 2000 weekly,
not later than the third Business Day of each week, a certificate of a
Responsible Officer of the Company with respect to a cash flow forecast for
such week and the next succeeding four weeks in a form acceptable to the
Agent;
(i) promptly, notice of any revision to the forecast delivered with
respect to fiscal year 2000 pursuant to Section 7.2(d); and
--------------
(j) promptly, such additional information regarding the business,
financial and corporate affairs of the Company, the Parent or any
Subsidiary as the Agent or any Lender may reasonably request.
(k) Section 7.13 of the Credit Agreement shall be amended to read in its
------------
entirety as follows:
7.13 Annual Clean-Up. The Company shall (a) for a period of not less
---------------
than thirty (30) consecutive days occurring between September 30 and
November 15 of each fiscal year other than the 2000 fiscal year, reduce the
aggregate outstanding principal amount of Revolving Loans plus accrued
interest thereon to $25,000,000 or less, and (b) for a period of not less
thirty (30) consecutive days occurring between October 15, 2000 and January
15, 2001, reduce the aggregate outstanding principal amount of Revolving
Loans plus accrued interest thereon to $27,000,000 or less.
(l) Section 8.5(f) of the Credit Agreement shall be amended by adding the
--------------
following immediately following the figure "$75,000,000" where it appears in
clause (i) of the proviso thereto: "plus the aggregate principal amount of any
notes issued
<PAGE>
thereunder in payment of interest as contemplated by Section 4(ii) of the Third
Amendment and Waiver to this Agreement dated as of March 13, 2000."
(m) Section 8A.1 of the Credit Agreement shall be amended to read in its
------------
entirety as follows:
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 ratio set forth below
opposite such period:
Period Ratio Level
------ -----------
March 31, 2000 through
June 30, 2000 1.00:1
Thereafter 1.50:1.
(n) Section 8A.2 of the Credit Agreement shall be amended to read in its
------------
entirety as follows:
8A.2 Minimum EBITDA. The Company shall not permit, as of the last day
--------------
of any fiscal quarter occurring during each period set forth below,
Consolidated EBITDA for the four consecutive fiscal quarter period then
ended to be less than the minimum amount set forth below opposite such
period:
Period Amount
- --------------------------------- -----------
March 31, 2000 $19,000,000
June 30, 2000 $19,500,000
September 30, 2000 $24,000,000
December 31, 2000 and each
fiscal quarter thereafter $24,500,000.
(o) Section 8A.3 of the Credit Agreement shall be amended to read in its
------------
entirety as follows:
8A.3. Capital Expenditures. The Company shall not permit Consolidated
--------------------
Capital Expenditures (i) during the 2000 fiscal year of the Company to
exceed $2,000,000, and (ii) during any fiscal year of the Company
thereafter to exceed $5,000,000 plus any Rollover Amount. For purposes of
this section "Rollover Amount" shall mean for any fiscal year beginning
after December 31, 2001, the amount by which $5,000,000 exceeds the
Consolidated Capital Expenditures during the prior fiscal year.
<PAGE>
(p) The following Section 8A.4 shall be added to the Credit Agreement:
------------
8A.4. Total Debt. (a) The Parent shall not permit its Total Debt to
----------
exceed $202,500,000 on June 30, 2000.
(b) The Company shall not permit its Total Debt to exceed $153,000,000
on June 30, 2000.
(c) Each of the Parent and the Company will deliver to the Agent, in
form and detail satisfactory to the Agent and the Majority Lenders, with
sufficient copies for each Lender, balance sheets for each of the Parent
and the Company as of June 30, 2000, together with certificates calculating
the Total Debt of the Parent and the Total Debt of the Company on June 30,
2000, which balance sheets and certificates must be delivered no later than
July 15, 2000.
SECTION 3. WARRANTIES. To induce the Lenders and the Agent to enter into
----------
this Amendment, each of the Company and the Parent warrant to the Lenders and
the Agent as of the date hereof that:
(a) No Default or Event of Default exists; and
(b) The representations and warranties of the Borrowers contained in
Article VI of the Credit Agreement are true and correct with the same effect as
- ----------
though made on the date hereof, except to the extent such representations and
warranties expressly refer to an earlier date, in which case they were true and
correct as of such earlier date.
SECTION 4. EFFECTIVENESS. The waivers set forth in Section 1 above and
------------- ---------
the amendments set forth in Section 2 above shall become effective on such date
---------
(the "Amendment Effective Date") when:
------------------------
(i) the Company, the Parent, the Agent and the Majority Lenders have
executed counterparts hereof and delivered them to the Agent;
(ii) the Agent shall have received evidence satisfactory to it that the
holders of not less than 76% of the principal amount of the Company's 10-7/8%
Senior Subordinated Notes due 2007 issued under the 1997 Debt Indenture ("Senior
------
Subordinated Notes") have irrevocably and unconditionally agreed not to
- ------------------
accelerate the Senior Subordinated Notes, or declare a default or otherwise
exercise any remedy with respect thereto as a result of any event of default
under the 1997 Debt Indenture arising from the failure of the Company to make
the payment of interest on the Senior Subordinated Notes due on February 1, 2000
and have agreed to accept a payment of additional Senior Subordinated Notes in a
principal amount equal to the amount of interest not paid in cash on the Senior
Subordinated Notes on such date, in each case on terms satisfactory to the
Agent;
<PAGE>
(iii) the Agent shall have received an amendment, in form and substance
satisfactory to the Agent, to the deed of trust entered into by the Company in
favor of the Agent in respect of the Company's real property in Front Royal,
Virginia increasing the amount of indebtedness secured thereby to $15,000,000,
duly executed by the Company;
(iv) the Agent shall have received such endorsements to the title insurance
policy issued in favor of the Agent with respect to the deed of trust described
in clause (iii) above as it shall reasonably request;
------------
(v) the Company, Vinylweld and Stuart Hall shall have entered into an
agreement with the Agent in form and substance satisfactory to the Agent
granting the Agent dominion and control over all cash receipts of the Company,
Vinylweld and Stuart Hall;
(vi) the Agent shall have received a Security Agreement duly executed by
Vinylweld, together with all schedules thereto;
(vii) the Agent shall have received certified copies of Uniform Commercial
Code Requests for Information or Copies (Form UCC-11), or a similar search
report certified by a party reasonably acceptable to the Agent, dated a date
reasonably near to the Amendment Effective Date, listing all effective financing
statements which name Vinylweld (under its present name and any previous names)
as debtor and which are filed in the jurisdictions in which filings are to be
made in connection with such Security Agreement, together with (A) copies of
such financing statements, (B) executed copies of proper Uniform Commercial Code
Form UCC-3 termination statements, if any, necessary to release all Liens and
other rights of any Person in any collateral described in such Security
Agreement previously granted by any Person (other than Permitted Liens) and (C)
such other Uniform Commercial Code Form UCC-3 termination statements as the
Agent may reasonably request;
(viii) the Agent shall have received each document (including Uniform
Commercial Code financing statements) reasonably requested by the Agent to be
filed, registered or recorded in order to create in favor of the Agent, for the
benefit of the Lenders, a perfected Lien on the Collateral of Vinylweld, prior
and superior to any other Person, in proper form for filing, registration or
recording;
(ix) the Agent shall have received a duly executed Reaffirmation of Loan
Documents from the Parent and Stuart Hall, in substantially the form of Exhibit
-------
A hereto; and
- -
(x) the Agent shall have received, for the account of each Lender, an
amendment fee equal to 0.375% of the sum of such Lender's Term Loan plus such
Lender's Commitment.
SECTION 5. GENERAL.
-------
<PAGE>
(a) Capitalized terms used but not otherwise defined herein have the
meanings assigned thereto in the Credit Agreement.
(b) As hereby amended or modified, the Credit Agreement shall remain in
full force and effect and is hereby ratified, approved and confirmed in all
respects.
(c) After the date hereof, all references in the Credit Agreement and the
Loan Documents to "Credit Agreement," "Agreement," "hereof" or the like shall
refer to the Credit Agreement as hereby amended or modified.
(d) The Company acknowledges its payment and reimbursement obligations
arising pursuant to Section 11.4 of the Credit Agreement with respect to
------------
reasonable Attorney Costs incurred by BofA in connection with the preparation of
this Amendment.
(e) This Amendment shall be binding upon the Company, the Parent, the
Lenders and the Agent and shall inure to the benefit of the Company, the Parent,
the Lenders and the Agent and the successors and assigns of the Lenders and the
Agent.
(f) This Amendment may be executed in any number of counterparts and by the
different parties on separate counterparts, and each such counterpart shall be
deemed to be an original, but all such counterparts shall together constitute
but one and the same Amendment.
(g) This Amendment shall be governed by, and construed in accordance with,
the laws of the State of Illinois, provided that the Agent and the Lenders shall
retain all rights arising under federal law.
* * * * *
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above
written.
PEN-TAB INDUSTRIES, INC.
By:____________________________
Title: ________________________
PEN-TAB HOLDINGS, INC.
By:____________________________
Title: ________________________
BANK OF AMERICA, N.A., as Agent
By:____________________________
Title: ________________________
BANK OF AMERICA, N.A., as Lender
By:____________________________
Title: ________________________
COMERICA BANK, as Lender
By:____________________________
Title: ________________________
<PAGE>
BAY VIEW FINANCIAL CORPORATION, as Lender
By:____________________________
Title: ________________________
UNION BANK OF CALIFORNIA, N.A., as Lender
By:____________________________
Title: ________________________
BAY VIEW BANK, as Lender
By:____________________________
Title: ________________________
LASALLE BANK NATIONAL ASSOCIATION, as Lender
By:____________________________
Title: ________________________
<PAGE>
EXHIBIT A
FORM OF REAFFIRMATION OF
LOAN DOCUMENTS
March __, 2000
Bank of America, N.A., as Agent
and the other parties to the Secured Credit
Agreement referred to below
231 South LaSalle Street
Chicago, Illinois 60697
Attn: Agency Management Services #33499
Re: Reaffirmation of Loan Documents
Ladies and Gentlemen:
Please refer to:
1. The Stuart Hall Company, Inc. Security Agreement dated as of
August 20, 1998 (the "Security Agreement") made by Stuart Hall Company , Inc.
------------------
("Stuart Hall") in favor of Bank of America, N.A. (formerly Bank of America
- -------------
National Trust and Savings Association) in its capacity as Agent (in such
capacity, the "Agent");
-----
1. The Stuart Hall Company, Inc. Guaranty dated as of August 20,
1998 (the "Stuart Hall Guaranty") made in favor of the Agent by Stuart Hall;
--------------------
1. The Pen-Tab Holdings, Inc. Guaranty dated as of August 20, 1998
(the "Holdings Guaranty") made in favor of the Agent by Pen-Tab Holdings, Inc.
-----------------
("Holdings");
--------
1. The Pen-Tab Holdings, Inc. Pledge Agreement dated as of August
20, 1998 made by Holdings in favor of the Agent (the "Pledge Agreement"); and
----------------
1. The Trademark Security Agreement made as of August 20, 1998 by
Stuart Hall in favor of the Agent (the "Trademark Security Agreement").
----------------------------
The Security Agreement, the Stuart Hall Guaranty, the Holdings Guaranty,
the Pledge Agreement and the Trademark Security Agreement, as well as each other
Loan Document to which either of the undersigned is a party, in each case as
heretofore amended, are collectively referred to herein as the "Documents".
---------
Capitalized terms not
<PAGE>
otherwise defined herein will have the meanings given in the Credit Agreement
referred to below.
Each of the undersigned acknowledges that the Company, the Lenders and the
Agent have executed the Third Amendment and Waiver (the "Amendment") to the
---------
Secured Credit Agreement dated as of August 20, 1998 (as amended, supplemented
or otherwise modified from time to time, the "Credit Agreement").
----------------
Each of the undersigned hereby confirms that each Document to which such
undersigned is a party remains in full force and effect after giving effect to
the effectiveness of the Amendment and that, upon such effectiveness, all
references in each such Document to the "Credit Agreement" shall be references
to the Credit Agreement as amended by the Amendment.
The letter agreement may be signed in counterparts and by the various
parties as herein on separate counterparts. This letter agreement shall be
governed by the laws of the State of Illinois applicable to contracts made and
to be performed entirely within such State.
STUART HALL COMPANY, INC.
By:_______________________________
Title:____________________________
PEN-TAB HOLDINGS, INC.
By:________________________________
Title:_____________________________
<PAGE>
Exhibit 10.22
PEN-TAB INDUSTRIES,INC.
167 Kelley Drive
Front Royal, VA 22630
Tel: (540) 622-2000
Fax: (540) 622-2008/631-9699
March 13, 2000
To the Holders of the 10 7/8% Senior
- ------------------------------------
Subordinated Notes due 2007 issued
- ----------------------------------
by Pen-Tab Industries, Inc.
- ---------------------------
CUSIP No. 706589AB4
- -------------------
Dear Noteholders,
As you may be aware, we were unable to make the February 1, 2000 cash
interest payment on the $75,000,000 of 10.875% Senior Subordinated Notes due
2007 bearing CUSIP No. 706589AB4 (the "Notes"). We are thus soliciting the
consent ("Consent") of holders of the Notes (collectively the "Noteholders" and
individually the "Noteholder") to make the February 1, 2000 interest payment in
the form of new notes in aggregate principal amount substantially equal to such
interest payment (the "Interest Notes"). The Interest Notes would be issued in
lieu of cash payment. Execution of the Consent Letter attached hereto and
acceptance of the Interest Notes will constitute a waiver of the failure to pay
the February 1, 2000 interest in cash. As part of the Consent, the Noteholders
will agree not to declare a default under, accelerate, or to participate with
other Noteholders in acceleration of, the Notes in each case, with respect to
the failure of the Company to make the cash interest payment or the breach by
the Company of any of the provisions contained in the Indenture dated as of
February 1, 1997, between the Company and the United States Trust Company of New
York (the "Indenture"), which is caused by the issue of the Interest Notes.
The Noteholders are requested to read and carefully consider the
information contained in the Consent Letter and the attachments thereto and to
give their Consent to the said waivers by properly completing and executing the
Consent Letter and the Accredited Investor Statement attached thereto and
delivering the same to the Company, prior to 5:00 p.m., New York City time, on
Friday, March 17, 2000 (the "Expiration Date"), at its address listed above, by
hand delivery, overnight courier, facsimile or mail, first-class postage
prepaid.
Promptly after the Expiration Date, the Company will issue or cause
to be issued, pursuant to a private placement under the terms of the Indenture
as it may be supplemented, directly to each consenting Noteholder, Interest
Notes in the form of Restricted Physical Securities (as that term is defined in
the Indenture) in aggregate principal amount substantially equal to the cash
interest payment such Noteholder was entitled to receive on February 1, 2000.
Pursuant to the Indenture, the Interest Notes will be issued in $1,000
denominations or integral multiples thereof and the difference between the
February 1, 2000 cash interest payment and the aggregate principal amount of the
Interest Note issued to each Noteholder paid in cash. Noteholders who do not
deliver their Consent Letters prior to the Expiration Date will not be entitled
to be issued the Interest Notes.
<PAGE>
The Interest Notes will not be registered under the Securities Act of
1933, as amended (the "Securities Act") and may not be transferred without
registration under the Securities Act or an applicable exemption therefrom. As
Restricted Physical Securities the Interest Notes may not be transferred through
the Depository Trust Company or any other clearinghouses.
Noteholders should be aware that the Company may be unable to make
future cash interest payments on the Notes or the Interest Notes until a
restructuring of the Company's debt and business is effected.
Noteholders are advised that Citicorp Venture Capital, Ltd. ("CVC")
which holds approximately 37% of the voting stock of the Company, presently owns
approximately $49,000,000 in aggregate principal amount of the Notes and has
agreed to execute this Consent Letter and accept an Interest Note in lieu of the
February 1, 2000 cash interest payment.
The law firm of Paul, Weiss, Rifkind, Wharton & Garrison has agreed to
represent all of the Noteholders except CVC in this matter and will be in direct
contact with each Noteholder. The Company will pay for all of Paul, Weiss's
fees and expenses in relation to this matter.
Notwithstanding anything to the contrary set forth in this Letter, the
Company reserves the right, at any time prior to the Expiration Date, to extend,
amend, withdraw or terminate both this Letter and the Consent Letter, but in
such event no Noteholder will be bound by its previous execution of the Consent
Letter.
Very truly yours
PEN-TAB INDUSTRIES, INC.
By___________________________________
Its__________________________________
-2-
<PAGE>
----------------------
Name of Noteholder
(Please print or type)
CUSIP No. 706589AB4
CONSENT LETTER
--------------
- --------------------------------------------------------------------------------
This Consent Letter and attached Accredited Investor Statement must be properly
completed, executed and delivered to Pen-Tab Industries, Inc. (the "Company")
prior to 5:00 p.m., New York City time, on Friday, March 17, 2000 (the
"Expiration Date"). Noteholders who do not deliver their Consent Letter and
Accredited Investor Statement prior to the Expiration Date will not receive the
Interest Notes.
- --------------------------------------------------------------------------------
We refer to the Indenture dated as of February 1, 1997 between the
Company and United States Trust Company of New York (the "Indenture") pursuant
to which the Company has issued $75,000,000 of 10.875% Senior Subordinated Notes
due 2007 bearing CUSIP No. 706589AB4 (the "Notes"). Capitalized terms used but
not otherwise defined herein shall have the respective meanings assigned thereto
in the Indenture and the Company's Secured Credit Agreement dated as of August
20, 1998, by and among the Company, the several financial institutions from time
to time parties thereto (the "Lenders"), and Bank of America N.A., as letter of
credit issuer and agent for the Lenders (as amended, the "Secured Credit
Agreement").
The undersigned, being a holder of $_______________________ principal
amount of Notes (the "Noteholder"), hereby represents, warrants and agrees as
follows:
1. The Noteholder agrees to accept from the Company, in lieu of the
February 1, 2000 cash interest payment on the Notes, a new note in aggregate
principal amount substantially equal to the February 1, 2000 interest payment
issued pursuant to the Indenture in a denomination of $1,000 or integral
multiples thereof, and in the form of Restricted Physical Securities
(individually the "Interest Note" and collectively the "Interest Notes") in the
form of note attached hereto as Exhibit 1, together with a cash payment equal to
---------
the difference between the February 1, 2000 cash interest payment and the
aggregate principal amount of the Interest Note.
2. By execution of this Consent Letter and acceptance of the
Interest Note, the Noteholder irrevocably and unconditionally agrees as follows:
(i) that the interest payment due February 1, 2000, shall be deemed
to have been paid and the Interest Note shall be deemed to have been
purchased with the proceeds thereof; and
(ii) to waive any Default caused by the Company's failure to make the
cash payment of the February interest payment and to waive any Default
caused by the Issuance of the Interest Notes.
3. The Noteholder irrevocably and unconditionally agrees not to
declare a Default under, accelerate, or to participate with other Noteholders in
acceleration of, the Notes in
<PAGE>
each case with respect to the failure of the Company to make the February 1,
2000 cash interest payment or any Default caused by the issuance of the Interest
Notes.
4. The Noteholder acknowledges that the Company may be unable to
make future cash interest payments on the Notes or the Interest Notes until a
restructuring of the Company's debt and business is effected.
5. If a natural person, the Noteholder is 21 years of age or over.
If a corporation, limited liability company, partnership, trust or other entity,
the Noteholder is authorized, empowered and qualified to execute this Agreement.
This Agreement is valid, binding and enforceable against the Noteholder in
accordance with its terms.
6. The Noteholder has completed the Accredited Investor Statement
(the "AIS") attached hereto, and incorporated herein, and all of the statements,
answers and information thereon are true and correct as of the date hereof and
will be true and correct as of the date of issue of the Interest Notes (the
"Closing Date").
7. The Noteholder understands that the Interest Notes have not been,
and will not be, registered under the Securities Act or any state securities
laws, and are being offered and sold in reliance upon federal and state
exemptions from registration requirements for transactions not involving any
public offering. The Noteholder recognizes that reliance upon such exemptions
is based in part upon the representations of the Noteholder contained herein
(including the AIS) and the Noteholder represents and warrants that the
Noteholder is an Accredited Investor within the meaning of Rule 501(a) under the
Securities Act of 1933 (the "Securities Act") and the Interest Notes are being
acquired for the Noteholder's own account without a view toward distribution.
The Noteholder represents and warrants that the Noteholder (a) is a
sophisticated investor with such knowledge and experience in business and
financial matters as will enable the Noteholder to evaluate the merits and risks
of investment in the Interest Notes, (b) is able to bear the economic risk and
lack of liquidity of an investment in the Interest Notes and (c) is able to bear
the risk of loss of its entire investment in the Interest Notes.
8. The Noteholder recognizes that the Interest Notes will be subject
to the restrictions on transferability described in the Indenture as affecting
the Restricted Physical Securities and the Noteholder represents and warrants
that the Noteholder will not offer, sell, transfer, pledge, hypothecate or
otherwise dispose of the Notes unless pursuant to a transaction either
registered under, or exempt from registration under, the Securities Act.
9. The Noteholder understands that the Noteholder should consult
with its own tax advisor concerning the tax consequences of this transaction and
that the Noteholder will be subject to federal and state income taxes upon the
receipt of the Interest Notes as though the Noteholder had received a cash
payment equal to the fair value of the Interest Notes.
10. The Noteholder acknowledges having read and understood the
documents respectively designated as the "Summary of Company and Business
Information", "Financial Information" and "Amendments to Senior Credit
Agreement" and attached hereto as Exhibit 2, Exhibit 3 and Exhibit 4.
--------- --------- ---------
-2-
<PAGE>
11. Except as expressly provided herein, the Noteholder expressly
reserves all of its rights and remedies in respect of the Notes and the
Indenture.
The Company represents and warrants to the Noteholder that:
1. The Company is duly organized, validly existing and in good
standing under the laws of its jurisdiction of organization and has full power
and authority to enter into this Consent Letter and to perform its obligations
hereunder. This Consent Letter, together with the Interest Notes to be issued
pursuant hereto, have been duly authorized, executed and delivered by or on
behalf of the Company and constitute valid and binding agreements of the Company
enforceable against the Company in accordance with the terms hereof.
2. Since January 1, 1999 the Company made all filings required to be
made by it under the Securities Exchange Act of 1934, amended (the "Company SEC
Filings"), and the Company shall promptly make any such filing required to be
made as a result of the transactions contemplated hereby. The Company has, on
or prior to March 14, 2000, filed an updated form 8-K disclosing that it is
seeking the consent of the Noteholders to the issue of the Interest Notes in
lieu of the February 1, 2000 cash interest payment. The Company SEC Filings
through the date hereof do not, and as of the Closing Date will not, contain any
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under
which they are made, not misleading.
3. No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company of the transactions on its part contemplated in this
Consent Letter.
4. The performance of this Consent Letter and the consummation of
the transactions contemplated hereby will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the assets of the
Company pursuant to the terms or provisions of, or result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or conflict with, or result in the acceleration of any obligation under, the
organizational documents of the Company or any material contract or other
agreement (including the Indenture) to which the Company is a party or by which
the Company or any of its property is bound or affected, or under any ruling,
decree, judgment, order, statute, rule or regulation of any court or other
governmental agency or body having jurisdiction over the Company or the property
of the Company.
5. The Company has not engaged in any activities that would
constitute a general solicitation or general advertising or any other activities
that would require the registration under the Act of the offer and sale of the
Interest Note to or by the Noteholder.
6. The Company shall pay any expenses payable in connection with the
issuance and delivery of the Interest Note to, and initial registration of the
Interest Note in the name of, the Noteholder or its nominee (other than income,
capital gain and similar taxes payable by the Noteholder).
7. As of the date hereof, the Company has not been, and as of the
Closing Date the Company will not be, subject to liquidation, dissolution or
bankruptcy proceedings. As
-3-
<PAGE>
of the date hereof, the Company has not, and as of the Closing Date the Company
shall not have, made a general assignment for the benefit of its creditors. As
of the Closing Date the Company shall not be in default with regard to the
payment of interest or principal on its indebtedness which are due, and no
Default or Event of Default shall have occurred and be continuing under the
Company's Secured Credit Agreement.
8. The representations, warranties and agreements of the Company
contained herein shall not survive the execution and delivery of this Consent
Letter and the Closing Date.
This Consent Letter is governed by the internal laws of the State of New York.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Consent
Letter as of ___________ __, 2000.
PEN-TAB INDUSTRIES, INC.
By_________________________________
Name:
Title:
FOR COMPLETION BY NOTEHOLDERS WHO ARE NATURAL PERSONS:
(i.e., individuals)
Noteholder's Name:________________________________
(print or type)
Noteholder's Signature:___________________________
(signature)
FOR COMPLETION BY NOTEHOLDERSWHO ARE NOT NATURAL PERSONS:
(i.e., corporations, partnerships, limited liability companies, trusts or other
entities)
Noteholder's Name:________________________________
(print or type)
By:_______________________________________________
(signature of authorized representative)
Its_______________________________________________
(name and title of authorized representative)
<PAGE>
______________________________
Name of Noteholder
(Please Print or Type)
PEN-TAB INDUSTRIES, INC.
------------------------
ACCREDITED INVESTOR STATEMENT
-----------------------------
(Noteholders please note: Sections (a) and (b) in this Part I must be
----
completed with respect to a Noteholder that is a natural person.)
(a) If the undersigned Noteholder is a natural person (i.e., an
individual), please indicate with an "X" the manner in which such person
qualifies as an "accredited investor" pursuant to Regulation D promulgated under
the Securities Act of 1933, as amended (the "Act") and in effect as of the date
---
hereof:
_____ (1) a natural person whose individual net worth/1/ (or joint net
worth with such person's spouse) exceeds $1,000,000; or
_____ (2) a natural person who had an individual income/2/ in excess of
$200,000 in each of the two most recent years and who reasonably
expects to have an individual income in excess of $200,000 in the
current year or who had joint income/2/ in excess of $300,000 in
each of the two most recent years and who reasonably expects to
have joint income in excess of $300,000 in the current year.
(b) If the undersigned Noteholder: is a natural person (i.e., an
individual), please answer questions 1-3 of this subparagraph (b):
(1) Occupation of Noteholder:
____________________
/1/ For purposes of this item, "net worth" means the excess of total assets at
fair market value, including home and personal property, over total liabilities,
including mortgage debt.
/2/ For purposes of this item, "individual income" means adjusted gross income
as reported for Federal income tax purposes, less any income attributable to a
spouse or to property owned by a spouse, increased by the following amounts (but
not including any amounts attributable to a spouse or to property owned by a
spouse): (i) the amount of any interest income received which is tax-exempt
under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"),
----
(ii) the amount of losses claimed as a limited partner in a limited partnership
(as reported on Schedule E of Form 1040), (iii) any deduction claimed for
depletion under Section 611 et seq. of the Code, and (iv) any amount by which
income from long-term capital gains has been reduced in arriving at adjusted
gross income pursuant to the provisions of Section 1202 of the Code prior to its
repeal by the Tax Reform Act of 1986.
/3/ For purposes of this item, "joint income" means adjusted gross income as
reported for Federal income tax purposes, including any income attributable to a
---------
spouse or to property owned by a spouse, increased by the following amounts
(including any amounts attributable to a spouse or to property owned by a
spouse): (i) the amount of any interest income received which is tax-exempt
under Section 103 of the Code, (ii) the amount of losses claimed as a limited
partner in a limited partnership (as reported on Schedule E of Form 1040), (iii)
any deduction claimed for depletion under Section 611 et seq. of the Code, and
(iv) any amount by which income from long-term capital gains has been reduced in
arriving at adjusted gross income pursuant to the provisions of Section 1202 of
the Code prior to its repeal by the Tax Reform Act of 1986.
<PAGE>
________________________________________
(2) Name of employer:
________________________________________
(3) Mailing address and, if different, Business address, of
Noteholder:
___________________________
___________________________
___________________________
(c) (Noteholders please note: This Section (c) and the following
Section (d) must be completed with respect to a Noteholder that is not an
---- ---
individual, natural person.) If the undersigned Noteholder is not a natural
---
person (i.e., is, instead, a corporation, partnership, a limited liability
company, trust or other entity), please indicate with an "X" the category or
categories in which such entity qualifies as an "accredited investor" pursuant
to Regulation D promulgated under the Act:
______ (1) a bank as defined in Section 3(a)(2) of the Act, or a savings and
loan association or other institution as defined in Section
3(a)(5)(A) of the Act, whether acting in its individual or
fiduciary capacity;
______ (2) a broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934, as amended;
______ (3) an insurance company as defined in Section 2(13) of the Act;
______ (4) an investment company registered under the Investment Company Act
of 1940, as amended;
______ (5) a business development company as defined in Section 2(a)(48) of
the Investment Company Act of 1940, as amended (the "Investment
----------
Company Act");
-----------
______ (6) a Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958, as amended;
______ (7) a plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees, if such
plan has total assets in excess of $5,000,000;
______ (8) an employee benefit plan within the meaning of Title I of the
Employee Retirement Income Security Act of 1974, as amended
("ERISA"), if either
-----
______ (A) the investment decision is made by a plan fiduciary, as
defined in Section 3(21) of ERISA, which is either a bank,
savings and loan
2
<PAGE>
association, insurance company or registered investment
adviser,
______ (B) the employee benefit plan has total assets in excess of
$5,000,000, or
______ (C) such a plan is a self-directed plan with investment
decisions made solely by persons that are "accredited
investors";
______ (9) a private business development company as defined in Section
202(a)(22) of the Investment Advisers Act of 1940, as amended;
______ (10) one of the following entities which was not formed for the
specific purpose of making an investment in the Interest Notes
and which has total assets in excess of $5,000,000:
______ (A) an organization described in Section 501(c)(3) of the Code;
______ (B) a corporation, limited liability company or partnership; or
______ (C) a Massachusetts or similar business trust;
______ (11) a trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the Interest Notes, whose
investment in the Interest Notes is directed by a sophisticated
person as described in Rule 506(b)(2)(ii) of Regulation D; or
______ (12) an entity in which all of the equity owners are "accredited
investors."
12. (d) If the undersigned Noteholder is not a natural person (i.e.,
is, instead, a corporation, partnership, limited liability company, trust or
other entity), please mark either (1) or (2) of this subparagraph (d) with an
"X":
______ (1) the Noteholder was not organized or reorganized for the purpose
of acquiring the Interest Notes; or
3
<PAGE>
______ (2) if the Noteholder was organized or reorganized for the purpose of
acquiring the Interest Notes, the number of stockholders,
partners, members or other owners, direct or indirect, of the
Noteholder is _____________ and all such stockholders, partners
or other investors are "accredited investors."/4/
13. (e) If the Noteholder is an accredited investor for the reason
----------------------------------------------------------
described in (c)(8)(C) above, a separate Accredited Investor Statement must be
- ----------------------------
submitted for each person making investment decisions for the undersigned.
If the Noteholder is an accredited investor for the reason
----------------------------------------------------------
described in (c)(12) above, a separate Accredited Investor Statement must be
- --------------------------
submitted for each stockholder, partner, member or other owner of the
undersigned.
If the Noteholder is described in (d)(2) above, a separate
----------------------------------------------
Accredited Investor Statement must be submitted for each direct or indirect
stockholder, partner, member or other owner of the undersigned.
The undersigned hereby represents and warrants that all of the
answers, statements and information set forth in this Accredited Investor
Statement are true and correct on the date hereof and will be true and correct
as of the date, if any, the Interest Notes are issued to the undersigned. The
undersigned hereby agrees to provide such additional information as requested by
the Company and to notify the Company promptly of any change which may cause any
of the answers, statements and information set forth in this Accredited Investor
Statement to become untrue in any material respect.
IN WITNESS WHEREOF, the undersigned has executed this Accredited
Investor Statement on the date set forth below.
Dated: _______________ ___, 2000
__________________________
/4/ For this calculation, if an entity was organized or reorganized for the
purpose of investing in the undersigned, each of such entity's investors must be
treated as an indirect investor in the undersigned.
In addition, if one of the entity's investors is another entity (the "Higher-
------
Tier Entity") which was organized or reorganized for the purpose of investing
- -----------
in the Interest Notes, each of the Higher-Tier Entity's investors must be
treated as an indirect investor in the undersigned and hence included in the
blank above. This rule must be applied again until an individual or entity which
was not so formed is reached.
For example, assume that (a) the undersigned is a partnership which was
organized or reorganized for the purpose of investing in the Interest Notes, (b)
the undersigned partnership has three partners, one of whom is a long-standing
corporation, one of whom is an individual, and one of whom is a corporation
("Newcorp") formed for the purpose of investing in the undersigned partnership,
-------
and (c) Newcorp has three stockholders. In this case the answer called for in
(d)(2) above would be 5.
If one of Newcorp's shareholders is an entity which was organized or reorganized
for the purpose of investing in Newcorp, the rule set forth above would be
applied again until an individual or an entity which was not so formed is
reached.
4
<PAGE>
FOR COMPLETION BY NOTEHOLDERS WHO ARE NATURAL PERSONS:
(i.e., individuals)
Noteholder's Name:________________________________
(print or type)
Noteholder's Signature: __________________________
(signature)
FOR COMPLETION BY NOTEHOLDERSWHO ARE NOT NATURAL PERSONS:
(i.e., corporations, partnerships, limited liability companies, trusts or other
entities)
Noteholder's Name:________________________________
(print or type)
By:_______________________________________________
(signature of authorized representative)
Its_______________________________________________
(name and title of authorized representative)
5
<PAGE>
Exhibit 10.23
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of May 26, 1999 among Pen-Tab
Industries, Inc., a Delaware corporation ("Pen-Tab"), Pen-Tab Holdings, Inc., a
-------
Virginia corporation (the "Company") and Marc English ("Executive").
------- ---------
The execution and delivery of this Employment Agreement by the
Company, Pen-Tab and the Executive, including, without limitation, the
agreements made by the Executive in Sections 7, 8 and 9, are a material
inducement to the Company's and Pen-Tab's decision to enter into this Employment
Agreement.
In consideration of the mutual covenants contained herein and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Definitions. Unless otherwise defined herein, as used herein,
-----------
the following terms shall have the following meanings:
"Cause" shall mean (i) a material breach of this Employment Agreement by
-----
Executive, (ii) the commission by Executive of a felony, a crime involving moral
turpitude or other act or omission causing material harm to the standing and
reputation of the Company and its Subsidiaries, (iii) failure by Executive to
perform his duties hereunder at a satisfactory level as determined by a majority
of the Board of Directors of Pen-Tab in good faith which failure has not been
corrected within a reasonable period following written notice to Executive.
"Executive Stock" means any shares of capital stock of the Company received
---------------
by Executive upon exercise of any stock options awarded to Executive under the
Option Agreement and any other shares of capital stock of the Company hereafter
acquired by Executive. Executive Stock will continue to be Executive Stock in
the hands of any holder other than the Executive, including all transferees of
the Executive, and except as otherwise provided herein, each such other holder
of Executive Stock will succeed to all obligations attributable to the Executive
as a holder of Executive Stock hereunder. Executive Stock will also include
shares of the Company's capital stock issued with respect to Executive Stock by
way of a stock split, stock dividend or other recapitalization, reclassification
or exchange.
"Good Reason Event" means a substantial diminution in the Executive's
-----------------
professional responsibilities to Pen-Tab (including a change in the reporting
responsibilities of the Executive which would cause the Executive to report to
an individual who is junior to the person the Executive was reporting to prior
to such change, the assignment to the Executive of duties or responsibilities
that are not commensurate with his position and the loss or diminution of
administrative or professional support but excluding any diminution in
responsibility or altered reporting structure during any period of disability)
together with a significant reduction in the compensation, benefits, services,
perquisites and amenities which the Executive was theretofore receiving.
"Option Agreement" means the Option Agreement dated the date hereof between
----------------
the Company and the Executive.
-1-
<PAGE>
"Person" means an individual, a partnership (including a limited
------
partnership), a corporation, an association, a limited liability company, a
joint stock company, a trust, a joint venture, an unincorporated organization
and a governmental entity or any department, agency or political subdivision
thereof or any other entity.
"Public Offering" means the sale, in an underwritten public offering
---------------
registered under the 1933 Act, of shares of the Company's common stock.
"Subsidiary" means, with respect to any Person, any corporation,
----------
partnership, association or other business entity of which (i) if a corporation,
a majority of the total voting power of shares of stock entitled (without regard
to the occurrence of any contingency) to vote in the election of directors,
managers or trustees thereof is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person or a combination thereof, or (ii) if a partnership, association, limited
liability company or other business entity, a majority of the partnership or
other similar ownership interests thereof is at the time owned or controlled,
directly or indirectly, by any Person or one or more Subsidiaries of that Person
or a combination thereof. For purposes hereof, a Person or Persons shall be
deemed to have a majority ownership interest in a partnership, association,
limited liability company or other business entity if such Person or Persons (x)
shall be or control the managing director, managing member, general partner or
other managing Person of such partnership, association, limited liability
company or other business entity, or, if no Person possesses the control
described in clause (x), then (y) shall be allocated a majority of partnership,
association, limited liability company or other business entity gains or losses
(without regard to any preferred allocations).
2. Employment. Pen-Tab shall employ Executive, and Executive hereby
----------
accepts employment with Pen-Tab, upon the terms and conditions set forth in this
Employment Agreement for the period beginning on the date hereof and ending as
provided in Section 6 hereof (the "Employment Period").
3. Position and Duties.
-------------------
(a) During the Employment Period, Executive shall serve as the Chief
Executive Officer of Pen-Tab and shall have the normal duties, responsibilities
and authority of the Chief Executive Officer, subject to the power of the Board
of Directors of Pen-Tab to expand or limit such duties, responsibilities and
authority and to override actions of the Chief Executive Officer.
(b) Executive shall report to the Board of Directors of Pen-Tab, and
Executive shall devote his best efforts and his full business time and attention
(except for permitted vacation periods and reasonable periods of illness or
other incapacity) to the business and affairs of Pen-Tab and its Subsidiaries.
Executive shall perform his duties and responsibilities to the best of his
abilities in a diligent, trustworthy, businesslike and efficient manner.
4. Base Salary and Benefits
------------------------
(a) During the Employment Period, Executive's base salary shall be
$330,000 per annum or such higher rate as the Board of Directors of Pen-Tab may
designate from time to time (the "Base Salary"), which salary shall be payable
-----------
in regular installments in accordance with
2
<PAGE>
Pen-Tab's general payroll practices and shall be subject to customary
withholding. In addition, during the Employment Period, Executive shall be
entitled to participate in all of Pen-Tab's employee benefit programs for which
senior executive employees of Pen-Tab and its Subsidiaries are generally
eligible and shall be entitled to receive a car allowance of $1,000.000 per
month.
(b) Pen-Tab shall reimburse Executive for all reasonable expenses
incurred by him in the course of performing his duties under this Employment
Agreement which are consistent with Pen-Tab's policies in effect from time to
time with respect to travel, entertainment and other business expenses, subject
to Pen-Tab's requirements with respect to reporting and documentation of such
expenses.
(c) In addition to the Base Salary, the Board may (subject to the
proviso below), in its sole discretion, award a bonus to Executive following the
end of each fiscal year during the Employment Period based upon Executive's
performance and Pen-Tab's operating results during such year; provided, however,
-----------------
that Pen-Tab shall award Executive a bonus for Pen-Tab's 1999 fiscal year in an
amount not less than $161,000.
5. Board Membership. With respect to all regular elections of
----------------
directors during the Employment Period, the Company shall nominate, and use its
best efforts to elect, Executive to serve as a member of the Board of Directors
of each of Pen-Tab and the Company. Upon the termination of the Employment
Period, Executive shall resign as a director of the Company and its
Subsidiaries, as the case may be.
6. Term.
----
(a) Unless renewed by the mutual agreement of Pen-Tab and Executive,
the Employment Period shall end on the fifth anniversary of the date hereof;
provided that (i) the Employment Period shall terminate prior to such date upon
Executive's resignation, death or permanent disability or incapacity (as
determined by the Board of Directors of Pen-Tab in its good faith judgment) and
(ii) the Employment Period may be terminated by Pen-Tab at any time prior to
such date for Cause (as defined below) or without Cause.
(b) If the Employment Period is terminated (i) by Pen-Tab without
Cause or (ii) by the Executive other than within 90 days of a Good Reason Event,
in each case prior to the fifth anniversary of the date of this Employment
Agreement, Executive shall be entitled to receive his Base Salary through the
first anniversary of the date of termination, if and only if Executive has not
breached the provisions of Sections 7, 8, 9 and 10 hereof.
(c) If the Employment Period is terminated for any other reason,
Executive shall be entitled to receive his Base Salary through the date of
termination and shall not be entitled to receive any other compensation from
Pen-Tab.
(d) All of Executive's rights to fringe benefits and bonuses hereunder
(if any) which accrue or become payable after the termination of the Employment
Period shall cease upon such termination. Pen-Tab may offset any amounts
Executive owes it or its Subsidiaries against any amounts it owes Executive
hereunder.
(e) The Executive hereby waives any claim for severance compensation
except as expressly set forth in this Section 6.
3
<PAGE>
7. Confidential Information. Executive acknowledges that the
------------------------
information, observations and data obtained by him while employed by the Company
and its Subsidiaries concerning the business or affairs of the Company or any of
its Subsidiaries ("Confidential Information") are the property of the Company or
such Subsidiary. Therefore, Executive agrees that he shall not disclose to any
unauthorized person or use for his own purposes any Confidential Information
without the prior written consent of the Board, unless and to the extent that
the aforementioned matters become generally known to and available for use by
the public other than as a result of Executive's acts or omissions. Executive
shall deliver to the Company at the termination of the Employment Period, or at
any other time the Company may request, all memoranda, notes, plans, records,
reports, computer tapes, printouts and software and other documents and data
(and copies thereof) relating to the Confidential Information, Work Product (as
defined below) or the business of the Company or any Subsidiary which he may
then possess or have under his control.
8. Inventions and Patents. Executive acknowledges that all
----------------------
inventions, innovations, improvements, developments, methods, designs, analyses,
drawings, reports and all similar or related information (whether or not
patentable) which relate to the Company's or any of its Subsidiaries' actual or
anticipated business, research and development or existing or future products or
services and which are conceived, developed or made by Executive while employed
by the Company and its Subsidiaries ("Work Product") belong to the Company or
------------
such Subsidiary. Executive shall promptly disclose such Work Product to the
Board and perform all actions reasonably requested by the Board (whether during
or after the Employment Period) to establish and confirm such ownership
(including, without limitation, assignments, consents, powers of attorney and
other instruments).
9. Non-Compete, Non-Solicitation.
-----------------------------
(a) In further consideration of the compensation to be paid to
Executive hereunder, Executive acknowledges that in the course of his employment
with the Company he shall become familiar with the Company's trade secrets and
with other Confidential Information concerning the Company and its Subsidiaries
and that his services shall be of special, unique and extraordinary value to the
Company and its Subsidiaries. Therefore, Executive agrees that, during the
Employment Period and for eighteen (18) months thereafter (the "Noncompete
----------
Period"), he shall not directly or indirectly own any interest in, manage,
- ------
control, participate in, consult with, render services for, or in any manner
engage in any business competing with the businesses of the Company or its
Subsidiaries, as such businesses exist or are in process on the date of the
termination of Executive's employment, within any geographical area in which the
Company or its Subsidiaries engage or plan to engage in such businesses.
Nothing herein shall prohibit Executive from being a passive owner of not more
than 2% of the outstanding stock of any class of a corporation which is publicly
traded, so long as Executive has no active participation in the business of such
corporation.
(b) During the Noncompete Period, Executive shall not directly or
indirectly through another entity (i) induce or attempt to induce any employee
of the Company or any Subsidiary to leave the employ of the Company or such
Subsidiary, or in any way interfere with the relationship between the Company or
any Subsidiary and any employee thereof, (ii) hire any person who was an
employee of the Company or any Subsidiary at any time during the Employment
Period or (iii) induce or attempt to induce any customer, supplier, licensee,
licensor, franchisee or other business relation of the Company or any Subsidiary
to cease doing
4
<PAGE>
business with the Company or such Subsidiary, or in any way interfere with the
relationship between any such customer, supplier, licensee or business relation
and the Company or any Subsidiary (including, without limitation, making any
negative statements or communications about the Company or its Subsidiaries).
(c) If, at the time of enforcement of this Section 9, a court shall
hold that the duration, scope or area restrictions stated herein are
unreasonable under circumstances then existing, the parties agree that the
maximum duration, scope or area reasonable under such circumstances shall be
substituted for the stated duration, scope or area and that the court shall be
allowed to revise the restrictions contained herein to cover the maximum period,
scope and area permitted by law. Executive agrees that the restrictions
contained in this Section 9 are reasonable.
(d) In the event of the breach or a threatened breach by Executive of
any of the provisions of this Section 9, the Company, in addition and
supplementary to other rights and remedies existing in its favor, may apply to
any court of law or equity of competent jurisdiction for specific performance
and/or injunctive or other relief in order to enforce or prevent any violations
of the provisions hereof (without posting a bond or other security). In
addition, in the event of an alleged breach or violation by Executive of this
Section 9, the Noncompete Period shall be tolled until such breach or violation
has been duly cured.
10. Restrictions on Transfer of Capital Stock of the Company held by
----------------------------------------------------------------
Executive.
- ---------
(a) Restrictions on Transfer. In further consideration of the
------------------------
compensation to be paid to Executive hereunder and in further consideration of
the stock options to be awarded to the Executive under the Option Agreement, the
Executive agrees that, subject to subsection (b) below, prior to the earlier of
(i) the fifth anniversary of the date hereof or (ii) a Public Offering,
Executive shall not sell, transfer, assign, pledge or otherwise dispose of (a
"Transfer") any Executive Stock.
--------
(b) Permitted Transfers. Subject to subsection (c) below, the
-------------------
restrictions contained in Section 10(a) shall not apply with respect to any
Transfer of Executive Stock pursuant to applicable laws of descent and
distribution or otherwise to such person's spouse, former spouse and descendants
(whether natural or adopted), parents and their descendants, descendants of such
brothers and sisters and any spouse of the foregoing individuals or any trust
solely for the benefit of any of the foregoing or to a partnership of which only
the foregoing are partners; provided, however, that if any of the foregoing is
less than 21 years of age at the time of such proposed Transfer, then such
Transfer may only be made to a trustee of a valid trust for the benefit of such
Person, which trust shall not terminate prior to the beneficiary (or
beneficiaries) thereof attaining the age of 21.
(c) Additional Requirements. No Transfer of Executive Stock shall be
-----------------------
permitted unless and until the prospective transferee agrees in a writing in
form and substance satisfactory to the Company to be bound by the provisions of
this Section 10.
Each certificate or instrument evidencing Executive Stock and each certificate
or instrument issued in exchange for or upon the Transfer of any Executive Stock
shall be stamped or otherwise imprinted with a legend in substantially the
following form:
5
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION
FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS
CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON
TRANSFER SET FORTH IN AN EMPLOYMENT AGREEMENT BETWEEN THE
COMPANY, PEN-TAB INDUSTRIES, INC. AND AN EXECUTIVE THEREOF DATED
AS OF MAY 20, 1999. A COPY OF SUCH EMPLOYMENT AGREEMENT MAY BE
OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF
BUSINESS WITHOUT CHARGE."
(e) Transfers in Violation of this Employment Agreement. Any Transfer
---------------------------------------------------
or attempted Transfer of any Executive Stock in violation of this Section 10
shall be null and void, and the Company shall not record such Transfer on its
books or treat any purported transferee of such Executive Stock as the owner of
such shares for any purpose.
11. Executive's Representations. Executive hereby represents and
---------------------------
warrants to each of the Company and Pen-Tab that (i) after the Executive has
given proper notice of termination by Executive under Executive's current
employment agreement with CSS, Industries Inc., the execution, delivery and
performance of this Employment Agreement by Executive do not and shall not
conflict with, breach, violate or cause a default under any contract, agreement,
instrument, order, judgment or decree to which Executive is a party or by which
he is bound, (ii) after the Executive has given proper notice of termination by
Executive under Executive's current employment agreement with CSS, Industries
Inc., Executive is not a party to or bound by any employment agreement,
noncompete agreement or confidentiality agreement with any other person or
entity and (iii) upon the execution and delivery of this Employment Agreement by
each of the Company and Pen-Tab, this Employment Agreement shall be the valid
and binding obligation of Executive, enforceable in accordance with its terms.
Executive hereby acknowledges and represents that he has consulted with
independent legal counsel regarding his rights and obligations under this
Employment Agreement and that he fully understands the terms and conditions
contained herein.
12. Survival. Sections 7, 8, 9 and 10 and Sections 12 through 20
--------
shall survive and continue in full force in accordance with their terms
notwithstanding any termination of the Employment Period.
13. Notices. Any notice provided for in this Employment Agreement
-------
shall be in writing and shall be either personally delivered, or mailed by first
class mail, return receipt requested, to the recipient at the address below
indicated:
6
<PAGE>
Notices to Executive:
--------------------
Marc English
c/o Pen-Tab Industries, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Telecopy No.: (540) 622-2008
with a copy, which shall not constitute notice, to:
_____________________________
_____________________________
_____________________________
Attention: _________________
Telecopy No.:________________
Notices to Pen-Tab or the Company:
---------------------------------
Pen-Tab Holdings, Inc.
167 Kelley Drive
Front Royal, Virginia 22630
Attention: President
Telecopy No.: (540) 622-2008
With copies, which shall not constitute notice, to:
--------------------------------------------------
Kirkland & Ellis
153 East 53rd Street
New York, NY 10022
Attention: Kirk A. Radke, Esq.
Telecopy No.: (212) 446-4800
Citicorp Venture Capital, Ltd.
399 Park Avenue
14th Floor
New York, New York 10043
Attention: Mr. Thomas F. McWilliams
Telecopy No.: (212) 888-2940
or such other address or to the attention of such other person as the recipient
party shall have specified by prior written notice to the sending party. Any
notice under this Employment Agreement shall be deemed to have been given when
so delivered or mailed.
14. Severability. Whenever possible, each provision of this
------------
Employment Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Employment Agreement is
held to be invalid, illegal or unenforceable in any respect under any applicable
law or rule in any jurisdiction, such invalidity, illegality or unenforceability
shall not affect any other provision or any other jurisdiction, but this
7
<PAGE>
Employment Agreement shall be reformed, construed and enforced in such
jurisdiction as if such invalid, illegal or unenforceable provision had never
been contained herein.
15. Complete Agreement. This Employment Agreement and the
------------------
Option Agreement embody the complete agreement and understanding among the
parties and supersede and preempt any prior understandings, agreements or
representations by or among the parties, written or oral, which may have related
to the subject matter hereof in any way.
16. No Strict Construction. The language used in this
----------------------
Employment Agreement shall be deemed to be the language chosen by the parties
hereto to express their mutual intent, and no rule of strict construction shall
be applied against any party.
17. Counterparts. This Employment Agreement may be executed
------------
executed in separate counterparts, each of which is deemed to be an original and
all of which taken together constitute one and the same agreement.
18. Successors and Assigns. This Employment Agreement is
----------------------
intended to bind and inure to the benefit of and be enforceable by Executive,
the Company, Pen-Tab and their respective heirs, successors and assigns, except
that Executive may not assign his rights or delegate his obligations hereunder
without the prior written consent of the Company and Pen-Tab.
19. Choice of Law. All issues and questions concerning the
-------------
construction, validity, enforcement and interpretation of this Employment
Agreement and the exhibits and schedules hereto shall be governed by, and
construed in accordance with, the laws of the State of Virginia, without giving
effect to any choice of law or conflict of law rules or provisions (whether of
the State of Virginia or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of Virginia. In
furtherance of the foregoing, the internal law of the State of Virginia shall
control the interpretation and construction of this Employment Agreement (and
all schedules and exhibits hereto), even though under that jurisdiction's choice
of law or conflict of law analysis, the substantive law of some other
jurisdiction would ordinarily apply.
20. Amendment and Waiver. The provisions of this Employment
--------------------
Agreement may be amended or waived only with the prior written consent of the
Company, Pen-Tab and Executive, and no course of conduct or failure or delay in
enforcing the provisions of this Employment Agreement shall affect the validity,
binding effect or enforceability of this Employment Agreement.
* * * * *
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first written above.
PEN-TAB HOLDINGS, INC.
By: __________________________
Name:
Title:
PEN-TAB INDUSTRIES, INC.
By: __________________________
Name:
Title:
_____________________________
MARC ENGLISH
9
<PAGE>
EXHIBIT 1
---------
PEN-TAB INDUSTRIES, INC.
No. $
10?% SERIES C SENIOR SUBORDINATED NOTE DUE 2007
Pen-Tab Industries, Inc. promises to pay _______ to or registered
assigns the principal sum of ________ Dollars on the Maturity Date of February
1, 2007.
Interest Payment Dates: February 1 and August 1, beginning August 1, 2000.
Record Dates: January 15 and July 15, beginning July 15, 2000.
IN WITNESS WHEREOF, PEN-TAB INDUSTRIES, INC. has caused this
instrument to be executed in its corporate name by a facsimile signature of its
_______________ and its ________________ and has caused the facsimile of its
corporate seal to be affixed hereunto or imprinted hereon.
PEN-TAB INDUSTRIES, INC.
By________________________
Name:
Title:
[SEAL]
Dated: February 1, 2000
By_________________________
Name:
Title:
Certificate of Authentication:
This is one of the 10?% Senior Subordinated Notes due 2007
referred to in the within-mentioned Indenture.
United States Trust Company
of New York, a Trustee
By________________________________ Date:
Authorized Signatory
1
<PAGE>
(REVERSE OF SECURITY)
PEN-TAB INDUSTRIES, INC.
10?% Series C Senior Subordinated Note due 2007
1. Interest.
--------
Pen-Tab Industries, Inc., a Delaware corporation (the "Company"),
promises to pay interest at the rate of 10?% per annum on the principal amount
of this Security semiannually commencing on August 1, 2000, until the principal
hereof is paid or made available for payment. Interest on the Securities will
accrue from and including the most recent date to which interest has been paid
or, if no interest has been paid, from and including February 1, 2000, through
but excluding the date on which interest is paid. If an Interest Payment Date
falls on a day that is not a Business Day, the interest payment to be made on
such Interest Payment Date will be made on the next succeeding Business Day with
the same force and effect as if made on such Interest Payment Date, and no
additional interest will accrue as a result of such delayed payment. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
2. Method of Payment.
-----------------
The interest payable on the Securities, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture
(as defined below), be paid to the person in whose name this Security is
registered at the close of business on the regular record date, which shall be
the January 15 or July 15 (whether or not a Business Day) next preceding such
Interest Payment Date. Any such interest not so punctually paid or duly provided
for, and any interest payable on such defaulted interest (to the extent lawful),
will forthwith cease to be payable to the Holder on such regular record date and
shall be paid to the person in whose name this Security is registered at the
close of business on a special record date for the payment of such defaulted
interest to be fixed by the Company, notice of which shall be given to Holders
not less than 15 days prior to such special record date. Payment of the
principal of and interest on this Security will be made at the agency of the
Company maintained for that purpose in New York, New York and at any other
office or agency maintained by the Company for such purpose, in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts; provided, however, that at the
option of the Company payment of interest may be made by check mailed to the
address of the person entitled thereto as such address shall appear in the
Security register.
3. Paying Agent and Registrar.
--------------------------
Initially, United States Trust Company of New York (the "Trustee")
will act as Paying Agent and Registrar. The Company may change any Paying Agent,
Registrar or co-Registrar without notice to the Holders of Securities. The
Company or any of its Subsidiaries may act as Registrar or co-Registrar but may
not act as Paying Agent.
2
<PAGE>
4. Indenture.
----------
This Security is one of a duly authorized issue of Securities of the
Company, designated as its 10?% Series C Senior Subordinated Notes due 2007 (the
"Securities"), limited in aggregate principal amount to $200,000,000 (except for
Securities issued in substitution for destroyed, lost or stolen Securities)
issuable under an indenture dated as of February 1, 1997 (the "Indenture"),
between the Company and the Trustee. The terms of the Securities include those
stated in the Indenture and those made part of the Indenture by the Trust
Indenture Act of 1939 (the "Act") (15 U.S. Code "" 77aaa-77bbbb) as in effect on
the date of the Indenture. The Securities are subject to all such terms, and
Holders of Securities are referred to the Indenture and the Act for a statement
of them. Each Securityholder, by accepting a Security, agrees to be bound to all
of the terms and provisions of the Indenture, as the same may be amended from
time to time. Payment on each Security is guaranteed on a senior subordinated
basis, jointly and severally, by the Guarantors pursuant to Article Eleven of
the Indenture.
The Securities are subordinated in right of payment to all Senior Debt
of the Company to the extent and in the manner provided in the Indenture. Each
Holder of a Security, by accepting a Security, agrees to such subordination,
authorizes the Trustee to give effect to such subordination and appoints the
Trustee as attorney-in-fact for such purpose.
Capitalized terms contained in this Security to the extent not
defined herein shall have the meanings assigned to them in the Indenture.
5. Optional Redemption.
-------------------
The Securities will be subject to redemption, at the option of the
Company, in whole or in part, at any time on or after February 1, 2002 and prior
to maturity, upon not less than 30 nor more than 60 days, notice mailed to each
holder of Securities to be redeemed at his address appearing in the register for
the Securities, in amounts of $1,000 or an integral multiple of $1,000, at the
following redemption prices (expressed as percentages of principal amount) plus
accrued interest to but excluding the date fixed for redemption (subject to the
right of holders of record on the relevant Record Date to receive interest due
on an interest payment date that is on or prior to the date fixed for
redemption), if redeemed during the 12-month period beginning February 1 of the
years indicated:
Year Percentage
----------------------------------- ----------------
2002 105.438%
2003 104.625
2004 101.813
2005 and thereafter 100.000
Selection of Securities for any partial redemption shall be made by
the Trustee, in accordance with the rules of any national securities exchange on
which the Securities may be listed or, if the Securities are not so listed, pro
rata or by lot or in such other manner as the Trustee shall deem appropriate and
fair. Securities in denominations larger than $1,000 may be redeemed in part but
only in integral multiples of $1,000. Notice of redemption will be mailed before
the date fixed for redemption to each holder of Securities to be redeemed at his
or her
3
<PAGE>
registered address. On and after the date fixed for redemption, interest will
cease to accrue on Securities or portions thereof called for redemption.
The Securities will not have the benefit of any sinking fund.
6. Purchase upon occurrence of a Change of Control.
-----------------------------------------------
Within 30 days of the occurrence of a Change of Control, the Company
will offer to purchase the Securities, in whole and not in part, at a purchase
price equal to 101% of the principal amount thereof plus any accrued and unpaid
interest thereon.
7. Notice of Redemption.
--------------------
Notice of redemption will be mailed by first class mail at least 30
days but not more than 60 days before the redemption date to each Holder of
Securities to be redeemed at his registered address. Securities in denominations
larger than $1,000 may be redeemed in part. on and after the redemption date,
interest ceases to accrue on those Securities or portion of them called for
redemption.
8. Denominations; Transfer; Exchange.
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 and integral multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and to pay any taxes and fees required by law or permitted by the Indenture. The
Registrar need not transfer or exchange any Securities selected for redemption.
9. Persons Deemed Owners.
---------------------
The registered Holder of a Security may be treated as the owner of it
for all purposes.
10. Unclaimed Funds.
---------------
If funds for the payment of principal or interest remain unclaimed for
two years, the Trustee or Paying Agent will repay the funds to the Company at
its request. After such repayment Holders of Securities entitled to such funds
must look to the Company for payment unless an abandoned property law designates
another person.
11. Discharge Prior to Redemption or Maturity.
-----------------------------------------
The Indenture will be discharged and cancelled except for certain
Sections thereof, subject to the terms of the Indenture, upon the payment of all
the Securities or upon the irrevocable deposit with the Trustee of funds or
United States Government Obligations sufficient for such payment or redemption .
4
<PAGE>
12. Amendment; Supplement; Waiver.
-----------------------------
Subject to certain exceptions, the Indenture or the Securities may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the outstanding Securities, and any past default or
compliance with any provision may be waived with the consent of the Holders of a
majority in principal amount of the outstanding Securities. Without notice to or
the consent of any Holder, the Company, the Guarantors and the Trustee may amend
or supplement the Indenture or the Securities to cure any ambiguity, defect or
inconsistency, or to make any change that does not adversely affect the rights
of any Holder of Securities.
13. Restrictive Covenants.
---------------------
The Indenture restricts, among other things, the ability of the
Company or any of its Subsidiaries to permit any Liens to be imposed on their
assets, to make certain Restricted Payments and Investments, limits the
Indebtedness which the Company and its Subsidiaries may incur and limits the
terms on which the Company may engage in Asset Dispositions. The Company is also
obligated under certain circumstances to make an offer to purchase Securities
with the net cash proceeds of certain Asset Dispositions. The Company must
report quarterly to the Trustee on compliance with the covenants in the
Indenture.
14. Successor Corporation.
---------------------
Pursuant to the Indenture, the ability of the Company to consolidate
with, merge with or into or transfer its assets to another person is conditioned
upon certain requirements, including certain financial requirements applicable
to the surviving Person.
15. Defaults and Remedies.
---------------------
If an Event of Default shall occur and be continuing, the
principal of all of the outstanding Securities, plus all accrued and unpaid
interest, if any, to the date the Securities become due and payable, may be
declared due and payable in the manner and with the effect provided in the
Indenture.
16. Trustee Dealings with Company.
-----------------------------
The Trustee in its individual or any other capacity, may become the
owner or pledgee of Securities and make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with
the Company or its Affiliates, as if it were not Trustee.
17. No Recourse Against Others.
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or any Guarantor shall not have any liability for any obligations of the Company
or any Guarantor under the Securities, the Guarantee or the Indenture or for any
claim based on, in respect of or by reason of such obligations or their
creation. Each Holder of a Security by accepting a Security
5
<PAGE>
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of the Securities.
18. Authentication.
--------------
This Security shall not be valid until the Trustee signs the
certificate of authentication on the other side of this Security.
19. Abbreviations.
-------------
Customary abbreviations may be used in the name of Securityholder or
an assignee, such as TEN COM (= tenants in common), TEN ENT (= tenants by the
entireties), JT TEN (= joint tenants with right of survivorship and not as
tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts to Minors
Act).
20. Governing Law.
-------------
The laws of the State of New York shall govern the Indenture, this
Security and the Guarantee without regard to principles of conflicts of law.
The Company will furnish to any Holder of record of Securities upon
written request and without charge a copy of the Indenture.
6
<PAGE>
[FORM OF NOTATION ON SECURITY RELATING TO GUARANTEE]
SENIOR SUBORDINATED GUARANTEE
The Guarantor(s) (as defined in the Indenture referred to in the
Security upon which this notation is endorsed) hereby, jointly and severally,
unconditionally guarantee on a senior subordinated basis (such guarantee by each
Guarantor being referred to herein as the "Guarantee") the due and punctual
payment of the principal of, premium, if any, and interest on the Securities,
whether at maturity, by acceleration or otherwise, the due and punctual payment
of interest on the overdue principal, premium and interest, if any, on the
Securities, and the due and punctual performance of all other obligations of the
Company to the Holders or the Trustee, all in accordance with the terms set
forth in Article Eleven of the Indenture.
The obligations of each Guarantor to the Holders of Securities and to
the Trustee pursuant to the Guarantee and the Indenture are expressly set forth,
and are expressly subordinated and subject in right of payment to the prior
payment in full of all Senior Debt of such Guarantor, to the extent and in the
manner provided, in Article Twelve of the Indenture, and reference is hereby
made to such Indenture for the precise terms of the Guarantee therein made.
The Guarantee shall not be valid or obligatory for any purpose until
the certificate of authentication on the Securities upon which the Guarantee is
noted shall have been executed by the under the Indenture by the manual
signature of one of its authorized officers.
This Guarantee shall be governed by and construed in accordance with
the laws of the State of New York without regard to principles of conflicts of
law.
This Guarantee is subject to release upon the terms set forth in the
Indenture.
[____________________]
By: _________________________
Name:
Title:
7
<PAGE>
ASSIGNMENT FORM
If you the Holder want to assign this Security, fill in the form below
and have your signature guaranteed:
I or we assign and transfer this Security to:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Print or type name, address and zip code and social security or tax
ID number of assignee)
and irrevocably appoint ________________________________________________________
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for him.
Dated:____________________________ Signed:________________________________
(Sign exactly as name appears on
the other side of this Security)
Signature Guarantee:____________________________________________________________
8
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you the Holder want to elect to have this Security purchased by the Company,
check the box: [_]
If you want to elect to have only part of this Security purchased by the
Company, state the amount: $__________
Dated:____________________ Signed:__________________________________________
(Sign exactly as name appears on the other
side of this Security)
Signature Guarantee:____________________________________________________________
9
<PAGE>
EXHIBIT 2
---------
SUMMARY OF COMPANY AND BUSINESS INFORMATION
-------------------------------------------
The Company
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.
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 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.
10
<PAGE>
Future Cash Interest Payments
The Company may be unable to make future cash interest payments on the
Notes or the Interest Notes until a restructuring of the Company"s debt and
business is effected.
Available Information
The Company is subject to the informational reporting requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy and information statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
material filed by the Company with the Commission may be inspected by anyone
without charge at the Public Reference Section of the commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048. Copies of such material may also be obtained at the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees.
Such material may also be accessed on the SEC"s web-site at www.sec.gov.
Incorporation of Certain Documents by Reference
All documents filed by the Company with the Commission pursuant to the
Exchange Act or the Securities Act of 1933, as amended (the "Securities Act"),
are hereby incorporated herein by reference. All documents filed by the Company
pursuant to the Exchange Act or the Securities Act on or subsequent to the date
hereof and prior to the Expiration Date will also be deemed to be incorporated
herein by reference from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of the Consent
Letter to the extent that a statement contained herein, or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein, modifies or supersedes such statement. The Company will
provide without charge to each person to whom the Consent Letter is delivered,
on the written request of such person, a copy of any or all the documents
incorporated herein by reference, other than exhibits to such documents (unless
such exhibits are specifically incorporated by reference into such documents).
Written requests should be directed to Pen-Tab, Industries, Inc., 167 Kelley
Drive, Front Royal, Virginia 22630, Attention: Secretary.
Related Parties
Citicorp Venture Capital, Ltd., which holds approximately 37% of the
voting stock of Pen-Tab Industries, Inc. presently owns approximately
$49,000,000 in aggregate principal amount of the Notes and has agreed to execute
the Consent Letter and accept an Interest Note in lieu of the February 1, 2000
cash interest payment.
11
<PAGE>
EXHIBIT 3
---------
FINANCIAL INFORMATION
Summary Selected Operations and 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. ("Holdings"). On February 4, 1997 Holdings
formed a wholly owned subsidiary called Pen-Tab Industries, Inc., a Delaware
corporation ("the Company"). 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 14 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.
12
<PAGE>
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 summary
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.
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.
<TABLE>
<CAPTION>
Nine Mos. Ended
---------------
Oct. 2 Oct. 3 Fiscal Year
------------------------------------------------------------
1999 1998 1998 1997 1996 1995 1994
--------- --------- ----------- -------- -------- --------- ---------
(unaudited)
Statement of Operations
Data
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $142,612 $98,739 $124,082 $96,637 $106,869 $96,808 $ 90,472
Cost of goods sold 101,427 73,811 91,105 71,701 74,781 74,305 70,581
Gross profit 41,185 24,928 32,977 24,936 32,088 22,503 19,891
Selling, general and
administrative expenses 22,650 16,005 22,030 16,838 16,528 13,204 13,346
Amortization of goodwill 1,401 142 578 __ __ __ __
Relocation and reorganization
expenses (a) __ __ __ 804 __ 1,906 __
Interest expense, net 12,512 7,161 11,413 8,194 2,346 2,883 2,410
Other (income) expense, net __ __ (28) __ (4) (55) (3)
Income (loss) before income taxes 4,622 1,620 (1,016) (900) 13,218 4,565 4,138
Income tax (benefit) provision
(b), (e) 1,812 616 (335) 1,945 (191) (343) 825
Net income (loss) $ 2,810 $1,004 $ (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 (42,861) 29,743 43,426 (768) 13,356 10,926 5,576
Net cash (used in) investing
activities (4,117) (131,150) (134,632) (1,562) (890) (8,521) (1,331)
Net cash provided by (used in)
financing activities 46,958 87,731 77,550 15,895 (13,191) (2,291) (4,163)
Adjusted EBITDA (c) 23,140 10,990 14,582 10,652 17,916 11,865 8,865
Adjusted EBITDA margin (c) 16.2% 11.1% 11.7% 11.0% 16.8% 12.3% 9.8%
Depreciation and amortization 6,687 2,554 4,892 2,968 2,364 2,760 2,317
Capital expenditures $ 2,169 $2,275 $ 2,854 $ 1,562 $ 890 $9,322 $1,371
Ratio of earnings to fixed charges
(d) 1.4x 1.2x __ (d) __ (d) 5.8x 2.4x 2.4x
</TABLE>
<TABLE>
<CAPTION>
As of
---------------------------------------------------------------------------------
Oct. 2 Oct. 3 Jan. 2 Jan. 3 Dec. 28 Dec. 30 Dec. 31
1999 1998 1999 1998 1996 1995 1994
--------- --------- --------- --------- -------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data
Total assets $206,330 $201,345 $181,943 $ 63,792 $43,504 $43,805 $41,711
Long-term debt (including current 179,499 144,022 132,460 82,754 24,210 28,000 26,890
portion)
Stockholders" equity (deficit) $13,246 $12,181 $ 10,517 $(28,005) $15,052 $11,044 $ 8,770
</TABLE>
13
<PAGE>
- -----
(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 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.
14
<PAGE>
<TABLE>
<CAPTION>
Nine Mos. Ended
---------------
Oct. 2 Oct. 3 Fiscal Year
1999 1998 1998 1997 1996 1995 1994
--------- --------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $4,622 $1,620 $ (1,016) $ (900) $13,218 $ 4,565 $ 4,138
Add back Fixed Charges;
Interest Expense 12,512 7,161 11,413 8,194 2,346 2,883 2,410
Operating Lease Expense 1/3 450 398 531 400 400 375 540
Earnings before Fixed Charges 17,584 9,179 10,928 7,694 15,964 7,823 7,088
Fixed Charges 12,962 7,559 11,944 8,594 2,746 3,258 2950
Ratio of Earnings to Fixed Charges 1.4x 1.2x 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.
15
<PAGE>
CAPITALIZATION
The following table sets forth (i) the cash and cash equivalents and
capitalization of Pen-Tab Industries, Inc. as of January 2, 1999 and October 2,
1999. The information in this table should be read in conjunction with the
audited financial statements of Pen-Tab Industries, Inc. as of January 2, 1999
included in the Company's form 10-K (#333-24519) and the unaudited financial
statements of Pen-Tab Industries, Inc. as of October 2, 1999 included in the
Company's form 10-Q as filed with the Securities and Exchange Commission.
<TABLE>
<CAPTION>
Dollars in thousands except per share amounts
<S> <C> <C>
Cash and cash equivalents $ 20 $ --
========== ==========
Long-term debt obligations, including current portion:
Collateralized loans payable to a bank/(1)/ $39,250 $88,500
Industrial development revenue bonds 7,100 6,700
10.875% Senior Subordinated Notes/(2)/ 75,000 75,000
Other 11,110 9,299
---------- ----------
20. $132,460 $179,499
========== ==========
Stockholders' equity:
Common stock $.01 par value, 1,000 share authorized; 100 $ -- $ --
shares issued at January 2, 1999 and October 2, 1999
Additional capital 39,209 39,209
Retained deficit (28,692) (25,963)
26. ---------- ----------
$10,517 $13,246
Total stockholders' equity
========== ==========
</TABLE>
(1) The information for the collateralized loans payable to a bank as of
January 2, 1999 and as of October 2, 1999 relate to amounts outstanding
under a $135 million Credit Facility ("Credit Facility") led and agented by
Bank of America which expires on August 20, 2001. The Credit Facility
includes a $100 million revolver and a $35 million term loan.
(2) After the Expiration Date, the Company will issue Interest Notes in the
amount of approximately $4 million to existing Noteholders.
16
<PAGE>
EXHIBIT 4
---------
AMENDMENTS TO THE SENIOR CREDIT AGREEMENT
-----------------------------------------
THIRD AMENDMENT AND WAIVER
TO
SECURED CREDIT AGREEMENT
THIS THIRD AMENDMENT AND WAIVER dated as of March ___, 2000 (this
"Amendment") is entered into by and 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 the
------
Credit Agreement referred to below (the "Lenders") and Bank of America, N.A.
(formerly known as Bank of America National Trust and Savings Association) as
letter of credit issuer and as agent for the Lenders (the "Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company, the Parent, the Lenders and the Agent are parties
to a certain Secured Credit Agreement dated as of August 20, 1998 (herein called
the "Credit Agreement"); and
----------------
WHEREAS, subject to the terms and conditions set forth herein the
Lenders are willing to waive non-compliance by the Company with certain
provisions of the Credit Agreement and to amend certain provisions of the Credit
Agreement.
NOW, THEREFORE, in consideration of the premises, and intending to be
legally bound hereby, the Company, the Parent, the Lenders and the Agent hereby
agree as follows:
SECTION 1. WAIVER. In reliance on the warranties of the Company and the
------
Parent set forth in Section 3 below, effective on (and subject to the occurrence
---------
of) the Amendment Effective Date (as defined below), the Lenders and the Agent
hereby waive (i) the Company's compliance with the provisions of Sections 8A.1
-------------
and 8A.2 of the Credit Agreement for the Company"s fiscal quarter ended December
----
31, 1999, (ii) the Company's compliance with Section 7.13 for the period from
------------
September 30, 1999 through January 15, 2000 and (iii) any Event of Default
caused by reason of the Company's failure to make a mandatory prepayment of the
Revolving Loans pursuant to Section 2.7 of the Credit Agreement during the
-----------
period from September 30, 1999 through the date hereof.
SECTION 2. AMENDMENTS. In reliance on the warranties of the Company and
----------
the Parent set forth in Section 3 below, effective on (and subject to the
---------
occurrence of) the Amendment Effective Date, the Credit Agreement shall be
amended as follows:
(a) The definition of "Borrowing Base" set forth in Section 1.1 of the
-----------
Credit Agreement shall be amended to read in its entirety as follows:
17
<PAGE>
"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 (including, without limitation,
program allowances), as the Agent may reasonably deem proper and
necessary) of the Eligible Accounts of the Company, Stuart Hall and
Vinylweld as of the date of the most recently delivered Borrowing Base
certificate; plus
----
(ii) an amount equal to the lesser of (x) 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, Stuart Hall and Vinylweld and (y) at all
times from February 1 through June 30 of each year, $45,000,000 and at
all other times, $30,000,000; plus
----
(iii) an amount equal to (1) for the period from March 1, 2000
through April 30, 2000, $16,500,000, (2) for the period from May 1,
2000 through May 31, 2000, $14,500,000, (3) for the period from June
1, 2000 through June 30, 2000, $10,000,000, (4) for the period from
July 1, 2000 through July 15, 2000, $5,000,000 and (5) for the period
from and after July 16, 2000, $0; 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.
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.
(b) The definition of "Applicable Margin" set forth in Section 1.1
-----------
of the Credit Agreement shall be amended to read in its entirety as follows:
"Applicable Margin" with respect to any Offshore Rate Loan, Base Rate
-----------------
Loan or the Commitment Fee, means (i) until the first time the Applicable
Margin is adjusted pursuant to the last paragraph of this definition, 3.50%
for Offshore Rate Loans, 1.75% for Base Rate Loans and 0.65% for the
Commitment Fee, and (ii) at all times when clause (i) above does not apply,
------
a margin based on the Fixed Charge Coverage Ratio, as follows:
18
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Fixed Charge Offshore Rate Base Rate Commitment Fee
Coverage Ratio Applicable Margin Applicable Margin Applicable Margin
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than or equal to 3.50% 1.75% 0.65%
1.5:1
- -------------------------------------------------------------------------------------------------------------------
Greater than 1.5:1 and 2.625% 1.50% 0.60%
less than or equal to
1.75:1
- --------------------------------------------------------------------------------------------------------------------
Greater than 1.75:1 2.00% 1.00% 0.50%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
; provided, that at all times during each month during which,
--------
at any time during such month, the Effective Amount of all Revolving
Loans plus the Effective Amount of all L/C Obligations (other than with
respect to the IRB Letter of Credit) exceeded the Borrowing Base less
any amount set forth in clause (a)(iii) of the definition of Borrowing
---------------
Base, the foregoing Offshore Rate Applicable Margin and Base Rate
Applicable Margin shall be increased by 0.50%.
The Applicable Margin shall be adjusted on the fifteenth day
following receipt by the Agent of the financial statements required by
Section 7.1(a) or (b), as applicable, and the related Compliance
-------------- ---
Certificate required by Section 7.2(b) (provided, that the Applicable
-------------- --------
Margin shall not be adjusted until financial statements in accordance
with Section 7.1(b) are delivered to the Agent with respect to the
--------------
Company"s fiscal quarter ended September 30, 2000), 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 financial statements required by Section 7.1(a) or
--------------
(b), as applicable, and the related Compliance Certificate required by
---
Section 7.2(b), then, until receipt of such financial statements and
--------------
certificate by the Agent, the Applicable Margin shall be 3.50% with
respect to Offshore Rate Loans, 1.75% with respect to Base Rate Loans
and 0.65% with respect to the Commitment Fee.
(c) The definition of "Consolidated EBITDA" set forth in Section 1.1 of
-----------
the Credit Agreement shall be amended by (i) deleting the word "and" where it
appears immediately prior to clause (i)(e) of such definition and inserting a
-------------
comma in lieu thereof and (ii) inserting the following immediately after clause
------
(i)(e) and before the semicolon "and (f) restructuring charges related to the
- ------
Company's 1999-2000 restructuring in an amount not to exceed $10,000,000 in the
aggregate."
(d) The definition of "Eligible Account" set forth in Section 1.1 of
-----------
the Credit Agreement shall be amended by: (i) deleting the words "the Company or
Stuart Hall" where they appear immediately prior to the parenthetical phrase
defining "Person" for purposes of the definition of "Eligible Account" and
inserting in lieu thereof the words "the Company, Stuart Hall or Vinylweld;"
(ii) deleting the percentage "10%" where it appears in clause (n) of such
----------
definition and inserting the following percentage in lieu thereof "25%"; (iii)
deleting the date "October 1" where it appears in clause (c) of such definition
----------
and inserting the following date in lieu thereof "October 10;" and (iv) adding
the following to clause (h) of such definition immediately following the word
----------
"Company", ", Stuart Hall or Vinylweld."
19
<PAGE>
(e) The definition of "Eligible Inventory" set forth in Section 1.1 of
-----------
the Credit Agreement shall be amended by: (i) deleting the words "the Company or
Stuart Hall" where they appear immediately prior to the parenthetical phrase
defining "Person" for purposes of the definition of "Eligible Inventory" and
inserting in lieu thereof the words "the Company, Stuart Hall or Vinylweld;"
and (ii) deleting from clause (g) of such definition the words "the Company or
----------
Stuart Hall" and inserting in lieu thereof the words "the Company, Stuart Hall
or Vinylweld."
(f) The definition of "Interest Payment Date" set forth in Section 1.1 of
-----------
the Credit Agreement shall be amended to read in its entirety as follows:
"Interest Payment Date" means the last Business Day of each
---------------------
month and, with respect to any Loan, each date such Loan is converted
into another Type of Loan and, with respect to any Offshore Rate Loan,
on the last day of each Interest Period with respect thereto.
(g) The definition of "Net Worth Shortfall Period" shall be deleted
from Section 1.1 of the Credit Agreement.
-----------
(h) The following definitions shall be added to Section 1.1 of the
-----------
Credit Agreement, each in its appropriate alphabetical position:
"Qualified Subordinated Debt" means unsecured indebtedness of
---------------------------
the Company, that has no financial covenants and otherwise has terms
and conditions satisfactory to the Agent, that is subordinated in right
of payment to the Obligations pursuant to terms satisfactory to the
Agent and that has, at a minimum, no right to payment in cash of any
interest, principal, fee, premium or other amount owing with respect
thereto until at least one year after the Term Maturity Date.
"Total Debt" means for any Person, all Indebtedness of such
----------
Person and its Subsidiaries other than (x) Qualified Subordinated Debt,
(y) obligations with respect to Swap Contracts and (z) Indebtedness
under letters of credit issued in support of trade payables arising in
the ordinary course of business.
(i) Section 2.11(b) of the Credit Agreement shall be amended to read
---------------
in its entirety as follows:
(b) [intentionally left blank].
(j) Section 7.2 of the Credit Agreement shall be amended by deleting
-----------
clauses (g) and (h) and inserting the following in lieu thereof:
- ----------- ---
(g) not later than the third Business Day of each week, a
certificate of a Responsible Officer of the Company, substantially in
the form of Exhibit L attached hereto, containing a calculation of the
Borrowing Base as of the last Business Day of the immediately preceding
week;
20
<PAGE>
(h) for the period from March 1, 2000 through July 15, 2000
weekly, not later than the third Business Day of each week, a
certificate of a Responsible Officer of the Company with respect to a
cash flow forecast for such week and the next succeeding four weeks in
a form acceptable to the Agent;
(i) promptly, notice of any revision to the forecast
delivered with respect to fiscal year 2000 pursuant to Section 7.2(d);
--------------
and
(j) promptly, such additional information regarding the
business, financial and corporate affairs of the Company, the Parent or
any Subsidiary as the Agent or any Lender may reasonably request.
(k) Section 7.13 of the Credit Agreement shall be amended to read in
------------
its entirety as follows:
7.13 Annual Clean-Up. The Company shall (a) for a period of
---------------
not less than thirty (30) consecutive days occurring between September
30 and November 15 of each fiscal year other than the 2000 fiscal year,
reduce the aggregate outstanding principal amount of Revolving Loans
plus accrued interest thereon to $25,000,000 or less, and (b) for a
period of not less thirty (30) consecutive days occurring between
October 15, 2000 and January 15, 2001, reduce the aggregate outstanding
principal amount of Revolving Loans plus accrued interest thereon to
$27,000,000 or less.
(l) Section 8A.1 of the Credit Agreement shall be amended to read in
------------
its entirety as follows:
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 ratio set forth below opposite such period:
Period Ratio Level
------------------------------------------
March 31, 2000 through
June 30, 2000 1.00:1
Thereafter 1.50:1.
(m) Section 8A.2 of the Credit Agreement shall be amended to read in
------------
its entirety as follows:
8A.2 Minimum EBITDA. The Company shall not permit, as of the
--------------
last day of any fiscal quarter occurring during each period set forth
below, Consolidated EBITDA for the four consecutive fiscal quarter
period then ended to be less than the minimum amount set forth below
opposite such period:
21
<PAGE>
Period Amount
-------------------------------------------
March 31, 2000 $19,000,000
June 30, 2000 $19,500,000
September 30, 2000 $24,000,000
December 31, 2000 and each
fiscal quarter thereafter $24,500,000.
(n) Section 8A.3 of the Credit Agreement shall be amended to read in
------------
its entirety as follows:
8A.3. Capital Expenditures. The Company shall not permit
--------------------
Consolidated Capital Expenditures (i) during the 2000 fiscal year of
the Company to exceed $2,000,000, and (ii) during any fiscal year of
the Company thereafter to exceed $5,000,000 plus any Rollover Amount.
For purposes of this section "Rollover Amount" shall mean for any
fiscal year beginning after December 31, 2001, the amount by which
$5,000,000 exceeds the Consolidated Capital Expenditures during the
prior fiscal year.
(o) The following Section 8A.4 shall be added to the Credit Agreement:
------------
8A.4. Total Debt. (a) The Parent shall not permit its Total
----------
Debt to exceed $202,500,000 on June 30, 2000.
(b) The Company shall not permit its Total Debt to exceed
$153,000,000 on June 30, 2000.
(c) Each of the Parent and the Company will deliver to the
Agent, in form and detail satisfactory to the Agent and the Majority
Lenders, with sufficient copies for each Lender, balance sheets for
each of the Parent and the Company as of June 30, 2000, together with
certificates calculating the Total Debt of the Parent and the Total
Debt of the Company on June 30, 2000, which balance sheets and
certificates must be delivered no later than July 15, 2000.
SECTION 3. WARRANTIES. To induce the Lenders and the Agent to enter
----------
into this Amendment, each of the Company and the Parent warrant to the Lenders
and the Agent as of the date hereof that:
(a) No Default or Event of Default exists; and
(b) The representations and warranties of the Borrowers contained in
Article VI of the Credit Agreement are true and correct with the same effect as
- ----------
though made on the date hereof, except to the extent such representations and
warranties expressly refer to an earlier date, in which case they were true and
correct as of such earlier date.
22
<PAGE>
SECTION 4. EFFECTIVENESS. The waivers set forth in Section 1 above and
-------------
the amendments set forth in Section 2 above shall become effective on such date
---------
(the "Amendment Effective Date") when:
------------------------
(i) the Company, the Parent, the Agent and the Majority Lenders have
executed counterparts hereof and delivered them to the Agent;
(ii) the Agent shall have received evidence satisfactory to it that
the holders of not less than 76% of the principal amount of the Company's 10-
7/8% Senior Subordinated Notes due 2007 issued under the 1997 Debt Indenture
("Senior Subordinated Notes") have irrevocably and unconditionally agreed not to
-------------------------
accelerate the Senior Subordinated Notes, or declare a default or otherwise
exercise any remedy with respect thereto as a result of any event of default
under the 1997 Debt Indenture arising from the failure of the Company to make
the payment of interest on the Senior Subordinated Notes due on February 1, 2000
and have agreed to accept a payment of additional Senior Subordinated Notes in a
principal amount equal to the amount of interest not paid in cash on the Senior
Subordinated Notes on such date, in each case on terms satisfactory to the
Agent;
(iii) the Agent shall have received an amendment, in form and substance
satisfactory to the Agent, to the deed of trust entered into by the Company in
favor of the Agent in respect of the Company"s real property in Front Royal,
Virginia increasing the amount of indebtedness secured thereby to $15,000,000,
duly executed by the Company;
(iv) the Agent shall have received such endorsements to the title
insurance policy issued in favor of the Agent with respect to the deed of trust
described in clause (iii) above as it shall reasonably request;
------------
(v) the Company, Vinylweld and Stuart Hall shall have entered into an
agreement with the Agent in form and substance satisfactory to the Agent
granting the Agent dominion and control over all cash receipts of the Company,
Vinylweld and Stuart Hall;
(vi) the Agent shall have received a Security Agreement duly executed
by Vinylweld, together with all schedules thereto;
(vii) the Agent shall have received certified copies of Uniform
Commercial Code Requests for Information or Copies (Form UCC-11), or a similar
search report certified by a party reasonably acceptable to the Agent, dated a
date reasonably near to the Amendment Effective Date, listing all effective
financing statements which name Vinylweld (under its present name and any
previous names) as debtor and which are filed in the jurisdictions in which
filings are to be made in connection with such Security Agreement, together with
(A) copies of such financing statements, (B) executed copies of proper Uniform
Commercial Code Form UCC-3 termination statements, if any, necessary to release
all Liens and other rights of any Person in any collateral described in such
Security Agreement previously granted by any Person (other than Permitted Liens)
and (C) such other Uniform Commercial Code Form UCC-3 termination statements as
the Agent may reasonably request;
23
<PAGE>
(viii) the Agent shall have received each document (including Uniform
Commercial Code financing statements) reasonably requested by the Agent to be
filed, registered or recorded in order to create in favor of the Agent, for the
benefit of the Lenders, a perfected Lien on the Collateral of Vinylweld, prior
and superior to any other Person, in proper form for filing, registration or
recording;
(ix) the Agent shall have received a duly executed Reaffirmation of
Loan Documents from the Parent and Stuart Hall, in substantially the form of
Exhibit A hereto; and
- ---------
(x) the Agent shall have received, for the account of each Lender,
an amendment fee equal to 0.375% of the sum of such Lender's Term Loan plus such
Lender's Commitment.
SECTION 5. GENERAL.
-------
(a) Capitalized terms used but not otherwise defined herein have the
meanings assigned thereto in the Credit Agreement.
(b) As hereby amended or modified, the Credit Agreement shall remain in
full force and effect and is hereby ratified, approved and confirmed in all
respects.
(c) After the date hereof, all references in the Credit Agreement and
the Loan Documents to "Credit Agreement," "Agreement," "hereof" or the like
shall refer to the Credit Agreement as hereby amended or modified.
(d) The Company acknowledges its payment and reimbursement obligations
arising pursuant to Section 11.4 of the Credit Agreement with respect to
------------
reasonable Attorney Costs incurred by BofA in connection with the preparation of
this Amendment.
(e) This Amendment shall be binding upon the Company, the Parent, the
Lenders and the Agent and shall inure to the benefit of the Company, the Parent,
the Lenders and the Agent and the successors and assigns of the Lenders and the
Agent.
(f) This Amendment may be executed in any number of counterparts and by
the different parties on separate counterparts, and each such counterpart shall
be deemed to be an original, but all such counterparts shall together constitute
but one and the same Amendment.
(g) This Amendment shall be governed by, and construed in accordance
with, the laws of the State of Illinois, provided that the Agent and the Lenders
shall retain all rights arising under federal law.
* * * * *
24
<PAGE>
Delivered at Chicago, Illinois, as of the date and year first above
written.
PEN-TAB INDUSTRIES, INC.
By:______________________________
Title: __________________________
PEN-TAB HOLDINGS, INC.
By:______________________________
Title: __________________________
BANK OF AMERICA, N.A., as Agent
By:______________________________
Title: __________________________
BANK OF AMERICA, N.A., as Lender
By:______________________________
Title: __________________________
COMERICA BANK, as Lender
By:______________________________
Title: __________________________
25
<PAGE>
BAY VIEW FINANCIAL CORPORATION,
as Lender
By:______________________________
Title: __________________________
UNION BANK OF CALIFORNIA, N.A.,
as Lender
By:______________________________
Title: __________________________
BAY VIEW BANK, as Lender
By:______________________________
Title: __________________________
LASALLE BANK NATIONAL ASSOCIATION,
as Lender
By:______________________________
Title: __________________________
26
<PAGE>
EXHIBIT A
FORM OF REAFFIRMATION OF
LOAN DOCUMENTS
March __, 2000
Bank of America, N.A., as Agent
and the other parties to the Secured Credit
Agreement referred to below
231 South LaSalle Street
Chicago, Illinois 60697
Attn: Agency Management Services #33499
Re: Reaffirmation of Loan Documents
Ladies and Gentlemen:
Please refer to:
1. The Stuart Hall Company, Inc. Security Agreement
dated as of August 20, 1998 (the "Security
--------
Agreement") made by Stuart Hall Company , Inc.
---------
("Stuart Hall") in favor of Bank of America, N.A.
-----------
(formerly Bank of America National Trust and Savings
Association) in its capacity as Agent (in such
capacity, the "Agent");
-----
2. The Stuart Hall Company, Inc. Guaranty dated as of
August 20, 1998 (the "Stuart Hall Guaranty") made in
--------------------
favor of the Agent by Stuart Hall;
3. The Pen-Tab Holdings, Inc. Guaranty dated as of
August 20, 1998 (the "Holdings Guaranty") made in
-----------------
favor of the Agent by Pen-Tab Holdings, Inc.
("Holdings");
--------
4. The Pen-Tab Holdings, Inc. Pledge Agreement dated as
of August 20, 1998 made by Holdings in favor of the
Agent (the "Pledge Agreement"); and
----------------
5. The Trademark Security Agreement made as of August
20, 1998 by Stuart Hall in favor of the Agent (the
"Trademark Security Agreement").
----------------------------
The Security Agreement, the Stuart Hall Guaranty, the Holdings
Guaranty, the Pledge Agreement and the Trademark Security Agreement, as well as
each other Loan Document to which either of the undersigned is a party, in each
case as heretofore amended, are collectively
27
<PAGE>
referred to herein as the "Documents". Capitalized terms not otherwise defined
---------
herein will have the meanings given in the Credit Agreement referred to below.
Each of the undersigned acknowledges that the Company, the
Lenders and the Agent have executed the Third Amendment and Waiver (the
"Amendment") to the Secured Credit Agreement dated as of August 20, 1998 (as
---------
amended, supplemented or otherwise modified from time to time, the "Credit
------
Agreement").
- ---------
Each of the undersigned hereby confirms that each Document to
which such undersigned is a party remains in full force and effect after giving
effect to the effectiveness of the Amendment and that, upon such effectiveness,
all references in each such Document to the "Credit Agreement" shall be
references to the Credit Agreement as amended by the Amendment.
The letter agreement may be signed in counterparts and by the
various parties as herein on separate counterparts. This letter agreement shall
be governed by the laws of the State of Illinois applicable to contracts made
and to be performed entirely within such State.
STUART HALL COMPANY, INC.
By:_______________________________
Title:____________________________
PEN-TAB HOLDINGS, INC.
By:________________________________
Title:_____________________________
28
<PAGE>
Exhibit 21.1
Subsidiaries
1. Subsidiaries as of January 1, 2000, which are consolidated in the financial
statements of the Company:
Subsidiary State of Incorporation Ownership
---------------------------- ------------------------- ------------------
Stuart Hall Company, Inc. Missouri 100%
Vinylweld L.L.C. Delaware 80%
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JAN-01-2000 JAN-02-1999
<PERIOD-START> JAN-03-1999 JAN-04-1998
<PERIOD-END> JAN-01-2000 JAN-02-1999
<CASH> 175 20
<SECURITIES> 0 0
<RECEIVABLES> 21,353 15,770
<ALLOWANCES> 3,794 2,325
<INVENTORY> 45,015 40,601
<CURRENT-ASSETS> 74,224 58,386
<PP&E> 64,078 61,760
<DEPRECIATION> 21,771 16,222
<TOTAL-ASSETS> 193,722 181,943
<CURRENT-LIABILITIES> 42,072 41,708
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 3,850 10,517
<TOTAL-LIABILITY-AND-EQUITY> 193,722 181,943
<SALES> 155,403 114,791
<TOTAL-REVENUES> 155,403 114,791
<CGS> 110,631 83,228
<TOTAL-COSTS> 137,312 103,697
<OTHER-EXPENSES> 7,983 550
<LOSS-PROVISION> 340 286
<INTEREST-EXPENSE> 17,427 11,527
<INCOME-PRETAX> (7,319) (881)
<INCOME-TAX> (1,492) (290)
<INCOME-CONTINUING> (7,319) (881)
<DISCONTINUED> (750) (90)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,577) (681)
<EPS-BASIC> 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 rations, 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 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.
