-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VfSyFqoabXTCgD31xxxxbBfVE+YZr+OHZDg0W680YPx6uxPn7dHrASX4llD+jYhZ 9RiS6Wk+XQmrOwrmSRFgbA== 0000912057-00-018255.txt : 20000417 0000912057-00-018255.hdr.sgml : 20000417 ACCESSION NUMBER: 0000912057-00-018255 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERICAN PAD & PAPER CO CENTRAL INDEX KEY: 0000005588 STANDARD INDUSTRIAL CLASSIFICATION: CONVERTED PAPER & PAPERBOARD PRODS (NO CONTAINERS/BOXES) [2670] IRS NUMBER: 043164298 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-11803 FILM NUMBER: 602463 BUSINESS ADDRESS: STREET 1: 17304 PRESTON D STREET 2: STE 700 CITY: DALLAS STATE: TX ZIP: 75252-5613 BUSINESS PHONE: 9727335400 MAIL ADDRESS: STREET 1: 17304 PRESTON ROAD STREET 2: SUITE 700 CITY: DALLAS STATE: TX ZIP: 75252 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER 1-11803 ------------------------ AMERICAN PAD & PAPER COMPANY (Exact name of registrant as specified in its charter) DELAWARE 04-3164298 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 17304 PRESTON ROAD, SUITE 700, DALLAS, TX 75252-5613 (Address of principal executive offices) (Zip Code)
------------------------ Registrant's telephone number, including area code: (972) 733-6200 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $.01 PER SHARE ------------------------ Indicate by check mark whether each 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 period that each 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 registrants' knowledge, in definitive proxy of information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / As of March 30, 2000, there were 28,527,983 outstanding shares of American Pad & Paper Company common stock and the aggregate market value of the common stock of American Pad & Paper Company held by non-affiliates was approximately $4.2 million. DOCUMENTS INCORPORATED BY REFERENCE None. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
ITEM PAGE - --------------------- -------- PART 1 1. Business.................................................... 3 Recent Developments......................................... 4 2. Properties.................................................. 11 3. Legal Proceedings........................................... 13 4. Submission of Matters to a Vote of Security Holders......... 14 PART II 5. Market of Registrant's Common Equity and Related Stockholder Matters................................................... 15 6. Selected Financial Data..................................... 16 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................. 18 7A. Quantitative and Qualitative Disclosures About Market Risk...................................................... 27 8. Financial Statements and Supplementary Data................. 27 9. Changes in and Disagreements on Accounting and Financial Disclosure................................................ 27 PART III 10. Directors and Executive Officers of the Registrant.......... 28 11. Executive Compensation...................................... 30 12. Security Ownership of Certain Beneficial Owners and Management................................................ 37 13. Certain Relationships and Related Transactions.............. 38 PART IV 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K.................................................. 40 Signatures.................................................. 70
2 American Pad & Paper Company (the "Company") is a holding company with no separate operations. At March 30, 2000, the Company had 28,527,983 shares of outstanding common stock traded on the National Association of Security Dealers Over-the-Counter Bulletin Board System. The Company owns 100% of the outstanding common shares of WR Acquisition, Inc. ("WR Acquisition"). WR Acquisition is also a holding company with no separate operations. WR Acquisitions owns 100% of the outstanding common shares of American Pad & Paper Company of Delaware, Inc. ("AP&P Delaware"), and AP&P Delaware owns 100% of the outstanding common shares of AP&P Manufacturing, Inc. ("Manufacturing"). AP&P Delaware and Manufacturing are the primary operating companies in which all significant operations of the Company take place. AP&P Delaware has $130 million of 13% Senior Subordinated Notes ("Notes") outstanding. The Company has followed full push-down accounting for the financial statements of AP&P Delaware such that the only differences between the Company and AP&P Delaware relate to the capital structure just described. ITEM 1 BUSINESS GENERAL The Company is one of the largest manufacturers and marketers of nationally branded and private label paper-based office products (excluding copy paper) in the $60 billion to $70 billion North American office products industry. Through its Ampad division, the Company is among the largest manufacturers of writing pads and notebooks, filing supplies, retail envelopes and machine papers to many of the largest office product retailers and distributors. Established in 1888, the Company's Ampad division has been a leading supplier of pads and other paper-based writing products throughout its history. Acquired in October 1995, the Company's Williamhouse division is the leading supplier of mill branded specialty and commodity business envelopes and machine papers to paper merchants/distributors and jobbers. The Company maintains several nationally recognized brand names such as AMPAD-REGISTERED TRADEMARK-, CENTURY-TM-, EMBASSY-REGISTERED TRADEMARK-, EVIDENCE-REGISTERED TRADEMARK-, GOLD-FIBRE-TM-, HUXLEY-TM-, KAROLTON-REGISTERED TRADEMARK-, KENT-REGISTERED TRADEMARK-, PEEL & SEEL-REGISTERED TRADEMARK-, SCM-TM-, WILLIAMHOUSE-TM- and WORLD FIBRE-TM-. Since the mid-1980s, the office products industry has experienced significant changes in the channels through which office products are distributed. Such changes include the emergence of new channels including national office product superstores, national contract stationers and mass merchandisers, and consolidation within these and other channels. The channels through which office products are distributed from the manufacturer to the end-user include retail channels such as national office products superstores, mass merchandisers and warehouse clubs; commercial channels such as national contract stationers; paper merchants/distributors and jobbers; and other channels such as regional distributors, school campuses and direct mail. HISTORY From 1986 to 1992, Ampad operated as a subsidiary of Mead Corporation ("Mead"). In July 1992, the Company acquired Ampad from Mead in an acquisition led by Bain Capital, Inc. ("Bain Capital") and former senior management. Since the acquisition, of Ampad, the Company has made additional acquisitions in order to enhance the Company's scale, broaden its product line, expand upon its national presence and strengthen its distribution capabilities. In July 1994, the Company acquired the assets and assumed certain liabilities of SCM, one of the industry leaders in hanging files and writing products. In August 1995, the Company acquired certain file folder and file product lines of American Trading and Production Corporation's ("Atapco") Globe-Weis-Registered Trademark- office products division. Prior to the acquisition, Atapco was one of the leading providers of file folders and hanging files to office product superstores. The acquisitions of the SCM-TM- and Globe-Weis-Registered Trademark- product lines further strengthened the Company's position in the filing supplies and writing products categories. 3 In October 1995, the Company acquired WR Acquisition and its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc. (collectively referred to as "Williamhouse"). Williamhouse is a leading supplier to many of the largest national, regional, and independent paper merchants/distributors and jobbers. Williamhouse also includes the Creative Card operations. Creative Card is an industry leader in design and publishing of boxed holiday greeting cards, all occasion greeting cards, social and business announcements, wedding invitations and pre-printed papers for desktop publishing. The Company's management identified the Regency Division of Williamhouse as a nonstrategic asset following the Williamhouse acquisition and, in June 1996, completed the sale of the Regency Division. In June 1996, the Company acquired Niagara Envelope Company, Inc. ("Niagara"). Niagara supplies mill branded, specialty and commodity envelopes to paper merchants/distributors through four manufacturing facilities located near Buffalo, Chicago, Dallas and Denver. In February 1997, the Company acquired Shade/Allied, Inc. ("Shade/Allied"). Shade/Allied supplied continuous forms to paper merchants/distributors and retail customers through four manufacturing facilities located near Green Bay, Seattle, Atlanta and Philadelphia. In July 1997, the Atlanta facility was closed, and in September 1997, the Seattle facility's lease was terminated. In November 1998, the remaining operations of Shade/Allied were combined with similar manufacturing operations of Ampad. In November 1999, the Company announced it had engaged Lazard Freres & Co. LLC ("Lazard Freres") to investigate the possible sale of its Williamhouse division, as well as other business assets of the Company, in order to reduce debt. In March 2000, the Company announced it had signed a letter of intent to sell its Creative Card division to Taylor Corporation. Such sale is subject to the approval of the bankruptcy court. Efforts by Lazard Freres to sell the Williamhouse division and other business assets are continuing. RECENT DEVELOPMENTS Since the Company's last acquisition in 1997 revenues have declined, margins have eroded, competitive pressures in the marketplace kept the Company from fully recouping increasing paper prices, and inventory levels were, for a period of time, built to an excessive level. Through the rationalization plan initiated in late 1998, three manufacturing plants were closed, inventory levels were reduced and production was better coordinated with sales. Although competitive pressures continued, price increases were initiated which, while not fully recouping prices movements in raw materials, caused amounts absorbed by the Company to be reduced. Despite the progress on operational and pricing issues, the Company's capital structure and high level of debt have limited its abiity to return to profitability. DEBT DEFAULT AND PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On November 12, 1999, the Company was notified by its banking group of a default of its revolving credit facility. The default stemmed from the formation of new subsidiaries in December 1997 related to a reorganization of the Company's corporate structure without proper notification to the banks. The reorganization was implemented primarily for state tax purposes and included the transfer of assets between existing entities and transfers to the new subsidiaries. The default on the revolving credit facility prevented the Company from paying interest on its publicly traded Notes due November 15, 1999, thereby causing a default on the Notes as well. On January 10, 2000, certain holders of the Company's 13% Senior Subordinated Notes due November 15, 2005 filed an involuntary chapter 11 petition against the Company and all of its subsidiaries except Notepad Funding Corporation (the "Debtors") in the United States Bankruptcy Court for the District of Delaware. On January 14, 2000, each of the Debtors consented to the entry of an Order for Relief and filed voluntary petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The bankruptcy Case Numbers 00-00066 (RRM) through 00-00072 (RRM) are being jointly administered under Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 (a) and 4 1108 of the Bankruptcy Code. On January 28, 2000, an Official Committee of Unsecured Creditors was appointed in these cases. No plan of reorganization has yet been proposed by the Company. On January 10, 2000, as a result of the chapter 11 filings, the Company's $60.0 million accounts receivable financing facility terminated and no further sales of receivables occurred. Although no post-termination receivables were sold under this facility, the Company continues to act as servicer under the facility and to collect and remit remaining outstanding receivables as provided in the facility. On February 9, 2000, the Bankruptcy Court entered a final order approving $65 million DIP financing in the form of a revolving credit facility provided by the Company's existing bank group. Availability under the facility is contingent upon a borrowing base of accounts receivable and inventory, and bears interest at a rate of prime plus 2.5%. The revolving credit facility matures July 17, 2000, and may be extended upon satisfaction of certain conditions. On March 8, 2000, the Company announced that it had signed a letter of intent with Taylor Corporation for the purchase of the Company's Creative Card division located in Chicago. Negotiations are continuing with Taylor Corporation and the Company expects the sale to be finalized in the second quarter of 2000. Such sale, subject to the approval of the bankruptcy court, is expected to result in a loss of $5 to $10 million. On March 21, 2000, the Company was notified by one of its major customers of the Ampad division that it intends to move its business to other suppliers. In 1999, that customer accounted for approximately $42 million or 6.4% of the Company's sales. Although Chapter 11 bankruptcy raises substantial doubt about the Company's ability to continue as a going concern, the accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a company on a going-concern basis which contemplates the continuity of operations, realization of assets and the liquidation of liabilities in the ordinary course of business. As a result of the Chapter 11 filing, realization of assets and liquidation of liabilities are subject to significant uncertainties. Specifically, the financial statements do not present the amount that will be paid to settle liabilities and contingencies that may be allowed in Chapter 11 reorganization. Also, the consolidated financial statements do not reflect i) adjustments to assets and liabilities which may occur in accordance with generally accepted accounting principles STATEMENT OF POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE (SOP 90-7) following the confirmation of a plan of reorganization; or ii) the realizable value of assets which would be required to be recorded if the Company presents a plan which contemplates the disposal of all or portions of its assets and operations. The filing of a plan of reorganization could materially affect the carrying value of the assets and liabilities currently disclosed in the consolidated financial statements. MANAGEMENT CHANGES. On March 31, 2000, William L. Morgan retired as Executive Vice President and Chief Operating Officer of the Company. Additionally, on March 31, 2000, the Company appointed William J. Mays as Chief Operations Officer. Mr. Mays joined the Company in December 1998 as Vice President, Operations Controller. COMPANY INITIATIVES/RESTRUCTURING. During 1999, the Company closed its Holland, New York; Dallas, Texas and Kosciusko, Mississippi facilities and consolidated the equipment at those facilities into its Scottdale, Pennsylvania; Corsicana, Texas; Mattoon, Illinois and Holyoke, Massachusetts facilities to eliminate excess space, reduce fixed overhead expenses and operating costs and improve customer service. Additionally, the Company consolidated six stand-alone distribution facilities into two, and relocated the Scottdale finished goods warehouse to a new state-of-the-art distribution facility in nearby New Stanton, Pennsylvania. 5 COMPETITIVE STRENGTHS Although the recent bankruptcy could limit the Company's ability to further capitalize or build on its competitive strengths, the Company still enjoys the following advantages: MARKET LEADER. The Company believes it is a market leader in core products sold to customers in the largest office product channels by offering one of the broadest assortments of high quality products in the industry. Furthermore, the Company enjoys national brand awareness in many of its product lines, including AMPAD-REGISTERED TRADEMARK-, CENTURY-TM-, EMBASSY-REGISTERED TRADEMARK-, EVIDENCE-REGISTERED TRADEMARK-, GOLD-FIBRE-TM-, HUXLEY-TM-, KAROLTON-REGISTERED TRADEMARK-, KENT-REGISTERED TRADEMARK-, PEEL & SEEL-REGISTERED TRADEMARK-, SCM-TM-, WILLIAMHOUSE-TM- and WORLD FIBRE-TM-. WELL-POSITIONED AND DIVERSIFIED CUSTOMER BASE. The Company maintains strong relationships with a combination of national, regional and independent paper merchants throughout the country. The Company also maintains strong customer relationships across all of the office products distribution channels, including superstores, contract stationers, mass merchandisers, warehouse clubs, office products wholesalers and independent dealers. NATIONAL SCALE AND SERVICE CAPABILITY. The Company's extensive product line, multiple brands and broad price point coverage provide significant advantages and economies of scale in selling to and servicing its customers. The Company is an important strategic partner to its customers as they seek higher value-added products, simplify their purchasing organizations and consolidate their relationships among selected national suppliers. The Company's national presence and network of 13 strategically located manufacturing and distribution facilities have enabled it to maintain rapid and efficient order fulfillment standards. In addition, the Company's advanced Electronic Data Interchange ("EDI") capabilities enable it to meet its customers' EDI requirements, executing automated transactions rapidly, efficiently and accurately. INNOVATION/NEW PRODUCTS. During the third and fourth quarters of 1999, the company introduced several value-added innovative products including: a new poly filing line, expandable filing products, REGAL MILLS-REGISTERED TRADEMARK- (papers), GEL MATES-TM- (papers), envelopes (new sizes, colors, features, etc.) and TWIN PERF-TM- writing pads. The Company is focused on developing a constant flow of new products. By developing new products and continuing the branding initiatives, the Company intends to increase its mix of value-added products. The Company believes these new products, combined with a new branding strategy, will improve inventory turn rates and return on inventory investment. LOW-COST MANUFACTURER. The Company believes completion of its plant rationalization plan has made it among the lowest-cost manufacturers of paper-based office products in the industry. PURCHASING ADVANTAGES. The Company has strong relationships with most of the country's largest paper mills, many of which have been conducting business with the Company for more than 30 years. The Company is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships which involve some of the largest and most recognized paper mill brands such as Hammermill, Fox River, Gilbert, Neenah and Strathmore. GROWTH STRATEGY Although the recent bankruptcy will impact the Company's strategy, its recent initiatives have laid the foundation for the future growth of its various divisions. E-COMMERCE INITIATIVE. Recognizing the growth in online commerce, the Company believes it can expand the Ampad division's presence in the SOHO (small office, home office) marketplace by working directly with both E-Tailers who offer the Company's products via the Internet and Commercial/Wholesale distributors who provide fulfillment for Internet sales of the Company's products. The 6 Company began its efforts in the E-Commerce channel in mid-1999 and the Ampad division currently has products available on approximately 30 Internet sites with an average of 175 items per site. ENHANCING PROFITABILITY. The plant rationalization plan completed in 1999 has produced the intended cost savings and has enabled the Company to be included among the lowest cost producers within its product category. Additional efforts are continuing that improve asset management, particularly inventory, equipment and receivables; enhance information systems, including those that increase productivity and provide efficiency; and provide better communication and coordination both internally and with its customers and vendors. FOCUS ON MARKET GROWTH AND INCREASING MARKET SHARE. The Company serves many of the largest and best positioned customers in the office products market segment including national office products superstores, mass merchandisers and warehouse clubs, national contract stationers and national and regional paper merchants/distributors and jobbers. 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 who are on the forefront of their markets. CONTINUE TO INTRODUCE NEW PRODUCTS. New, 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 differentiate itself from other suppliers and improve profitability through product innovation, differentiation and line extensions. BROADEN PRODUCT DISTRIBUTION. The Company's market presence and distribution strengths position it to sell new or acquired product lines across its distribution channels, including paper merchants, national office products superstores, national contract stationers, office product wholesalers and mass merchandisers. PRODUCTS AND SERVICES PADS AND OTHER PAPER-BASED WRITING PRODUCTS. The Company is one of the largest manufacturers and marketers of paper-based writing products (excluding copy paper) in North America, offering approximately 725 SKUs of writing pads, notebooks and specialty papers. Many of the Company's writing products are available in multiple sizes, grades of paper (including recycled), and colors and with glued, perforated tops or wire binding. All writing products are offered under the AMPAD-REGISTERED TRADEMARK- brand name or a retailer's private label. The Company has created innovative packaging especially for sale through warehouse clubs (bulk and crate packaging), superstores and mass merchandisers. FILING SUPPLIES. The Company is one of the three largest manufacturers of filing supplies in North America. The product line includes approximately 465 SKUs of filing supplies including file folders, hanging files, index cards and expandable folders under the SCM-TM- and Globe-Weis-Registered Trademark- brand names. The Company is attempting to grow its market share in filing supplies by focusing its sales efforts on large retail customers and contract stationers and by expanding into other areas of the mass market channel. ENVELOPES. The Company is among the largest manufacturers of envelopes serving the paper merchant/distributor and office product superstore channels. In 1999, the Company produced approximately 20 billion envelopes. The Company's broad envelope product line includes products manufactured from mill branded paper, which is paper unique in color and texture to a particular mill, typically with an identifying watermark. The Company is the largest designated envelope manufacturer, producing envelopes for 33 mill brands. These mills include the Hammermill, Strathmore and Beckett divisions of International Paper Company, the Neenah division of Kimberly-Clark Corporation, the Gilbert division of Mead and the Fox River Paper Company. The Company also produces a wide variety of standard size and specialty envelopes made from commodity paper and Tyvek-Registered Trademark- (a high density polyurethane based product made by Du Pont), including 7 booklet and catalog mailing envelopes, envelopes closable by metal clasp or button-and-string, PEEL & SEEL-REGISTERED TRADEMARK- (pressure sensitive adhesion) envelopes, and jumbo, X-ray and remittance envelopes. The Company offers in excess of 27,000 SKUs of envelopes (which the Company believes is more than any of its competitors), providing its customers with a wide choice of paper grades, colors and sizes. MACHINE PAPERS. The Company manufactures machine papers, a product category defined by the Company which includes inkjet papers, printed formats, fine papers such as cotton content and laid papers, as well as continuous forms. INVITATIONS AND ANNOUNCEMENTS. The Company manufactures invitations and announcements, Christmas and holiday cards, and presentation folders. These products are sold principally to paper merchants/ distributors, personalizing businesses (including the former Regency Division), and other wholesale outlets throughout the United States. The Company offers a wide variety of such products, primarily made from the same mill branded grades of paper used in manufacturing envelopes. Principal products, customers and selected brands of the Company include:
AMPAD WILLIAMHOUSE CREATIVE CARD - ------------------------------ ------------------------------ ---------------------------- PRODUCTS - - Pads and Notebooks - Business Envelopes - Invitations - - Filings Supplies - Invitations - Announcements - - Retail envelopes - Announcements - Christmas Cards - - Machine Papers - Christmas and Holiday Cards - Holiday Cards - - Christmas and Holiday Cards - Machine Papers - PC/Desktop Stationary - - Invitations - - Announcements DISTRIBUTION CHANNELS - - Office Products Superstores - Paper Merchants/Distributors - Superstores - - Mass Merchants - Jobbers - Mass Merchandisers - - Contract Stationers - Personalizing Businesses - Card Distributors - - Wholesalers - Imprinters - - Buying Groups - Card Outlets SELECTED BRANDS - - AMPAD-Registered Trademark- - Century-TM- - Century-TM- - - - Huxley-TM- Embassy-Registered Trademark- - - - Karolton-Registered Trademark- Evidence-Registered Trademark- - Kent-Registered Trademark- - - Globe - Weis-Registered Trademark- Kentwove-Registered Trademark- - - Gold-Fibre-TM- - Peel & - - SCM-TM- Seel-Registered Trademark- - - World Fibre-TM- - Williamhouse-TM-
SALES, DISTRIBUTION AND MARKETING The Company markets its broad range of products to a wide variety of customers. One customer accounted for 21%, 15% and 12% of the Company's net sales in 1999, 1998 and 1997, respectively. The Company markets its writing products, filing supplies, retail envelopes and machine papers through virtually every channel of distribution for paper-based office products including the largest mass merchant retailers, office product superstores, warehouse clubs, major contract stationers, paper merchants/distributors and other traditional outlets for office supplies such as office product wholesalers, independent dealers, buying groups and mail order firms. 8 The Company sells its business envelopes and machine papers principally to paper merchants/ distributors and other wholesale outlets throughout the United States, primarily through an in-house sales force. In addition, mill branded products are sold directly to personalizing businesses (including the former Regency Division). The Company currently employs sales representatives throughout the United States and sells products to over 1,700 paper merchant/distributor locations in the United States and Canada. The Williamhouse acquisition provided the Company with the ability to manufacture and distribute retail envelopes to the Ampad division customers under the AMPAD-Registered Trademark- and private label names. Current key customers of the Company include:
OFFICE PRODUCT SUPERSTORES MASS MERCHANTS PAPER MERCHANTS/DISTRIBUTORS - ----------------------------- ----------------------------- ----------------------------- Office Max Wal-Mart Nationwide Staples xpedx Unisource
CONTRACT STATIONERS OFFICE PRODUCT WHOLESALERS WAREHOUSE CLUBS - ----------------------------- ----------------------------- ----------------------------- Boise Cascade Office Products S. P. Richards Sam's Warehouse Club BT Office Products United Stationers Staples* U.S. Office Products
- ------------------------ * Contract Stationers division. RAW MATERIAL The Company's principal raw material is paper. Historically, certain commodity grades utilized by the Company have shown considerable price volatility. For example, all the key commodity grades of paper used by the Company increased in cost between 9% and 28% in 1999. To the extent that the Company is not able to pass such price changes on to its customers due to strategic customer considerations or competitive market conditions, this price volatility has and is expected to continue to have an effect on net sales and cost of sales. The Company's gross margin was adversely affected in 1999 due to these paper price increases. There is no assurance that the Company will not be materially affected by future fluctuations in the price of paper. The Company has strong relationships with most of the country's largest paper mills, many of which have been doing business with the Company for more than 30 years. The Company is one of the largest purchasers of the principal paper grades used in its manufacturing operations. In addition, the Company has the largest number of designated mill relationships, which involve some of the largest and most recognized paper mill brands such as Hammermill, Fox River, Gilbert, Neenah and Strathmore. The Company believes that these relationships afford it certain paper purchasing advantages, including stable supply and favorable pricing arrangements. While these relationships are stable, all but one of the designated manufacturer arrangements are oral and terminable at will at the option of either party. There can be no assurance that any of the supplier or designated manufacturer relationships will not be terminated in the future. While the Company has been able to obtain sufficient paper supplies during paper shortages and otherwise, the Company is subject to the risk that it will be unable to purchase sufficient quantities of paper to meet its production requirements during times of tight supply. COMPETITION The markets for the Company's products are highly competitive. Competition is based largely on a company's ability to offer a broad range of products on a regional or national scale at competitive prices and to deliver these products on a timely basis. The Company has many local and regional competitors. The markets in which the Company operates have become increasingly characterized by a limited number 9 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. In the writing products segment, the Company's key domestic competitors include Mead, Pen-Tab Industries, and the Tops division of Wallace Computer Services. In the filing supplies segment, the Company's key domestic competitors include Esselte AB and Smead Manufacturing. In the machine papers segment, the Company's key domestic competitors are CST/Star and Willamette Industries. Envelope manufacturers compete in three distinct channels. In the paper merchant/distributor channel, where the Company competes, manufacturers sell a wide variety of mill branded, specialty and commodity envelope products to paper merchants/distributors. The Company believes that envelope competitors in one channel have the ability to compete in other channels, as competitive conditions change. INTELLECTUAL PROPERTY The Company registers some of its material trademarks, tradenames and copyrights and has acquired patent protection for some of its proprietary processes. In the opinion of management, the Company has current trademark rights to conduct its business as now constituted. The Company has the right to use the Globe-Weis-Registered Trademark- name on a non-exclusive basis through August 15, 2000, pursuant to the extension of a royalty agreement it obtained when it purchased certain file folder and hanging file assets from Atapco. Thereafter, it shall continue in force for successive 12-month periods unless terminated by either party. Under the terms of the agreement, the Company pays a royalty of 0.3% of the net selling price of licensed products to Atapco. EMPLOYEES As of January 1, 2000, the Company had 3,834 full-time employees. All the Company's operations are non-union except for the operations located in Scottdale, Pennsylvania and Appleton, Wisconsin which have, in total, 917 employees participating in collective bargaining agreements. The collective bargaining contracts covering the Company's employees will expire as follows: the Scottdale contract expires April 30, 2003 and covers 777 employees; and the Appleton contract expires March 31, 2001 and covers 140 employees. With the exception of a strike at the Company's Marion, Indiana plant, as described below, there have been no work stoppages at any Company facility during the last five years. The Company believes that its relations with its employees and unions are satisfactory. In July 1994, the Company acquired the writing products and filing supplies assets of SCM. Work rules and associated costs at SCM's plant in Marion, Indiana were less favorable to the Company than those at other plants. As a result of management's effort to bring the labor agreement at the plant more in line with its other plants, a labor strike occurred on September 1, 1994. Consequently, the Company closed the Marion, Indiana plant on February 15, 1995, and moved the equipment to other facilities. As part of the rationalization substantially completed in 1999, a total of 436 employees were severed in connection with the closures of Kosciusko, Mississippi; Dallas, Texas and Holland, New York. BACKLOG The Company does not consider backlog to be a significant factor is its business. Customer orders are generally received anywhere from same day to three months in advance of shipment dates and are satisfied with on-hand finished goods inventory or completed manufacturing within the customers delivery deadlines. 10 KNOWN TRENDS AND SEASONALITY The Company experiences some seasonality in its business operations. During the Company's third and fourth quarters, net sales tend to be higher than in the first and second quarters due to sales of back-to-school items, seasonal greeting card and tax filing products. With the sale of the Company's Creative Card division, fourth quarter sales will likely be lower than they ordinarily would have been. The Company's Ampad division sells primarily to customers such as office product superstores, mass merchants and national contract stationers. Such customers periodically adjust the levels of inventory in the retail distribution channels, either in retail stores or in distribution centers. The Company will experience lower sales during periods when downward adjustments are made. The Company is not able to predict the future effect of such adjustments; however, it is likely that its retail customers will continue to adjust inventory levels in the future. The Company's gross profit is directly affected by, among other factors, the mix of products sold. Based on the Company's current product categories, the Company's gross profit will be negatively or positively affected as the actual product sales mix changes. ITEM 2 PROPERTIES PROPERTIES AND FACILITIES As of December 31, 1999, the Company operated manufacturing, distribution, office and warehouse space in the United States with a total area of approximately 5.4 million square feet. Of this area, approximately 2.5 million square feet are leased and the Company owns approximately 2.9 million square feet. Three closed facilities totaling approximately 343,000 square feet in Gainesville, Georgia; Dallas, Texas and Holland, New York were held for sale at December 31, 1999. All of the Company's owned facilities are pledged as collateral under the Company's financing agreements. To provide a cost efficient supply of products to its customers, the Company maintains centralized management of nationwide manufacturing and distribution facilities. Since 1992, the Company has consolidated 32 manufacturing and distribution facilities into 23 facilities. The Company believes that substantially all of its property and equipment is in good condition and that it has sufficient capacity to 11 meet its current and projected manufacturing and distribution needs in the foreseeable future. The following table describes the principal properties of the Company as of December 31, 1999:
BUSINESS OWNED OR EXPIRATION OF SQUARE LOCATION DIVISION(1) LEASED LEASE(2) FEET - ----------------------------------------- ----------- -------- --------------- -------- ARKANSAS Bentonville A Leased 2000 CALIFORNIA City of Industry W Owned -- 85,000 City of Industry W Leased 2008 105,000 COLORADO Aurora W Leased 2001 55,000 GEORGIA Gainesville(c) A Owned (c) 70,000 ILLINOIS Bedford Park C Leased 2000 107,000 Bedford Park C Leased (d) 183,000 Chicago C Owned -- 40,000 Chicago C Leased 2000 227,000 Columbia A Leased month-to-month 29,200 Elk Grove Village W Owned -- 128,716 Mattoon A Leased 2009 172,000 Mattoon A Owned -- 261,800 Mattoon A Leased month-to-month 43,115 INDIANA Marion A Leased 2000 279 MASSACHUSETTS Holyoke A Owned -- 536,000 Holyoke A Owned -- 30,000 Springfield A Leased 2000 132,600 Westfield A Owned -- 165,785 MISSISSIPPI Kosciusko A Leased 2000 303,085 NEW JERSEY Bloomfiled W Leased 2003 70,000 NEW YORK Holland(c) W Owned (c) 168,000 New York City W Leased 2000 4,000 New York City W Leased 2009(b) 50,000 PENNSYLVANIA Lancaster F Leased 2001 105,000 Mt. Pleasant W Leased 2001 226,000 New Stanton W Leased 2009 176,000 Scottdale W Owned -- 400,000 TENNESSEE Morristown A Owned -- 255,000 Morristown A Leased 2000 52,500 TEXAS Corsicana W Owned -- 250,000 Dallas Corporate Leased 2002 49,119 Dallas(c) W Owned (c) 105,000 Dallas A Leased 2002 5,000 UTAH Salt Lake City A Leased 2016 385,106 WASHINGTON Kent W Leased month-to-month 38,400 WISCONSIN DePere F Owned (a) 95,853 Appleton W Owned (a) 313,000
- ------------------------ (1) "A" indicates operations associated with the Company's Ampad division, "W" indicates operations associated with the Company's Williamhouse division, "F" indicates operations associated with the Company's Forms division, and "C" indicates operations associated with the Company's Creative Card division. (2) (a) Two or more properties owned at this location. (b) Subleased to third parties (c) Closed facility held for sale (d) Lease was rejected as part of the bankruptcy proceedings. 12 ITEM 3 LEGAL PROCEEDINGS CHAPTER 11 PROCEEDINGS On January 10, 2000, certain holders of the Company's 13% Senior Subordinated Notes due November 15, 2003 filed an involuntary chapter 11 petition against the Company and all of its subsidiaries except Notepad Funding Corporation (the "Debtors") in the United States Bankruptcy Court for the District of Delaware. On January 14, 2000, each of the Debtors consented to the entry of an Order for Relief and filed voluntary petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The bankruptcy Case Numbers 00-00066 (RRM) through 00-00072 (RRM) are being jointly administered under Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 (a) and 1108 of the Bankruptcy Code. On January 28, 2000, an Official Committee of Unsecured Creditors was appointed in these cases. With Court approval, the Company has obtained debtor in possession financing in the amount of $65 million from a subset of its prepetition secured bank group. No plan of reorganization has yet been proposed by the Company. OTHER LEGAL PROCEEDINGS As previously reported, between March 10, 1998 and April 11, 1998, three complaints were filed in the United States District Court for the Northern District of Texas naming as defendants the Company, certain of its officers and directors and certain of the underwriters and other related entities involved in the Company's initial public offering. The plaintiffs in the first two complaints purport to represent a class of stockholders who acquired shares of the Company's common stock between July 2, 1996 and December 17, 1997. The complaints seek unspecified damages and other relief under the federal securities laws based on allegations that the Company made omissions and misleading disclosures in public reports and press releases and to securities analysts during 1996 and 1997 concerning the Company's financial condition, its future business prospects and the impact of various acquisitions. These two lawsuits were consolidated on July 2, 1998. The third complaint was dismissed without prejudice by the plaintiffs on September 29, 1998. Motions to dismiss have been filed in the consolidated cases and all briefing is complete. Pending a ruling on the motions to dismiss, all proceedings in the consolidated action have been stayed. To the extent that the motions to dismiss are denied in whole or in part, the Company believes that it has meritorious defenses to plaintiff's claims and, subject to actions relating to the lawsuit under the company's bankruptcy proceedings, intends to vigorously defend the action. ENVIRONMENTAL, HEALTH AND SAFETY MATTERS The operations of the Company are subject to federal, state and local laws and regulations relating to the environment. Certain of the more significant federal laws are described below. The implementation of these laws by the United States Environmental Protection Agency ("EPA") and the states will continue to affect the Company's operations by imposing increased operating and maintenance costs and capital expenditures required for compliance. The Resource Conservation and Recovery Act ("RCRA") of 1976, as amended, affects the Company through its reporting, recordkeeping and waste management requirements, thereby increasing the cost of all types of waste disposal. Regulations under RCRA prohibit certain types of waste disposal, further increasing Company costs for waste management. The Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended ("CERCLA") creates the potential for substantial liability for the costs of study and cleanup of waste disposal sites and requires the reporting of certain releases into the environment. Court interpretation of this Act may result in joint and several liability even for parties not primarily responsible for hazardous waste disposal sites. Additional laws and the regulations promulgated thereunder also have resulted in additional reporting duties. 13 Violations of any federal environmental statutes or regulations or orders issues thereunder, as well as relevant state and local laws and regulations, could result in civil or criminal actions. While there can be no assurance that the Company is at all times in complete compliance with all such laws and regulations, the Company has made and will continue to make capital and other expenditures to comply with such requirements. The Company spent approximately $1.2 million, $880,000 and $839,000 in 1999, 1998 and 1997, respectively, on environmental capital projects, primarily for the acquisition of waste paper baling and vacuum systems to improve the collection of paper waste at its plants. The Company estimates that its environmental capital expenditures will be approximately $0.3 million in each of 2000 and 2001. As is the case with manufacturers in general, if a release of hazardous substances occurs on or from the Company's properties or any associated offsite disposal location, or if contamination from prior activities is discovered at any of the Company's properties, the Company may be held liable and the amount of such liability could be material. The Company is aware that three of its facilities have been the subject of certain soil and groundwater investigations. The prior owner of the facilities has indemnified the Company for certain environmental liabilities associated with historical use of the properties. The Company currently believes that any environmental liabilities associated with such facilities would not be material or have been adequately covered by agreements with the former owners. Soil and groundwater contamination relating to underground storage tanks has been identified at an additional facility not covered by an indemnification agreement with the prior owner. The Company is cooperating with state and local environmental officials to finalize remediation plans for the site. Current cleanup costs are not expected to exceed $150,000. The Company has been named a potentially responsible party ("PRP") under CERCLA at five waste disposal sites. The Company settled its liability at four of these sites as a de minimis party. At the Spectron site in Elkton, Maryland, the Company paid approximately $1,300 in 1989 as a de minimis settlement for an initial removal action at the site. In 1995, the Company received a notice of a remedial action at the site, and based upon its allocation in 1989, expects to be eligible for a de minimis or de micromis settlement. The Company is aware that Niagara has been named a PRP at the Envirotek II site in Tonawanda, New York with respect to which Niagara expects to be eligible for a de minimis settlement. GENERAL The potential effect of the Company's chapter 11 bankruptcy proceedings will be considered by the Company with regard to any decisions or actions relating to the foregoing Legal Proceedings. The resolution in any reporting period of one or more of the foregoing matters in a manner adverse to the Company could have a material adverse effect on the Company's financial condition or results of operations. The Company is also a party to various other litigation matters incidental to the conduct of its business. Although the outcome of these matters cannot be predicted with certainty, management does not expect the outcome of any of the matters in which it is currently involved to have a material adverse effect on the Company's financial position. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the stockholders of the Company during the quarter ended December 31, 1999. 14 PART II ITEM 5 MARKET FOR THE REGISTRANTS' COMMON STOCK Until January 25, 1999, the common stock of the Company was traded on the New York Stock Exchange (NYSE) under the symbol "AGP". On January 26, 1999, the NYSE suspended trading of the Company's common stock and the NYSE applied to the Securities and Exchange Commission in Washington, D.C. for removal of the common stock of the Company from listing and registration on the NYSE. On January 26, 1999, the Company's common stock began trading on the NASD Over-the-Counter Bulletin Board System under the symbol "AMPP." The quarterly high and low prices for the common stock during 1999 and 1998 were:
QUARTER ENDED LOW PRICE HIGH PRICE - ------------- --------- ---------- 1999: March 31, 1999.......................................... $0.500 $1.750 June 30, 1999........................................... $1.125 $2.750 September 30, 1999...................................... $0.469 $2.500 December 31, 1999....................................... $0.203 $0.625 1998: March 31, 1998.......................................... $6.875 $9.500 June 30, 1998........................................... $4.500 $7.500 September 30, 1998...................................... $1.063 $5.125 December 31, 1998....................................... $1.188 $3.438
As of December 31, 1999, there were approximately 6,000 stockholders of the Company's common stock. The Company has not sold any unregistered securities during the last fiscal year. DIVIDEND POLICY Subsequent to its initial public offering, the Company has not declared or paid any cash or other dividends on its common stock and does not expect to pay dividends for the foreseeable future. Instead, the Company currently intends to retain earnings to reduce debt. As a holding company, the ability of the Company to pay dividends in the future is dependent upon the receipt of dividends or other payments from its principal operating subsidiaries, AP&P Delaware and Manufacturing. The payment of dividends by AP&P Delaware and Manufacturing to the Company for purposes of paying dividends to holders of common stock is prohibited by the revolving credit facility and restricted by the indenture related to the Notes. Any future determination to pay dividends will be at the discretion of the Company's Board of Directors and will depend upon, among other factors, the Company's results of operations, financial condition, capital requirements and contractual restrictions. 15 ITEM 6 SELECTED FINANCIAL DATA SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The selected historical consolidated financial data set forth below for the years ended December 31, 1999, 1998 and 1997 have been derived from, and are qualified by reference to, the audited consolidated financial statements of the Company included elsewhere in this Form 10-K. The selected historical consolidated financial data set forth for the years ended December 31, 1996 and 1995 have been derived from the Company's audited financial statements not included in this Form 10-K. The selected historical consolidated financial data set forth below should be read in conjunction with, and is qualified by reference to, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited consolidated financial statements and accompanying notes thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31, ----------------------------------------------------- INCOME STATEMENT DATA(1,2) 1999 1998 1997 1996 1995 - -------------------------- --------- -------- -------- -------- -------- (IN THOUSANDS) Net sales................................................... $ 572,616 $662,031 $687,335 $583,859 $257,160 Cost of sales(3)............................................ 531,085 597,456 598,416 466,385 209,633 --------- -------- -------- -------- -------- Gross profit............................................ 41,531 64,575 88,919 117,474 47,527 --------- -------- -------- -------- -------- Operating expenses: Selling and marketing..................................... 22,204 21,261 22,246 16,964 6,254 General and administrative................................ 26,780 31,840 19,133 16,438 10,447 Rationalization charges(4)................................ (2,773) 5,741 -- -- -- Losses on sales of accounts receivable.................... 3,295 3,226 2,954 1,823 423 Amortization of goodwill and intangible assets............ 5,133 5,939 6,110 4,488 879 Write down of assets--Shade/Allied(5)..................... -- 41,000 -- -- Nonrecurring compensation charge(6)....................... -- -- -- -- 27,632 Management fees and services(7)........................... 1,500 2,030 4,871 3,880 542 --------- -------- -------- -------- -------- 56,139 111,037 55,314 43,593 46,177 --------- -------- -------- -------- -------- Income (loss) from operations............................... (14,608) (46,462) 33,605 73,881 1,350 Other income (expense): Interest.................................................. (44,865) (44,970) (37,843) (42,968) (13,657) Other income, net......................................... 2,005 1,411 389 1,153 735 --------- -------- -------- -------- -------- Income (loss) before income taxes........................... (57,468) (90,021) (3,849) 32,066 (11,572) Provision (benefit) for income taxes........................ 23,270 (11,374) 642 13,852 (6,538) --------- -------- -------- -------- -------- Income (loss) before extraordinary item and cumulative effect of a change in accounting principle................ (80,738) (78,647) (4,491) 18,214 (5,034) Extraordinary loss from extinguishment of debt, net of income tax................................................ -- -- -- (19,995) (9,652) Loss before cumulative effect of a change in accounting principal................................................. (80,738) (78,647) (4,491) (1,781) (14,686) Cumulative effect of a change in accounting principle(11)... (726) -- -- -- -- --------- -------- -------- -------- -------- Net loss.................................................... $ (81,464) $(78,647) $ (4,491) $ (1,781) $(14,686) ========= ======== ======== ======== ======== Basic earnings (loss) per share: Earnings (loss) before extraordinary item and cumulative effect of a change in accounting principle.............. $ (2.89) $ (2.84) $ (0.16) $ 1.05 $ (0.69) Extraordinary loss from extinguishment of debt, net of income tax.............................................. -- -- -- (1.15) (1.32) Cumulative effect of a change in accounting principle..... (0.03) -- -- -- -- --------- -------- -------- -------- -------- Net loss.................................................. $ (2.92) $ (2.84) $ (0.16) $ (0.10) $ (2.01) ========= ======== ======== ======== ======== Diluted earnings (loss) per share: Earnings (loss) before extraordinary item and cumulative effect of a change in accounting principle.............. $ (2.89) $ (2.84) $ (0.16) $ 0.99 $ (0.69) Extraordinary loss from extinguishment of debt, net of income tax.............................................. -- -- -- (1.09) (1.32) Cumulative effect of a change in accounting principle..... (0.03) -- -- -- -- --------- -------- -------- -------- -------- Net loss.................................................. $ (2.92) $ (2.84) $ (0.16) $ (0.10) $ (2.01) ========= ======== ======== ======== ======== Weighted average shares outstanding:(8) Basic..................................................... 27,944 27,718 27,431 17,408 7,307 Diluted................................................... 27,944 27,718 27,431 18,426 7,307 Other Data: Depreciation and amortization............................. $ 20,156 $ 19,769 $ 18,639 $ 14,253 $ 4,248 Capital expenditures...................................... $ 11,876 $ 15,000 $ 23,095 $ 15,109 $ 5,640
16
DECEMBER 31, ----------------------------------------------------- 1999 1998 1997 1996 1995 --------- -------- -------- -------- -------- Balance Sheet Data: Working capital........................................... $(343,178) $ 73,308 $152,819 $ 77,857 $108,845 Total assets.............................................. $ 472,228 $516,480 $638,401 $509,417 $504,356 Long-term debt, less current maturities(9)................ $ -- $373,675 $398,577 $269,812 $443,794 Stockholders' equity (deficit)(10)........................ $ (60,779) $ 20,713 $100,666 $104,599 $(66,421)
The Company has completed the following acquisitions during the periods presented. All such acquisitions have been accounted for using the purchase method of accounting. The results of operations for each of the businesses acquired are included in the Company's results of operations from the date of acquisition through the end of the year in which the acquisition occurred and in each subsequent year presented. (1) - Effective August 16, 1995, the Company acquired the inventory and certain equipment of the file folder and hanging file product lines of the Globe-Weis office products division of Atapco. - Effective October 31, 1995, the Company acquired Williamhouse. The Personalizing Division of Williamhouse was identified as a non-strategic asset at the date of the acquisition and was reflected as an asset held for sale in the consolidated balance sheet through June 27, 1996, when it was sold. As such, the operating results of the Personalizing Division are excluded from the results of operations from the date of the Williamhouse acquisition. - Effective June 28, 1996, the Company acquired Niagara. - Effective February 11, 1997, the Company acquired Shade/Allied. (2) Certain amounts in the 1998, 1997 and 1996 consolidated financial statements have been reclassified in order to conform to the presentation in the 1999 consolidated financial statements. (3) Inventory cost is determined using the LIFO method of valuation. (4) In the third quarter of 1998, the Company recorded a $5.7 million charge for part of the plan to rationalize the Company's manufacturing operations. In the fourth quarter of 1999, the Company reversed $2.8 million of the restructuring charges for a facility not closed as planned. (5) In the second quarter of 1998, the Company wrote off $41.0 million of goodwill and intangible assets associated with the Shade/ Allied continuous forms business. See Note 5, "Impairment of Shade/Allied Long-Lived Assets," in Part IV, Item 14(a)(1). (6) Includes non-cash stock option compensation charges of $24.3 million directly related to the Williamhouse acquisition as well as other non-recurring cash and non-cash charges aggregating $3.3 million. (7) Includes $2.5 million in 1997 and 1996 related to a one-year consulting agreement with the former president and major shareholder of Niagara, which ended in 1997. (8) In the fourth quarter of 1997, the Company adopted the provisions of Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE, and the provisions of Securities and Exchange Commission Staff Accounting Bulletin No. 98. Basic earnings per share are computed using the actual weighted average number of outstanding common shares for each period after giving effect to the Company's 8.1192-for-one stock split prior to the Company's initial public offering. However, changes in the Company's capital structure at the time of the initial public offering relative to preferred stock and preferred stock option conversions to common stock and common stock options are not presented retroactively. Diluted earnings per share are based on the weighted average number of outstanding common shares and give effect to the exercise of common stock options. Diluted earnings per share are not presented for years in which the Company incurred losses, as the earnings per share information would be anti-dilutive. (9) All indebtedness of the Company, in the aggregate amount of $392 million, is in default at December 31, 1999, and has been classified as a current liability in its balance sheet. (10) For 1995, includes $4.5 million to pay the liquidation preference, including the return of original cost, of the Company's Class P common stock and $70.6 million to redeem a portion of its preferred stock. (11) For 1999, reflects a charge of $0.7 million, net of tax, for the write off of previously recorded start-up costs. The Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-5, which is effective for fiscal years commencing after December 15, 1998. SOP 98-5, "Reporting on the Costs of Start-up Activities", prescribes that start-up costs should be expensed as incurred. The SOP states that its adoption should be reported as a cumulative effect of a change in accounting principle. 17 ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is one of the largest manufacturers and marketers of nationally branded and private label paper-based office products (excluding copy paper) in the $60 billion to $70 billion North American office products industry. Through its Ampad division, the Company is among the largest manufacturers of writing pads and notebooks, filing supplies, retail envelopes and machine papers to many of the largest office product retailers and distributors. Through its Williamhouse division, the Company is the leading supplier of mill branded, specialty and commodity business envelopes to paper merchants and distributors. The Company believes that certain aspects of its future operating results, such as year to year revenue growth, will not be directly comparable to its historical operating results because of the effect of its strategic acquisitions. Certain factors, which have affected, and may affect prospectively, the operating results of the Company are discussed below. STRATEGIC ACQUISITIONS. In October 1995, the Company acquired Williamhouse, a leading supplier of envelopes to many of the largest distributors, for an aggregate purchase price (including assumption of debt) of approximately $300.7 million plus reimbursement of certain expenses to the sellers. In June 1996, the Company acquired Niagara, a national supplier of envelopes to distributors, for an aggregate purchase price of approximately $53.2 million, including costs of the acquisition and a $5.0 million one-year consulting agreement with Niagara's former president. With these acquisitions, the Company became the largest supplier of envelopes to the national paper merchants. The Williamhouse acquisition was financed through the Company's revolving credit facility and the assumption of senior subordinated notes. The Niagara acquisition was financed with proceeds from the sale of the Personalizing Division of Williamhouse. In February 1997, the Company acquired Shade/Allied, a national supplier of machine papers, principally continuous computer forms. The purchase price of $50.7 million was financed through the Company's revolving credit facility. Both the Ampad and Williamhouse divisions distribute machine papers products. PURCHASE ACCOUNTING EFFECTS. The Company's acquisitions have been accounted for using the purchase accounting method. The acquisitions have currently affected, and will prospectively affect, the Company's results of operations in certain significant respects. The aggregate acquisition costs (including assumption of debt) are allocated to the assets acquired based on the fair market value of such assets on the date of acquisition. The allocations of the purchase price result in an increase in the historical book value of certain assets such as property, plant and equipment and intangible assets, including goodwill, which results in incremental annual depreciation and amortization expense each year. RAW MATERIAL. The Company's principal raw material is paper. Historically, certain commodity grades utilized by the Company have shown considerable price volatility. For example, all the key commodity grades of paper utilized by the Company increased in cost between 9% and 28% in 1999. To the extent that the Company is not able to pass such price changes on to its customers due to strategic customer considerations or competitive market conditions, this price volatility has and is expected to continue to have an effect on net sales and cost of sales. The Company's gross margin was adversely affected in 1999 due to these paper price increases. There is no assurance that the Company will not be materially affected by future fluctuations in the price of paper. RECENT DEVELOPMENTS Since the Company's last acquisition in 1997 revenues have declined, margins have eroded, competitive pressures in the marketplace kept the Company from fully recouping increasing paper prices, and inventory levels were, for a period of time, built to an excessive level. Through the rationalization plan initiated in late 1998, three manufacturing plants were closed, inventory levels were reduced and production was better coordinated with sales. Although competitive pressures continued, price increases were initiated which, while not fully recouping prices movements in raw materials, caused amounts absorbed by 18 the Company to be reduced. Despite the progress on operational and pricing issues, the Company's capital structure and high level of debt have limited its ability to return to profitability. DEBT DEFAULT AND PROCEEDINGS UNDER CHAPTER 11 OF THE BANKRUPTCY CODE. On November 12, 1999, the Company was notified by its banking group of a default of its revolving credit facility. The default stemmed from the formation of new subsidiaries in December 1997 related to a reorganization of the Company's corporate structure without proper notification to the banks. The reorganization was implemented primarily for state tax purposes and included the transfer of assets between existing entities and transfers to the new subsidiaries. The default on the revolving credit facility prevented the Company from paying interest on its publicly traded Notes due November 15, 1999, thereby causing a default on the Notes as well. On January 10, 2000, certain holders of the Company's 13% Senior Subordinated Notes due November 15, 2005 filed an involuntary chapter 11 petition against the Company and all of its subsidiaries except Notepad Funding Corporation (the "Debtors") in the United States Bankruptcy Court for the District of Delaware. On January 14, 2000, each of the Debtors consented to the entry of an Order for Relief and filed voluntary petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The bankruptcy Case Numbers 00-00066 (RRM) through 00-00072 (RRM) are being jointly administered under Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 (a) and 1108 of the Bankruptcy Code. On January 28, 2000, an Official Committee of Unsecured Creditors was appointed in these cases. No plan of reorganization has yet been proposed by the Company. On January 10, 2000, as a result of the chapter 11 filings, the Company's $60.0 million accounts receivable financing facility terminated and no further sales of receivables occurred. Although no post-termination receivables were sold under this facility, the Company continues to act as servicer under the facility and to collect and remit remaining outstanding receivables as provided in the facility. On February 9, 2000, the Bankruptcy Court entered a final order approving $65 million DIP financing in the form of a revolving credit facility provided by the Company's existing bank group. Availability under the facility is contingent upon a borrowing base of accounts receivable and inventory, and bears interest at a rate of prime plus 2.5%. The revolving credit facility matures July 17, 2000, and may be extended upon satisfaction of certain conditions. Although Chapter 11 bankruptcy raises substantial doubt about the Company's ability to continue as a going concern, the accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a company on a going-concern basis which contemplates the continuity of operations, realization of assets and the liquidation of liabilities in the ordinary course of business. As a result of the Chapter 11 filing, realization of assets and liquidation of liabilities are subject to significant uncertainties. Specifically, the financial statements do not present the amount that will be paid to settle liabilities and contingencies that may be allowed in Chapter 11 reorganization. Also the consolidated financial statements do not reflect i) adjustments to assets and liabilities which may occur in accordance with generally accepted accounting principles, STATEMENT OF POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE (SOP 90-7) following the confirmation of a plan of reorganization; or ii) the realizable value of assets which would be required to be recorded if the Company presents a plan which contemplates the disposal of all or portions of its assets and operations. The filing of a plan of reorganization could materially affect the carrying value of the assets and liabilities currently disclosed in the consolidated financial statements. MANAGEMENT CHANGES. On March 30, 2000, William L. Morgan retired as Executive Vice President and Chief Operating Officer of the Company. Additionally, on March 30, 2000, the Company appointed William J. Mays as Chief Operations Officer. Mr. Mays joined the Company in December 1998 as Vice President, Operations Controller. 19 COMPANY INITIATIVES/RESTRUCTURING. Under the leadership of new management, the Company performed a review of all operations with the goals of rebuilding market share, reducing debt and returning the Company to profitability. As previously reported in 1998, the Company announced a plan to rationalize its manufacturing operations, and recorded a $5.7 million dollar restructuring charge to include employee termination costs, costs to exit facilities, lease termination costs, and property taxes after ceasing operations. The plan included plant consolidations, equipment moves, plant/product changes, warehouse consolidations and the addition of new distribution centers. In 1999, the Company closed three plants as part of the rationalization plan. The closing of the Kosciusko, Mississippi plant was announced on November 10, 1998, and final production occurred on April 14, 1999. The closing of the Dallas, Texas, plant was announced on January 19, 1999, and final production occurred on April 22, 1999. The closing of the Holland, New York, plant was announced on May 10, 1999, and final production occurred on November 30, 1999. As of December 31, 1999, 436 employees have been severed and severance and benefit payments totaling $1.3 million have been charged to the restructuring reserve. The original rationalization plan included the consolidation of two existing plants. After attempts to hire additional skilled labor at the receiving plant failed, the decision to close the first plant was reversed; as such, $2.8 million of the originally recorded restructuring charges were reversed in the third and fourth quarters of 1999. The Company additionally recorded one-time implementation costs associated with the rationalization plan of $9.4 million in cost of sales during 1999. These expenses represent costs to move equipment and inventory, interim warehouse costs, employee retention and relocation, recruiting costs, and other training and efficiency costs. The Company also recorded one-time capital expenditure costs of $2.0 million in 1999 associated with the rationalization plan. The major undertakings of the rationalization plan have been completed as of December 31, 1999. OTHER. On March 8, 2000, the Company announced that it had signed a letter of intent with Taylor Corporation for the purchase of the Company's Creative Card division located in Chicago. Negotiations are continuing with Taylor Corporation and the Company expects the sale to be finalized in the second quarter of 2000. Such sale, subject to the approval of the bankruptcy court, is expected to result in a loss of $5 to $10 million. On March 21, 2000, the Company was notified by one of its major customers of the Ampad division that it intends to move its business to other suppliers. In 1999, that customer accounted for approximately $42 million or 6.4% of the Company's sales. 20 RESULTS OF OPERATIONS The following table summarizes the Company's historical results of operations as a percentage of net sales for the years 1999, 1998, and 1997. The Company's historical results of operations for each of these periods are significantly affected by the results of the February 1997 acquisition by the Company of Shade/Allied.
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Net sales................................................... 100.0% 100.0% 100.0% Gross profit............................................ 7.3% 9.8% 12.9% Operating expenses: Selling and marketing..................................... 3.9% 3.2% 3.2% General and administrative................................ 4.7% 4.8% 2.8% Rationalization charges................................... (0.5)% 0.9% 0.0% Losses on sales of accounts receivable.................... 0.6% 0.5% 0.4% Amortization of goodwill and intangible assets............ 0.9% 0.9% 0.9% Write down of assets--Shade/Allied........................ 0.0% 6.2% 0.0% Management fees and services.............................. 0.3% 0.3% 0.7% ------ ------ ------ 9.9% 16.8% 8.0% ------ ------ ------ Income (loss) from operations............................... (2.6)% (7.0)% 4.9% Other income (expense): Interest.................................................. (7.8)% (6.8)% (5.6)% Other income, net......................................... 0.4% 0.2% 0.1% ------ ------ ------ Loss before income taxes.................................... (10.0)% (13.6)% (0.6)% Provision (benefit) for income taxes........................ 4.1% (1.7)% 0.1% ------ ------ ------ Loss before cumulative effect of a change in accounting principle................................................. (14.1)% (11.9)% (0.7)% Cumulative effect of a change in accounting principle....... (0.1)% 0.0% 0.0% ------ ------ ------ Net loss.................................................... (14.2)% (11.9)% (0.7)% ====== ====== ======
YEAR 1999 COMPARED TO 1998 NET SALES decreased to $572.6 million in 1999 from $662.0 million in 1998, a decrease of $89.4 million or 13.5%. The decrease is comprised of a $84.4 million decrease in sales and a $5.0 million increase in customer incentives. The net sales decrease is primarily attributable to the loss of a superstore customer in 1998, the Company's efforts to eliminate unprofitable business, and the continued effort by the Company's superstore customers to reduce inventory. The decrease was partially offset by increases in sales to the remaining superstore customers. GROSS PROFIT decreased to $41.5 million, or 7.3% of net sales, in 1999 from $64.6 million, or 9.8% of net sales, in 1998. This $23.1 million decrease in gross profit margin is primarily attributable to lower sales and LIFO charges that exceeded 1998 charges by $9.5 million. These variances were partially offset by lower standard costs and operating variances. In addition, 1999 cost of sales included $9.4 million of one-time costs associated with the plant rationalization plan. These expenses represent costs to move equipment, efficiency costs and recruiting costs. SELLING AND MARKETING expenses increased to $22.2 million in 1999 from $21.3 million in 1998, or $0.9 million, due to increased advertising costs associated with an effort to re-align branding and revise merchandising within the Company's Ampad division. GENERAL AND ADMINISTRATIVE expenses decreased to $26.8 million in 1999 from $31.8 million in 1998, or $5 million. This decrease is primarily attributable to 1998 one-time severance and consulting costs paid to certain former executives of the Company of $3.0 million, $2.1 million of consulting fees paid in 1998 related to work on the Company's restructuring, and $1.4 million in management bonus and sales incentives in 1998; partially offset by $3.0 million in 1999 in fees paid to professionals to assist in negotiations with the banks regarding potential debt restructuring. 21 RATIONALIZATION CHARGES recorded in September 1998 of $2.8 million were reversed during 1999. The original rationalization plan included the consolidation of two existing plants. After attempts to hire additional skilled labor at the receiving plant failed, the decision to close the first plant was reversed. Restructuring charges for 1998 were $5.7 million. LOSSES ON SALES OF ACCOUNTS RECEIVABLE increased to $3.3 million in 1999 from $3.2 million in 1998 due primarily to a higher average level of accounts receivable sold to the third party trust in 1999, partially offset by slightly lower average interest rates. The losses on sales of accounts receivable represent the Company's cost of using a third party trust to provide off balance sheet financing of trade accounts receivable. GOODWILL AND INTANGIBLE ASSET AMORTIZATION expense decreased to $5.1 million in 1999 from $5.9 million in 1998. The decrease of $0.8 million is due primarily to the amortization associated with the $41.0 million writedown of intangible assets in the second quarter of 1998. (SEE WRITE DOWN OF INTANGIBLE ASSETS BELOW.) WRITE DOWN OF INTANGIBLE ASSETS expense of $41.0 million for the year ended 1998 reflects a write-off of goodwill and a writedown of intangible assets associated with the Shade/Allied continuous forms business. MANAGEMENT FEES AND SERVICES decreased to $1.5 million in 1999 from $2.0 million for 1998, representing a decrease of $0.5 million. The change in management fees is due to the renegotiation of the Company's Advisory Agreement with Bain Capital to reduce the fee from $2.0 million to $1.5 million annually. INTEREST EXPENSE decreased from $45 million in 1998 to $44.9 million in 1999, representing a decrease of $0.1 million. This $0.1 million variance was due primarily to the conversion from base rate denominated debt in 1998, to Euro-dollar denominated debt in 1999, following the November default. THE INCOME TAX PROVISION for the year ended December 31, 1999, reflects an effective income tax rate of 39.9% as compared with the effective income tax benefit rate of 12.6% for the year ended December 31, 1998. In 1999, the Company recorded a deferred tax asset valuation allowance of $43.3 million based on management's uncertainty surrounding the realizability of certain deferred tax assets. Therefore, the 1999 income tax benefit was reduced by a provision of $43.3 million related to the valuation allowance. In future periods, the Company's provision for income taxes may be impacted by adjustments to the valuation allowance. In 1998, the Company's loss before income taxes included non-deductible expenses of $45.0 million. These expenses were primarily the write off of goodwill and other intangibles, goodwill amortization, and travel and entertainment costs. In 1998, the Company recorded a net deferred tax valuation allowance of $6.3 million to reduce the deferred tax asset to an amount which the Company believed, based on the Company's estimates of near-term taxable earnings, was realizable. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE for the year ended December 31, 1999, reflects a charge of $0.7 million, net of tax, for the write off of previously recorded start-up costs. The Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-5, which is effective for fiscal years commencing after December 15, 1998. SOP 98-5, "Reporting on the Costs of Start-up Activities", prescribes that start-up costs should be expensed as incurred. The SOP states that its adoption should be reported as a cumulative effect of a change in accounting principle. YEAR 1998 COMPARED TO 1997 NET SALES decreased to $662.0 million in 1998 from $687.3 million in 1997, a decrease of $25.3 million or (3.7%). This net sales decrease is comprised primarily of a $12.4 million decrease in sales and a $12.5 million increase in customer incentives. The net sales decrease is primarily attributable to unfavorable volume variances and the loss of a major customer, partially offset by favorable mix and price variances, and owning Shade/Allied ($3.3 million) for twelve months of 1998 versus only ten and one-half months in the same period in 1997. The sales decrease occurred primarily in the merchant channel due to the consolidation and restructuring experienced in that channel. The increased customer incentives are due to additional rebate programs caused by more competitive pricing, changing product mix, higher volumes 22 resulting in certain customers reaching the next incentive tier level and a write off related to the loss of a major customer. GROSS PROFIT decreased to $64.6 million, or 9.8% of net sales, in 1998 from $88.9 million, or 12.9% of net sales, in 1997. This $24.3 million decrease in gross profit margin is primarily attributable to increased customer incentives discussed above, higher unit production costs due to underutilized capacity resulting from the Company's efforts to reduce its inventory, the lower sales, and increased manufacturing costs. In addition, 1998 included approximately $7.5 million of charges resulting from reevaluating certain inventories based on changes in current market conditions and accruals for workers' compensation and property tax; approximately $1.9 million of net charges for additional obsolescence reserves; $0.9 million of one-time costs associated with the plant rationalization plan. SELLING AND MARKETING expenses decreased to $21.3 million in 1998 from $22.2 million in 1997, or $0.9 million due to efforts to control costs. GENERAL AND ADMINISTRATIVE expenses increased to $31.8 million in 1998 from $19.1 million in 1997, or $12.7 million. This increase is primarily attributable to $3.0 million of severance and consulting costs paid to certain former executives of the Company, $2.1 million of consulting fees related to work on the Company's rationalization plan, and $1.4 million of management bonus and sales incentives. In addition, the Company's second quarter reevaluation of certain assets resulted in $1.7 million of current charges for additional allowance for doubtful accounts and other severance and litigation costs of $1.3 million. The remainder of the increase is attributable to owning Shade/Allied for the full year in 1998 versus only ten and one-half months in the same period in 1997 and one time charges associated with centralizing certain functions in Dallas. RESTRUCTURING CHARGES for the year ended 1998 of $5.7 million represents part of the rationalization plan of the Company's manufacturing operations. LOSSES ON SALES OF ACCOUNTS RECEIVABLE increased to $3.2 million in 1998 from $3.0 million in 1997 due primarily to a higher average level of accounts receivable sold to the third party trust in 1998, partially offset by slightly lower average interest rates. The losses on sales of accounts receivable represent the Company's cost of using a third party trust to provide off balance sheet financing of trade accounts receivable. GOODWILL AND INTANGIBLE ASSET AMORTIZATION expense decreased to $5.9 million in 1998 from $6.1 million in 1997. The decrease of $200,000 is due primarily to the amortization associated with the $41.0 million writedown of intangible assets in the second quarter of 1998. (SEE WRITE DOWN OF INTANGIBLE ASSETS BELOW.) WRITE DOWN OF INTANGIBLE ASSETS expense of $41.0 million for the year ended 1998 reflects a writeoff of goodwill and a writedown of intangible assets associated with the Shade/Allied continuous forms business. In June 1998, the Company's management reviewed all operations of the Company and determined that the acquired Shade/Allied continuous forms business was underperforming as a result of several factors. Principally among these factors were (i) the greater use of personal computers and desk printers resulting in lesser reliance on large mainframe printers, and (ii) the disappearance of tractor-fed personal printers from the marketplace. These two factors seemed to be driving a permanent decline of 6-8% per year in continuous forms usage. Increased competition and aggressive pricing in response to the overall decline in usage had contributed to the Company's year-over-year decline in sales and margins. Finally, certain marketing and pricing strategies and cost saving synergies assumed at the time of acquisition did not occur. As part of its review, management considered various alternatives for its continuous forms business including measures to improve operations, potential strategic alliances, and the possible exit of the business. At June 30, 1998, based upon management's intention to explore exiting the business, a write down of goodwill and other intangibles totaling $41 million was recorded to reduce the carrying value of 23 the long-lived assets to their net realizable value. The Company has discussed the sale of the acquired Shade/Allied business with potential purchasers but has not reached agreement on any potential sale. This $41 million charge recorded at June 30, 1998, consisted of a $39.9 million write down of goodwill and a $1.1 million write down of trade names. The recorded values of the property, plant and equipment and trade names at December 31, 1998, are $10.7 million and $4.3 million respectively. In November 1998, the continuous forms business was consolidated from six separate manufacturing facilities where forms comprised only a portion of the plant's manufacturing operations into two dedicated continuous forms plants located in DePere, Wisconsin and Lancaster, Pennsylvania. Although manufacturing efficiencies and margins have improved, management continues to consider the sale of the business as well as various other alternatives. At December 31, 1998, an analysis based upon the discounted expected future cash flows of the acquired continuous forms business indicated that no further write down of the carrying value of the long-lived assets was required. MANAGEMENT FEES AND SERVICES decreased to $2.0 million in 1998 from $4.9 million for 1997, representing a decrease of $2.9 million. The change in management fees is due primarily to a one-year non-recurring consulting agreement with the former president of Niagara, which expired June 30, 1997. INTEREST EXPENSE increased to $45.0 million in 1998 from $37.8 million in 1997, representing an increase of $7.2 million. Of this increase, approximately $2.5 million is attributable to increased debt levels, approximately $3.0 million is attributable to increased interest rates and approximately $1.7 million is attributable to amortization of fees paid in connection with amendments to the revolving credit facility. THE INCOME TAX PROVISION for the year ended December 31, 1998, reflects an effective income tax benefit rate of 12.6% as compared with the effective income tax provision rate of 16.7% for the year ended December 31, 1997. In 1998, the Company's loss before income taxes included non-deductible expenses of $45.0 million. These expenses were primarily the write off of goodwill and other intangibles, goodwill amortization, and travel and entertainment costs. In 1998, the Company recorded a net deferred tax valuation allowance of $6.3 million to reduce the deferred tax asset to an amount which the Company believes, based on the Company's estimates of near-term taxable earnings, is realizable. In 1997, the Company's loss before income taxes was relatively low, $3.8 million, in comparison to the amount of expenses which were not deductible, $5.4 million. Such expenses primarily consist of goodwill amortization, certain travel and entertainment costs and life insurance for certain current and former employees. As a result, the Company had taxable income for tax reporting purposes versus a loss for financial reporting purposes and, therefore, the Company recorded a tax provision for 1997. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the year ended 1999 was $4.2 million compared to the year ended 1998 of $43.3 million. The decreased cash flow from operations in 1999 is primarily the net result of the following: (i) cash used by the net loss of $40.1 million after adjustment for non-cash expenses, (ii) a decrease in accounts receivable of $21.3 million due to lower sales in 1999, (iii) a decrease in inventories of $18.5 million, (iv) a reduction of accounts payable of $9.7 million, and (v) a net change in all other assets and liabilities of $14.2 million. Cash provided by operating activities in 1998 was $43.3 million and consisted of (i) $20.4 million of cash generated from the net loss, after adding back non-cash charges, (ii) a decrease in accounts receivable of $17.5 million as a result of improving days sales outstanding in receivables, (iii) a decrease in inventories of $42.2 million, (iv) a reduction of accounts payable of $6.8 million, and v) a net change in all other assets and liabilities of $10.7 million. Cash used by operating activities in 1997 amounted to $62.4 million and consisted of (i) $17.4 million of cash generated from the net loss, after adding back non-cash charges, (ii) cash used to fund increases in accounts receivable of $17.3 million, (iii) cash used to fund increases in inventories of $44.2 million (iv) an increase in accounts payable of $4.6 million and (v) a decrease in all other assets and liabilities of $22.9 million. 24 Cash used in investing activities for the year ended 1999 and 1998 was $6.2 million and $13.2 million, respectively. The year 1999 use was due to the purchase of production equipment and computer software and related hardware in the amount of $11.8 million, offset by proceeds from the sale of assets of $5.6 million. The year 1998 use was due to the purchase of equipment, principally production equipment. The year 1997 use of $69.7 million was due to the Shade/Allied acquisition of $50.7 million and purchases of equipment of $23.1 million. Net cash provided by financing activities during 1999 was $20.6 million compared to net cash used by financing activities in 1998 of $32.6 million. Net cash provided in 1999 included $18.3 million net borrowings on the revolving credit facility, $1.7 million repayment of long-term debt, an increase of $4 million in the financing outstanding under the accounts receivable financing facility, a reduction of $.1 million for accrued interest on stockholders' notes, and $.1 million paid-in-capital received from the exercising of stock options. Net cash used during 1998 included $25.8 million repayment of long-term debt, the payment of fees in connection with amendments to the revolving credit facility of $2.8 million, and a reduction of $4.0 million in financing outstanding under the accounts receivable financing facility. During 1997, the Company borrowed $130.4 million to finance the acquisition of Shade/Allied of $50.7 million and the purchases of equipment of $23.1 million and to fund the increase in working capital of $56.6 million. A portion of the consolidated 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. The Company has entered into an interest rate cap to reduce the impact from a significant rise in interest rates. However, there were no amounts received under the agreement in 1999, 1998 and 1997. On November 12, 1999, the Company was notified by its banking group of a default of its revolving credit facility. The default stemmed from the formation of new subsidiaries in December 1997 related to a reorganization of the Company's corporate structure without proper notification to the banks. The reorganization was implemented primarily for state tax purposes and included the transfer of assets between existing entities and transfers to the new subsidiaries. The default on the revolving credit facility prevented the Company from paying interest on its publicly traded Notes due November 15, 1999, thereby causing a default on the Notes as well. On January 10, 2000, certain holders of the Company's 13% Senior Subordinated Notes due November 15, 2005 filed an involuntary chapter 11 petition against the Company and all of its subsidiaries except Notepad Funding Corporation (the "Debtors") in the United States Bankruptcy Court for the District of Delaware. On January 14, 2000, each of the Debtors consented to the entry of an Order for Relief and filed voluntary petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The bankruptcy Case Numbers 00-00066 (RRM) through 00-00072 (RRM) are being jointly administered under Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 (a) and 1108 of the Bankruptcy Code. On January 28, 2000, an Official Committee of Unsecured Creditors was appointed in these cases. No plan of reorganization has yet been proposed by the Company. On January 10, 2000, as a result of the chapter 11 filings, the Company's $60.0 million accounts receivable financing facility terminated and no further sales of receivables occurred. Although no post-termination receivables were sold under this facility, the Company continues to act as servicer under the facility and to collect and remit remaining outstanding receivables as provided in the facility. On February 9, 2000, the Bankruptcy Court entered a final order approving $65 million DIP financing in the form of a revolving credit facility provided by the Company's existing bank group. Availability under the facility is contingent upon a borrowing base of accounts receivable and inventory, and bears interest at a rate of prime plus 2.5%. The revolving credit facility matures July 17, 2000, and may be extended upon satisfaction of certain conditions. 25 INFLATION The Company believes that inflation has not had a material impact on its financial position or its results of operations for 1999, 1998, and 1997. NEWLY ISSUED ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated at part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. Adoption of the Statement is not expected to have a material impact on the Division's financial position and results of operations. IMPACT OF YEAR 2000 In prior years, the Company discussed the nature and progress of its plans to become Year 2000 compliant. In late 1999, the Company completed its Year 2000 project. As a result of the Company's efforts, the Company experienced no significant disruptions related to Year 2000. The Company is not aware of any material problems resulting from Year 2000 issues either with its products, its internal systems, or with vendors, customers and other third parties. The total estimated cost of the Year 2000 project, including system upgrades, was approximately $3.5 million. As of December 31, 1999, all costs had been incurred. Of the total cost of the project, approximately $2.5 million was attributable to new software and related hardware, which was capitalized. The remaining costs were expensed as incurred. FORWARD-LOOKING STATEMENTS The Company is including the following cautionary statement in this Form 10-K to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, the Company. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance, and underlying assumptions and other statements which are other than statements of historical facts. From time to time, the Company may publish or otherwise make available forward-looking statements of this nature. All such subsequent forward-looking statements, whether written or oral and whether made by or on behalf of the Company, are also expressly qualified by these cautionary statements. Certain statements contained herein are forward-looking statements and accordingly involve risks and uncertainties, which could cause actual results, or outcomes to differ materially from those expressed in the forward-looking statements. The forward-looking statements contained herein are based on various assumptions, many of which are based, in turn, upon further assumptions. The Company's expectations, beliefs and projections are expressed in good faith and are believed by the Company to have a reasonable basis, including without limitation, management's examination of historical operating trends, data contained in the Company's records and other data available from third parties, but there can be no assurance that management's expectation, beliefs or projections will result or be achieved or accomplished. In addition to the other factors and matters discussed elsewhere herein, the following are important factors that, in the view of the Company, could cause actual results to differ materially from those discussed in the forward-looking statements: 1. Changes in economic conditions, in particular those, which affect the retail and wholesale office product markets. 2. Changes in the availability and/or price of paper, in particular if increases in the price of paper are not passed along to the Company's customers. 26 3. Changes in senior management or control of the Company. 4. Inability to obtain new customers or retain existing ones. 5. Significant changes in competitive factors, including product pricing conditions affecting the Company. 6. Governmental/regulatory actions and initiatives, including those affecting financings. 7. Significant changes from expectations in actual capital expenditures and operating expenses. 8. Occurrences affecting the Company's ability to obtain funds from operations, debt or equity to finance needed capital expenditures and other investments. 9. Significant changes in rates of interest, inflation or taxes. 10. Significant changes in the Company's relationship with its employees and the potential adverse effects if labor disputes or grievances were to occur. 11. Changes in accounting principles and/or the application of such principles to the Company. 12. Completion of the Company's restructuring plan. 13. Emergence from Chapter 11 filing. The Company disclaims any obligation to update any forward-looking statements to reflect events or other circumstances after date hereof. ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has market risk exposure arising from changes in interest rates. The Company's earnings are affected by changes in short-term interest rates as a result of borrowings under its revolving credit facility, which bear interest based on floating rates. The Company has entered into an interest rate cap to reduce the impact from a significant rise in interest rates on its floating rate debt and may do so in the future. However, there were no amounts received under the agreement in 1999, 1998, and 1997. At December 31, 1999, the Company had approximately $252.7 million of variable rate debt obligations outstanding with a weighted average interest rate of 8.48%. A hypothetical 10% change in the effective interest rate for these borrowings, assuming debt levels at December 31, 1999, would change interest expense by approximately $2.0 million. As a result of the Chapter 11 filing, principal or interest payments may not be made on any pre-petition debt until a plan of reorganization defining the repayment terms has been approved by the Bankruptcy Court. ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Item 14(a)(1) of the Exhibit Index for a listing of the Company's financial statements included with this Form 10-K. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 27 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth information concerning the executive officers and directors of the Company as of March 1, 2000:
NAME AGE POSITION - ---- -------- ------------------------------------------------------------ James W. Swent III............. 49 Co-Chairman of the Board & Chief Executive Officer, and Director Robert C. Gay.................. 48 Co-Chairman of the Board and Director John H. Rodgers................ 56 Senior Vice President & General Counsel, Secretary and Director Scott R. Watterson............. 44 Director Gregory M. Benson.............. 44 Director Paul B. Edgerley............... 44 Director Jeffrey K. Hewson.............. 56 Director William L. Morgan*............. 60 Executive Vice President, and Chief Operating Officer John J. Grymes................. 42 President, Williamhouse division
- ------------------------ * Mr. Morgan retired from the Company on March 31, 2000. JAMES W. SWENT III. Co-Chairman of the Board since March 17, 1999; Director and Chief Executive Officer since July 1998; Chief Financial Officer since June 1998; Executive Vice President from June 1998 to July 1998. Chief Executive Officer, Cyrix Corporation, from December 1996 to December 1997; Senior Vice President Finance and Administration from July 1996 to December 1996. Vice President, Business Development, Northern Telecom, from September 1993 to July 1996. ROBERT C. GAY. Co-Chairman of the Board since March 17, 1999; Director since 1992; Chairman of the Board from July 1998 to March 1999. Managing Director, Bain Capital, Inc. ("Bain Capital") since 1993. A General Partner of Bain Venture Capital since 1989; Principal from 1988 through 1989. Vice Chairman of the Board of Directors, IHF Capital, Inc., the parent of ICON Health & Fitness Inc. Director, Cambridge Industries, Inc., GS Industries, Inc. and its subsidiary GS Technologies Operating Co., Inc. and Nutraceutical International Corporation. JOHN H. RODGERS. Director of the Company since March 17, 1999; Senior Vice President and General Counsel, Secretary since September 1998. President, Clairemead Corporation, operator of small retail and service businesses, since 1996. Executive Vice President, The Southland Corporation, from 1992 to 1995; Chief Administrative Officer from 1991 to 1995; General Counsel from 1979 to 1992; other management positions, including Senior Vice President, Vice President and Secretary, from 1973 to 1995. SCOTT R. WATTERSON. Director of the Company since December 1996. Chairman of the Board and Chief Executive Officer, IHF Capital, Inc., the parent of ICON Health & Fitness Inc., since November 1994. President and Chief Executive Officer, Weslo, Inc., since 1977. President and Chief Executive Officer, ProForm Fitness Products, Inc., since 1988. GREGORY M. BENSON. Director of the Company since 1992. Executive Vice President, Bain Capital since November 1996. Acting Chief Financial Officer of the Company from December 1997 to June 1998; Executive Vice President and Director of Strategic Planning and Acquisitions from May 1996 through November 1996; Chief Financial Officer and Secretary from 1992 to August 1996. Chief Financial Officer, Chief Administrative Officer and Director of Ampad Corporation (the principal operating subsidiary of the Company during that period) from 1992 to 1995. 28 PAUL B. EDGERLEY. Director of the Company since July 1998. Managing Director, Bain Capital since 1993. General Partner, Bain Venture Capital, since 1990 and a Principal, Bain Venture Capital, from 1988 to 1990. Director, GS Technologies Corporation, AMF Group Inc., Anthony Crane Rental and Sealy Corporation. JEFFERY K. HEWSON. Director of the Company since March 17, 1999. President, The Beckley Cardy Group from 1996 to 1997. Chief Executive Officer, United Stationers, Inc., from 1995 to 1996; President and Chief Operating Officer from 1991 to 1995. Formerly, President, ACCO World Corporation, US Division. President, ACCO World Corporation, Canada; Director, ISA International, a publicly held company in Great Britain. JOHN J. GRYMES. President, Williamhouse division since May 1996. National Sales Manager, Williamhouse-Regency of Delaware, Inc. from 1991 to 1996 prior to and after its acquisition by the Company in October 1995; Employee of Williamhouse since 1987. WILLIAM L. MORGAN. Executive Vice President since July 1998 and Chief Operating Officer since May 10, 1999. Retired from 1994 until July 1998. Corporate Vice President and President, Transmission, Connection & Broadband Systems, Northern Telecom, LTD., from 1991 to 1994. Mr. Morgan retired from the Company on March 31, 2000. DIRECTOR COMPENSATION At present, no separate compensation or fees are payable to employee Directors of the Company. The Company pays non-employee Directors an annual retainer of $20,000. In addition, the Company reimburses Directors for reasonable travel expenses incurred in attending Board of Directors' meetings. Pursuant to the Company's Non-Employee Director Stock Option Plan (the "Non Employee Director Plan"), non-employee Directors are granted options to purchase 25,000 shares of Common Stock upon their initial election or appointment to the Board (or upon the adoption of the Non Employee Director Plan for those Directors in office on the date of such adoption) and will be granted options to purchase an additional 2,000 shares of Common Stock on an annual basis beginning on the later of the fourth anniversary of the adoption of the Non Employee Director Plan (July 8, 2000) or a Director's fourth anniversary of being elected to the Board. The Directors do not receive any additional compensation for committee participation. 29 ITEM 11 EXECUTIVE COMPENSATION The table below sets forth the compensation paid by the Company to its Chief Executive Officer and each of its four other current executive officer for 1999 and 1998; and for the last three fiscal years for one former executive officer who received compensation in 1999. The amounts shown include compensation for services in all capacities that were provided to the Company.
LONG TERM COMPENSATION AWARDS ANNUAL COMPENSATION ------------ ------------------------------------------------ SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(5) COMPENSATION(6) OPTIONS COMPENSATION(7) - --------------------------- -------- -------- -------- --------------- ------------ --------------- James W. Swent III ............... 1999 $490,735 $200,000 -- 300,000 5,000 Chief Executive Officer(1) 1998 184,423 89,682 600,000 0 William L. Morgan ................ 1999 $305,481 $ 82,500 -- 100,000 0 Executive Vice President & 1998 134,238 100,000 200,000 0 Chief Operating Officer(2) John J. Grymes ................... 1999 $234,545 $ 68,500 -- 75,000 3,793 President, Williamhouse division 1998 225,000 0 150,000 4,615 John H. Rodgers .................. 1999 $243,637 $ 37,500 -- 65,000 2,712 Senior Vice President & 1998 76,881 37,500 100,000 0 General Counsel; Secretary(3) James V. Heim .................... 1999 $246,925 $ 20,000 -- 62,500 73,289 President, Ampad division(4)
- -------------------------- (1) Mr. Swent was employed by the Company on June 1, 1998. Mr. Swent entered into an employment agreement with the Company effective as of September 3, 1998. The 1998 annual salary for Mr. Swent was determined based upon a survey of compensation paid to similar officers at comparably sized companies and a recognition of their importance to the Company. See "Employment Agreements." (2) Mr. Morgan was employed by the Company on July 20, 1998 and retired as an executive officer on March 31, 2000. (3) The Company employed Mr. Rodgers on August 26, 1998. (4) Mr. Heim was employed by the Company on December 1, 1998 and resigned as an executive officer of the Company on January 18, 2000. (5) Bonus levels for Messrs. Swent, Grymes, Morgan, Rodgers and Heim in 1999 were established by the Board to recognize attainment of certain objectives, including plant rationalization, which was substantially completed in December, 1999. 1998 bonus payments to Messrs. Swent, Morgan and Rodgers were paid as inducements for employment. (6) The aggregate amount of perquisites and other personal benefits given to each of the Named Executive Officers, valued on the basis of the aggregate incremental cost to the Company, was less than either $50,000 or 10% of the total of annual salary and bonus for that Named Executive Officer during each of the periods presented. Such benefits included automobile allowances. (7) The amounts shown for "All Other Compensation" in 1999 for Messrs. Swent, Grymes and Rodgers include $5,000, $3,793 and $2,712, respectively, which represents a matching contribution made by the Company on behalf of each executive officer to the Company's 401 (k) plan. Additionally, the amount shown for "All Other Compensation" in 1998 for Mr. Grymes includes $4,615, which represents a matching contribution made by the Company on behalf of Mr. Grymes to the Company's 401 (k) plan. In addition, the amounts shown for Mr. Heim in 1999, include $73,289, which represents a matching contribution made by the Company on behalf of Mr. Heim to the Company's 401 (k) plan, and reflect relocation expenses paid by the Company ($65,294), and the gross up of taxes on the imputed income from such payment ($7,430). 30 STOCK OPTION GRANTS The following table provides information relating to the stock options awarded to the Named Executive Officers during the Company's last fiscal year.
INDIVIDUAL GRANTS(1) POTENTIAL REALIZABLE VALUE AT ------------------------ ASSUMED ANNUAL RATES OF NUMBER OF % OF TOTAL MARKET STOCK PRICE APPRECIATION SECURITIES OPTIONS EXERCISE PRICE ON FOR OPTION TERM(2) UNDERLYING GRANTED TO OR BASE DATE OF -------------------------------- OPTIONS EMPLOYEES PRICE GRANT EXPIRATION NAME GRANTED (#) IN FY ($/SHARE) ($/SHARE) DATE 5% ($) 10% ($) - ---- ----------- ---------- --------- --------- ---------- -------- -------- James W. Swent III..... 300,000 18.14% 1.8125 1.8125 05/03/2009 341,961 866,597 William L. Morgan...... 100,000 6.05% 1.8125 1.8125 05/03/2009 113,987 288,866 John J. Grymes......... 75,000 4.53% 1.8125 1.8125 05/03/2009 85,490 216,649 John H. Rodgers........ 65,000 3.93% 1.8125 1.8125 05/03/2009 74,092 187,763 James V. Heim.......... 62,500 3.78% 1.8125 1.8125 05/03/2009 71,242 180,541
- ------------------------ (1) Options vest in three equal installments on each anniversary of the date of grant. Unless otherwise determined by the Compensation Committee of the Board, options expire upon the termination of the executive's employment with the exception of options which are then exercisable in the following circumstances: (i) 180 days following the executive's death or disability; (ii) 90 days following the executive's retirement; and (iii) 30 days following the termination of the executive's employment by the Company other than by cause. (2) Amounts reflect certain assumed rates of appreciation set forth in the SEC's compensation disclosure rules. Actual gains, if any, on stock options exercises depend on future performance of the Common Stock and overall market conditions. STOCK OPTION HOLDINGS The following table sets forth information with respect to the Named Executive Officers concerning stock options outstanding as of December 31, 1999. There were no options exercised by the Named Executive Officers in 1999 for securities of the Company.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING IN-THE-MONEY UNEXERCISED OPTIONS OPTIONS AT FY-END AT FY-END (#) ($)(1) -------------------- -------------------- SHARES AQUIRED EXERCISABLE/ EXERCISABLE/ NAME ON EXERCISE (#) VALUE REALIZED ($) UNEXERCISABLE UNEXERCISABLE - ---- --------------- ------------------ -------------------- -------------------- James W. Swent III.......... -- -- 200,000/700,000 --/-- William L. Morgan........... -- -- 66,667/233,333 --/-- John J. Grymes.............. -- -- 50,000/175,000 --/-- John H. Rodgers............. -- -- 33,333/131,667 --/-- James V. Heim............... -- -- 41,667/145,833 --/--
- ------------------------ (1) The closing sale price of the Common Stock on December 31, 1999, was $.2344 per share, as reported by the National Association of Security Dealers Over-the-Counter Bulletin Board System. The value of such options at fiscal year end is calculated on the basis of the difference between the option exercise price and $1.5625 multiplied by the number of shares of Common Stock underlying the option. As of December 31, 1999, no Named Executive Officer held any in-the-money options, exercisable or unexercisable. 31 EMPLOYMENT AGREEMENTS. Effective September 3, 1998, the Company and Mr. Swent entered into an employment agreement (the "Swent Agreement"), pursuant to which Mr. Swent agreed to serve as the Chief Executive Officer of the Company. Under the Swent Agreement, the Company agreed to pay to Mr. Swent: (i) an annual base salary equal to at least $425,000; (ii) an annual bonus in 1998 of $200,000 and thereafter an annual bonus not to exceed 120% of his annual base salary (based upon the Company achieving certain operating targets); and (iii) certain fringe and severance benefits. In February 2000, the severance benefits payable to Mr. Swent under the Swent Agreement were amended and superceded by a one-time stay-on bonus payable to Mr. Swent upon the occurrence of specific events under the Retention Plan [See Below]. Mr. Swent has agreed not to compete with the Company for a period of twelve months following his termination of employment with the Company and not to disclose any confidential information at any time without the prior written consent of the Company. RETENTION PLAN. On November 30, 1999, the Board of Directors approved a retention and incentive plan (the "Retention Plan") for key employees who have been identified by management as critical to continue the operations of the Company throughout the bankruptcy and reorganization process. Under the Retention Plan, a maximum of $6,470,000 has been approved to be paid to 85 designated employees as special incentives for continued employment though established transition periods and, for certain managers, as a special award for the successful sale of specified business units of the Company. The Retention Plan includes a special severance program totaling $2,686,158 to be paid in lieu of regular severance pay to key employees in the event that their employment with the Company is involuntarily terminated without cause. The amount of the incentives was determined as a percentage of base pay by level of job and responsibility within the Company. An order approving the Retention Plan was entered by the Bankruptcy Court on February 7, 2000. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee was established by the Board of Directors in June 1996 in connection with the Company's IPO. At such time, Messrs. Robert C. Gay and Marc B. Wolpow, Managing Directors of Bain Capital, were appointed to the Committee. The Bain Capital Funds collectively own approximately 34.9% of the outstanding Common Stock. The Board selected Messrs. Gay and Wolpow to help ensure that the compensation policies of the Company serve to align the interests of the Company's management with those of its stockholders. In 1999, Mr. Wolpow resigned from the Compensation Committee, and Messrs. Jeffrey K. Hewson and Scott R. Watterson were named to the Compensation Committee. The Compensation Committee is responsible for (i) determining the compensation of the Company's executive officers; (ii) reviewing the recommendations of the Company's Chief Executive Officer on compensation levels of all other officers of the Company; and (iii) adopting and changing compensation policies and practices of the Company and reporting its recommendations to the full Board of Directors. In making its recommendations to the Board concerning adjustments to compensation levels, the Compensation Committee considers the financial condition and operational performance of the Company during the prior year. The Company's executive compensation program consists of three principal components (i) base salary; (ii) annual bonus; and (iii) long-term equity incentives. BASE SALARY. The base salary for each of the Company's executive officers was determined in 1999 pursuant to the terms of his respective employment agreement or arrangement with the Company. The executive officers' base salaries are based on their respective expected levels of responsibility and competitive market conditions. Messrs. Swent's, Grymes', Morgan's, Rodgers' and Heim's base salaries 32 were increased in December 1999. Mr. Swent entered into an employment agreement with the Company effective September 3, 1998. See "Compensation of Executive Officers--Employment Agreements." ANNUAL BONUS. Each of the executive officers and senior management of the Company is eligible, under the terms of his or her employment with the Company, to participate annually in a Key Manager Bonus Program based upon individual bonus targets and the Company achieving certain operating targets. In general, such operating targets relate to the attainment by the Company of certain minimum levels of EBITDA, which are recommended by management and established by the Board of Directors. In 1999, the Company did not implement the Key Manager Bonus Program and, as a result, no annual bonuses were paid under the program to executive officers. In January and February 2000 bonus payments were made to selected named executives of the Company to recognize their continuing performance and support of the Company's strategic objectives. During that period, the Company paid a total of $382,000 to named executive officers and senior management. LONG-TERM EQUITY INCENTIVES. Long-term incentive awards are intended to develop and retain strong management through stock ownership that recognizes future performance. The Board believes that a significant portion of senior executives' compensation should depend on value created for the stockholders. In order to more closely align the interests of the Company's senior management with those of its stockholders, and to link the value of management's holdings directly to the market value of the Common Stock, the Company has adopted the 1999 Key Employees Stock Incentive Plan (the "1999 Option Plan") and the 1996 Key Employee Stock Incentive Plan (the "1996 Option Plan") and the Management Stock Purchase Plan. On February 16, 1999, the Board of Directors adopted the American Pad & Paper Company 1999 Key Employees Stock Incentive Plan (the "1999 Option Plan") which provides that the Compensation Committee (the "Committee") of the Board, on behalf of the Company, may enter into any type of arrangement with an employee that is consistent with the provisions of the 1999 Option Plan and that by its terms involves the issuance or potential issuance of (i) shares of Common Stock or (ii) a Derivative Security (as such term is defined in Rule 16a-1 promulgated under the Exchange Act as such Rule may be amended from time to time) with an exercise or conversion right at a price related to the Common Stock or with a value derived from the value of the shares of Common Stock. The entering into of any such arrangement is referred to under the 1999 Option Plan as the grant of an "Award." The maximum number of shares of Common Stock available for issuance upon exercise of Awards granted to employees under the 1999 Option Plan is 1,500,000, subject to adjustment in the event of a stock dividend, stock split or similar change in outstanding shares of Common Stock. Common Stock purchased under the 1999 Option Plan will be purchased from the Company; therefore the Company will receive the purchase price paid for the Common Stock, if any. The Compensation Committee granted a total of 1,204,250 new options under the 1999 Option Plan in 1999, of which 602,500 were granted to executive officers. As of December 31, 1999, a total of 1,122,750 options were outstanding under the 1999 Option Plan. The following description of certain features of the 1999 Option Plan is qualified in its entirety by reference to the 1999 Option Plan, a copy of which is attached hereto as Appendix A and incorporated herein by reference. Terms with their initial letter capitalized that are used in this description and not specifically defined herein shall have the same meaning given such terms in the 1999 Option Plan. PURPOSE AND ADOPTION. The purpose of the 1999 Option Plan is to enable the Company and its subsidiaries to attract, retain and motivate their employees by providing for or increasing the proprietary interests of such employees in the corporation. The 1999 Option Plan was originally adopted by the Board of Directors on February 16, 1999, approved by the stockholders of the Company on April 27, 1999, and became effective on April 27, 1999. 33 AWARDS. Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of stock, restricted stock, stock options, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares, and an Award may consist of one or more such security or benefit. The Company anticipates that under the 1999 Option Plan it will only issue nonqualified stock options ("NQOs") that are not intended to qualify as incentive stock options under Section 422 of the Internal Revenue Code ("ISOs"). ADMINISTRATION. The Committee administers the 1999 Option Plan. The Committee currently consists of two Directors, and, subject to certain limitations in the 1999 Option Plan, the Committee (or its Authorized Delegate) is authorized and empowered to do all things necessary or desirable in connection with the administration of the 1999 Option Plan, including the following: (i) adopt, amend and rescind rules and regulations relating to the 1999 Option Plan; (ii) determine which persons meet the requirements for eligibility under the 1999 Option Plan and to which of such eligible persons, if any, Awards shall be granted; (iii) determine whether, and the extents to which adjustments are required under the 1999 Option Plan; (iv) interpret and construe the 1999 Option Plan and the terms and conditions of any Award granted under the 1999 Option Plan; and (v) correct any defect or supply any omission or reconcile any inconsistency in the 1999 Option Plan or in any Award in the manner and to the extent the Committee deems necessary or desirable to carry it into effect. Any decision of the Committee (or any Authorized Delegate) in the interpretation and administration of the 1999 Option Plan lies within its sole and absolute discretion and is final, conclusive and binding on all parties concerned. TRANSFERABILITY. Except as may be set forth in an Award or otherwise approved by the Committee, an employee's rights and interest under the 1999 Option Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of an employee's death) including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner. ELIGIBILITY. Any person employed by the Company or any of its subsidiaries including any Director who is so employed is eligible to be considered for the grant of Awards under the 1999 Option Plan. AMENDMENT, TERMINATION AND ADJUSTMENT. The Board may amend or terminate the 1999 Option Plan at any time and in any manner; PROVIDED, HOWEVER, that no such amendment or termination may deprive the recipient of an Award previously granted under the 1999 Option Plan of any of his or her rights thereunder without the consent of such recipient; and; PROVIDED FURTHER, that no amendment shall become effective without stockholder approval if such stockholder approval is required by law. No Awards may be granted under the 1999 Option Plan after April 27, 2009. Shares of Common Stock may be issued after April 27, 2009 pursuant to Awards granted prior to such date; however, no shares of Common Stock may be issued under the 1999 Option Plan after April 27, 2019. ADJUSTMENTS. If the outstanding securities of the class then subject to the 1999 Option Plan are increased, decreased or exchanged for or converted into cash, property or a different number or kind of securities, or if cash, property or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, restructuring, reclassification, dividend (other than a regular, quarterly cash dividend) or other distribution, stock split, reverse 34 stock split or the like, or if substantially all of the property and assets of the Company are sold, then, unless the terms of such transaction provide otherwise, the Committee must make appropriate and proportionate adjustments in (a) the number and type of shares or other securities or cash or other property that may be acquired pursuant to Awards theretofore granted under the 1999 Option Plan, (b) the maximum number and type of shares or other securities that may be issued pursuant to Awards thereafter granted under the 1999 Option Plan and (c) to the extent permitted under the 1999 Option Plan, the maximum number of shares of Common Stock with respect to which Awards may be granted to any employee during any calendar year; PROVIDED, HOWEVER, that no adjustment may be made to the number of shares of Common Stock that may be acquired pursuant to outstanding ISOs or the maximum number of shares of Common Stock with respect to which ISOs may be granted under the 1999 Option Plan to the extent such adjustment would result in such options being treated as other than ISOs; PROVIDED FURTHER, that no such adjustment may be made to the extent the Committee determines that such adjustment would result in the disallowance of a federal income tax deduction for compensation attributable to Awards hereunder by causing such compensation to be other than performance-based compensation. CONSIDERATION. Common Stock may be issued pursuant to an Award for any lawful consideration as determined by the Committee, including without limitation, services rendered by the recipient of such Award. Under the 1996 Option Plan, the Compensation Committee was granted broad authority to award equity-based compensation arrangements to any eligible employee of the Company. An aggregate of 1,500,000 shares of Common Stock was reserved for issuance upon the exercise of awards granted to eligible participants under the 1996 Option Plan. Under the Management Stock Purchase Plan, eligible management employees of the Company are entitled to purchase shares of Common Stock at a purchase price equal to 75% of its fair market value using up to 25% of their annual incentive bonuses. The Management Stock Purchase Plan is designed to encourage management employees of the Company to acquire an ownership interest in the Company and thereby permit such employees to share in the growth in value of the Company. No annual bonuses were paid for 1998 and consequently no shares of Common Stock were purchased under the Management Stock Purchase Plan in 1998. In September 1998, the Board approved a proposal to re-price currently outstanding options under the 1996 Option Plan. Under the proposal, on a voluntary basis, the Company offered to exchange at an exchange rate of .8 to 1, all currently outstanding stock options granted under the 1996 Option Plan prior to July 1, 1998, and to re-price such outstanding options to a market valuation of $4.50 per share with a vesting period of three years commencing on October 1, 1998. The proposal further offered to the holders of such outstanding options a three year retention bonus equal to $2.50 for each new option share granted to be paid in three equal payments on the same vesting terms and schedule as the new option grants. A total of 413,200 options were granted in exchange for 516,500 outstanding options pursuant to the re-pricing program. After taking into account options exchanged under the re-pricing program, the Compensation Committee granted a net of 1,117,800 new options under the 1996 Option Plan in 1998 of which 350,000 were granted to executive officers, and granted 60,000 new options under the 1996 Option Plan in 1999. A total of 1,214,600 options were outstanding under the 1996 Option Plan as of December 31, 1999. In September 1998, the Board, with the prior approval of the New York Stock Exchange, reserved a total of 1,210,000 option shares to be available for option grants outside of the 1996 Option Plan and as conditions of employment to certain newly hired executives in individual amounts and at option prices to be approved by the Compensation Committee. The Compensation Committee granted 800,000 options to executive officers outside of the 1996 Option Plan in 1998. POLICY WITH RESPECT TO QUALIFYING COMPENSATION FOR DEDUCTIBILITY AND OTHER MATTERS. Section 162(m) of the Internal Revenue Code generally limits to $1 million the annual tax-deductible compensation paid to a covered officer. However, the limitation does not apply to performance-based compensation, provided certain conditions are satisfied. Although the Compensation Committee recognizes that, under certain circumstances, compensation paid pursuant to the options granted outside the 1996 Option Plan could 35 exceed the limitations of Section 162(m) of the Internal Revenue Code, it does not believe that any executives will earn in excess of deductible limits. The Company's policy is generally to preserve the federal income tax deductibility of compensation paid. Accordingly, the Company has taken, to the extent it believes feasible, appropriate actions to preserve the deductibility of annual incentive, long-term performance, and stock option awards. However, notwithstanding the Company's general policy, the Committee retains the authority to authorize payments that may not be deductible if it believes that is in the best interests of the Company and its stockholders. The Compensation Committee will continue to review the compensation package provided for the Chief Executive Officer and all other officers, and to monitor its competitiveness within the industry and the community, as well as its relationship to stockholders' returns. The Compensation Committee will recommend adjustments that are deemed appropriate, both in compensation policies and practices, compensation structure and the actual compensation paid. PERFORMANCE GRAPH. The Performance Graph below compares the value at year-end 1996, 1997, 1998 and 1999 of an investment in the Common Stock of $100 on July 2, 1996, the date the Common Stock became publicly traded at an initial offering price of $15.00 per share. Also shown are the values, assuming $100 invested in the Russell 2000 Stock Index and a peer group index selected by the Company consisting of manufacturers, distributors or retailers of office products, also beginning on July 2, 1996, and at year-end 1996, 1997 and 1998. The companies selected to form the Company's peer group index are Avery Dennison Corporation, Day Runner, Inc., Mail-Well, Inc., Mead Corporation, Moore Corporation LTD, New England Business Services, Wallace Computer Services, Westvaco Corporation and Willamette Industries. The Company may decide, in future years, to change the composition of the peer group if the Company believes that comparative data is available. Total returns are based on market capitalization. COMPARE CUMULATIVE TOTAL RETURN AMONG AMERICAN PAD & PAPER, RUSSELL 2000 INDEX AND PEER GROUP INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
AMERICAN PAD & PAPER COMPANY RUSSELL 2000 STOCK INDEX PEER GROUP INDEX July 2, 1996 $100 $100 $100 1996 $151 $106 $114 1997 $64 $129 $125 1998 $10 $126 $118 1999 $2 $150 $155
ASSUMES $100 INVESTED ON JULY 2, 1996 ASSUMES DIVIDENDS REINVESTED
FISCAL YEAR ENDING DECEMBER 31ST -------------------------------------------------- JULY 2, 1996 1996 1997 1998 1999 ------------ -------- -------- -------- -------- American Pad & Paper Company......................... $100 $151 $ 64 $ 10 $ 2 Russell 2000 Stock Index............................. $100 $106 $129 $126 $150 Peer Group Index..................................... $100 $114 $125 $118 $155
36 ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Except as otherwise noted, the following table sets forth certain information as of March 1, 2000, as to the security ownership of equity securities of the Company by (i) each of the executive officers named in the Summary Compensation Table; (ii) each of the Directors and Director nominees of the Company; (iii) all Directors and executive officers as a group; and (iv) those persons owning of record or known to the Company to be the beneficial owner of more than five percent of the voting securities of the Company. All information with respect to beneficial ownership has been furnished by the respective Director, Director nominee, executive officer or five percent beneficial owner, as the case may be. Unless otherwise indicated, the persons named below have sole voting and investment power with respect to the number of shares set forth opposite their names. Beneficial ownership of the Common Stock has been determined for this purpose in accordance with the applicable rules and regulations promulgated under the Exchange Act.
COMMON STOCK --------------------- EXECUTIVE OFFICERS, NUMBER PERCENT DIRECTORS AND 5% STOCKHOLDERS OF SHARES OF CLASS - ----------------------------- ---------- -------- Executive Officers and Directors: Robert C. Gay(1)........................................ 9,967,141 34.9% James W. Swent III(2)................................... 250,000 * Gregory M. Benson(3).................................... 845,842 3.0% Paul B. Edgerley(4)..................................... 9,956,641 34.9% John J. Grymes(5)....................................... 92,943 * Jeffrey K. Hewson....................................... 0 * William L. Morgan(6).................................... 66,667 * John H. Rodgers(7)...................................... 39,908 * Scott R. Watterson(8)................................... 25,000 * James V. Heim(9)........................................ 41,667 * All Directors and Executive Officers as a 11,343,668 39.8% group (10 persons)(10)................................ 5% Stockholders: Bain Capital Funds(11) ................................. 9,942,141 34.9% c/o Bain Capital, Inc. Two Copley Place Boston, Massachusetts 02116
- ------------------------ * Less than one percent. (1) Includes (i) 25,000 shares of Common Stock that can be acquired through currently exercisable options and (ii) 9,942,141 shares held collectively by Bain Capital partnerships as described herein. Mr. Gay is a general partner of Bain Venture Capital, a California limited partnership ("BVC"), which is the general partner of the Tyler Capital Fund, L.P. ("TCF"), Tyler Massachusetts L.P. ("TM") and Tyler International L.P.-II ("TI"). Accordingly, Mr. Gay may be deemed to beneficially own shares held by such investment funds. In addition, Mr. Gay is a general partner of BCIP Trust Associates L.P. ("BCIP Trust") and BCIP Associates ("BCIP") and, as a result, may be deemed to beneficially own shares held by such partnerships. Mr. Gay disclaims beneficial ownership of such shares in which he does not have a pecuniary interest. The address of Mr. Gay is c/o Bain Capital, Inc., Two Copley Place, Boston, Massachusetts 02116. 37 (2) Includes 200,000 shares of Common Stock that can be acquired through currently exercisable options. (3) Includes 299,457 shares of Common Stock that can be acquired through currently exercisable options. (4) Includes (i) 12,500 shares of Common Stock that can be acquired through currently exercisable options and (ii) 9,942,141 shares held collectively by Bain Capital partnerships as described herein. Mr. Edgerley is a general partner of BVC, which is the general partner of TCF, TM and TI. Accordingly, Mr. Edgerley may be deemed to beneficially own shares held by such investment funds. In addition, Mr. Edgerley is a general partner of BCIP Trust and BCIP and, as a result, may be deemed to beneficially own shares held by such partnerships. Mr. Edgerley disclaims beneficial ownership of such shares in which he does not have a pecuniary interest. (5) Includes 50,000 shares of Common Stock that can be acquired through currently exercisable options. (6) Includes 66,667 shares of Common Stock that can be acquired through currently exercisable options. (7) Includes 33,333 shares of Common Stock that can be acquired through currently exercisable options. (8) Includes 25,000 shares of Common Stock that can be acquired through currently exercisable options. (9) Includes 41,667 shares of Common Stock that can be acquired through currently exercisable options. (10) Includes shares, which may be deemed to be beneficially owned by Messrs. Gay and Edgerley as a result of their relationship with the Bain Capital Funds and shares that the Directors and executive officers can acquire through currently exercisable options. (11) Includes (i) 7,270,836 shares held by TCF; (ii) 1,489,744 shares held by TM; (iii) 435,915 shares held by TI; (iv) 620,562 shares held by BCIP; and (v) 125,084 shares held by BCIP Trust (BCIP Trust, TCF, TM, TI and BCIP are collectively referred to herein as the "Bain Capital Funds"). BVC, as the sole general partner of TCF, TM and TI, may be deemed to be the beneficial owner of the shares of Common Stock held by such investment funds. In addition to Mr. Gay, the other general partners of BVC include: Joshua Bekenstein, Paul B. Edgerley, Adam W. Kirsch, Geoffrey S. Rehnert, W. Mitt Romney and Robert F. White. All such persons disclaim beneficial ownership of all such shares in which they do not have a pecuniary interest. BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of the Exchange Act requires the Company's officers, Directors and persons who beneficially own more than ten percent of the Company's Common Stock to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission ("SEC"). Officers, Directors and greater than ten percent beneficial owners also are required by rules promulgated by the SEC to furnish the Company with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to the Company, or written representations that no Form 5 filings were required, the Company believes that during the period from January 1, 1999, through December 31, 1999, all Section 16(a) filing requirements applicable to its officers, Directors and greater than ten percent beneficial owners were complied with. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ADVISORY AGREEMENT. In October 1995, the Company entered into a ten-year Management Advisory Agreement (the "Advisory Agreement") with Bain Capital to replace Bain Capital's prior agreement with the Company. In connection with the Company's IPO, the Company and Bain Capital amended and restated the Advisory Agreement to provide for an initial term of four years, subject to automatic one-year extensions beyond the initial term (not to exceed an aggregate of eight years) on each anniversary of the effective date of such agreement so long as Bain Capital continues to own at least 5% of the outstanding 38 Common Stock. Under the amended Advisory Agreement, the Company agreed to pay Bain Capital an annual cash advisory fee of $2.0 million, payable by the Company on a quarterly basis in arrears, and a transaction fee in connection with the consummation of each acquisition, divestiture or financing by the Company or its subsidiaries in an amount equal to 1% of the aggregate value of such transaction (the "Bain Fees"), plus reasonable out-of-pocket expenses. In September 1998, the Company and Bain Capital mutually agreed to reduce the advisory fee to $1.5 million annually. Amendments to the Company's revolving credit agreement, approved on September 30, 1998, prohibit future payments of the Bain Fees, with a right to accrue them, until satisfaction of all obligations under the revolving credit agreement or unless otherwise permitted by the Company's banking group. For the year ended December 31, 1999, the Company accrued Bain Fees of $1.5 million, plus expenses of approximately $46,000. The Company believes that the fees received for the professional services rendered are at least as favorable to the Company as those which could be negotiated with an independent third party. REGISTRATION AGREEMENT. The Company and certain of its executive officers and other existing stockholders, including investment funds controlled by Bain Capital (the "Bain Capital Funds"), are parties to a registration agreement (the "Registration Agreement"). Under the Registration Agreement, the holders of a majority of the registrable securities owned by the Bain Capital Funds and related investors have the right, at any time and subject to certain conditions, to require the Company to register any or all of their shares of Common Stock under the Securities Act on Form S-1 on three occasions at the Company's expense and on Form S-2 or Form S-3 on an unlimited number of occasions at the Company's expense. In addition, all holders of registrable securities are entitled to request the inclusion of any shares of Common Stock subject to the Registration Agreement in any registration statement at the Company's expense whenever the Company proposes to register any of its securities under the Securities Act, subject to certain conditions. As of December 31, 1999, the holders of an aggregate of 9,979,641 shares of Common Stock (including 37,500 shares that could be acquired through exercisable options) had demand registration rights pursuant to the Registration Agreement. INDEBTEDNESS OF MANAGEMENT. On July 2, 1996, the Company lent Mr. Needham, a former executive officer of the Company, an aggregate of $324,537 in order to permit him to purchase shares of Common Stock in the Company's IPO. The loan had an interest rate of 8% per annum, was due on July 2, 1998, and requires Mr. Needham to prepay the loan with 40% of any bonus received by him during the first four years of his employment agreement with the Company or with any proceeds he receives from the sale of any of his shares of Common Stock. The amounts due under the loan are with full recourse and are secured by a pledge of all such shares of Common Stock purchased by Mr. Needham. On February 6, 1998, the Company extended the due date of the loan to July 2, 2000, and, effective July 7, 1998, in conjunction with the amendment of Mr. Needham's employment agreement, reduced the interest rate under the loan to the lesser of (i) 6% per annum or (ii) the highest rate permitted by applicable law. On December 31, 1999, approximately $289,000 in aggregate principal and interest remained outstanding under the loan. On March 31, 1998, the Company lent Mr. Benson, a director and former executive officer of the Company, an aggregate of $1.0 million in order to permit him to purchase shares of Common Stock. The loan has an interest rate of 5.89% per annum, is due on March 31, 2001, and requires Mr. Benson to prepay the loan with any proceeds he receives from the sale of any of his shares of Common Stock. The amounts due under the loan are with full recourse and are secured by a pledge of 546,385 shares of Common Stock owned by Mr. Benson and certain stock options granted to Mr. Benson, together with certain stock issuable to Mr. Benson, under certain of the Company's stock option agreements. On December 31, 1999, approximately $1.1 million in aggregate principal and interest remained outstanding under the loan. 39 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14(A)(1) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE -------- AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES Responsibility for the Consolidated Financial Reports....... 44 Report of Independent Accountants........................... 45 Consolidated Balance Sheets at December 31, 1999 and 1998... 46 Consolidated Statements of Operations for the years ended December 31 1999, 1998, and 1997.......................... 47 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998, and 1997...................................................... 48 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997......................... 49
ITEM 14(A)(2) FINANCIAL STATEMENT SCHEDULES Other than the schedule listed below, the information required by this item is included in the consolidated financial statements or is omitted because the schedules are not applicable to the Company. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
BALANCE AT CHARGED TO BEGINNING COSTS AND CHARGED TO BALANCE AT OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS END OF PERIOD ---------- ---------- -------------- ---------- ------------- Allowance for doubtful accounts and sales returns (a) (b) 1999 $2,248 $6,823 $ -- $4,994 $4,077 1998 2,794 4,204 -- 4,750 2,248 1997 2,216 3,279 225 2,926 2,794 Inventory obsolescence reserve (a) (b) 1999 $3,517 $ 724 $ -- $2,354 $1,887 1998 1,647 2,332 -- 462 3,517 1997 2,135 32 300 820 1,647
- ------------------------ (a) APB 16 purchase accounting (b) Accounts written off and customer returns 40 ITEM 14(B) REPORTS ON FORM 8-K The Company filed the following Current Reports on Form 8-K during 1999 and through March 15, 2000: (1) Current Report on Form 8-K filed January 22, 1999, relating to the Company's January 8, 1999, press release. A press release on January 8, 1999, announcing that the NYSE is delisting the Company's common stock. (2) Current Report on Form 8-K filed February 4, 1999, relating to the Company's January 19, 1999, January 26, 1999, and February 1, 1999, press releases. A press release on January 19, 1999, announcing that the Company's plant in Dallas, Texas will be closed and consolidated as part of a previously announced restructuring plan. A press release on January 26, 1999, announcing that the Company will begin trading on the NASD OTC Bulletin Board System under the symbol AMPP effective January 26, 1999. A press release on February 1, 1999, announcing that the Williamhouse division of the Company will increase the price of White Wove Commodity Envelopes to its customers by approximately 7% effective February 15, 1999. (3) Current Report on Form 8-K filed February 24, 1999, relating to the Company's February 9, 1999, and February 17, 1999, press releases. A press release on February 9, 1999, announcing the appointments of William J. Mays as Vice President of Operations and Leon W. Hall as Vice President of Sales for Ampad. A press release on February 17, 1999, announcing financial results for the fourth quarter and year ended December 31, 1998. (4) Current Report on Form 8-K filed April 1, 1999, relating to the Company's March 22, 1999, press release. A press release on March 22, 1999, announcing that the Board of Directors elected two new directors, Jeffery K. Hewson and John H. Rodgers, and has named James W. Swent III as Co-Chairman of the Board, effective March 17, 1999. (5) Current Report on Form 8-K filed April 28, 1999, relating to the Company's April 19, 1999, press release. A press release on April 19, 1999, announcing reported financial results for the first quarter ended March 31, 1999. (6) Current Report on Form 8-K filed May 14, 1999, relating to the Company's May 10, 1999, press release. A press release on May 10, 1999, announcing the appointment of William L. Morgan as Chief Operating Officer (COO). (7) Current Report on Form 8-K filed May 14, 1999, relating to the Company's May 10, 1999, press release. A press release on May 10, 1999, announcing the closing and consolidation of the Holland, New York plant. (8) Current Report on Form 8-K filed June 3, 1999, relating to the Company's June 1, 1999, press release. A press release on June 1, 1999, announcing the appointment of Lee E. Meyer as President of its Creative Card division. (9) Current Report on Form 8-K filed July 26, 1999, relating to the Company's July 19, 1999, press release. A press release on July 19, 1999, announcing reported financial results of the second quarter ended June 30, 1999. (10) Current Report on Form 8-K filed August 26, 1999, relating to the Company's August 18, 1999, press release. A press release on August 18, 1999, announcing the appointment of Raj Tanna as Vice President of E*Commerce. (11) Current Report on Form 8-K filed September 20, 1999, relating to the Company's September 13, 1999, press release. A press release on September 13, 1999, announcing the appointment of Barry L. Silberman as Vice President of Marketing for Ampad division. 41 (12) Current Report on Form 8-K filed November 16, 1999, relating to the Company's November 15, 1999, press release. A press release on November 15, 1999, announcing reported financial results of the third quarter ended September 30, 1999. A press release on November 15, 1999, announcing that a default of the Company's bank credit agreement will preclude payment of its November 15, 1999 interest payment to its subordinated debt holders; and that the Company has engaged Lazard Freres & Co. LLC to investigate and pursue various strategic and financial alternatives, including the possible sale of the Williamhouse division. (13) Current Report on Form 8-K filed December 17, 1999, relating to the Company's December 16, 1999, press release. A press release on December 16, 1999, announcing that the Company is in continuing negotiations with its bank group and a committee of bondholders, that the Company believes represents holders of over 70% of the principal amount of its subordinated debt. (14) Current Report on Form 8-K filed January 11, 2000, relating to the Company's January 11, 2000, press release. A press release on January 11, 2000, announcing that a group of its bondholders filed a petition on January 10, 2000 with the United States Bankruptcy Court in Delaware asking the court to place the Company in an involuntary Chapter 11. The Company has 20 days to respond to this petition and is not currently operating in Chapter 11. (15) Current Report on Form 8-K filed January 18, 2000, relating to the Company's January 14 press release, and to the January 18, 2000 resignation of James V. Heim as President of the Ampad division. A press release on January 14, 2000, announcing that the Company has filed a petition in the United States Bankruptcy Court in Delaware to convert the involuntary Chapter 11 petition filed by its bondholders on January 10, 2000 to a voluntary Chapter 11 proceeding under the Federal Bankruptcy Code; and that it had received a commitment for $65 million of debtor-in-possession (DIP) financing from a group of its current bank lenders. (16) Current Report on Form 8-K filed January 20, 2000, relating to the Company's January 19, 2000, press release. A press release on January 19, 2000, announcing that it has received Bankruptcy Court approval to, among other things, pay employee wages, salaries and benefits during its voluntary reorganization under Chapter 11; and that the Court has approved interim debtor-in-possession (DIP) financing for immediate use by the Company for its day-to-day operational needs. ITEM 14(B) EXHIBITS See Exhibit Index that follows on pages 69 to 71. 42 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AMERICAN PAD & PAPER COMPANY AND SUBSIDIARIES
PAGE -------- Responsibility for the Consolidated Financial Reports....... 44 Report of Independent Accountants........................... 45 Consolidated Balance Sheets at December 31, 1999 and 1998... 46 Consolidated Statements of Operations for the years ended December 31 1999, 1998, and 1997.......................... 47 Consolidated Statements of Changes in Stockholders' Equity (Deficit) for the years ended December 31, 1999, 1998, and 1997...................................................... 48 Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998, and 1997......................... 49 Notes to Consolidated Financial Statements.................. 50
43 RESPONSIBILITY FOR THE CONSOLIDATED FINANCIAL REPORTS Company management is responsible for the preparation, accuracy and integrity of the consolidated financial statements and other financial information included in this Annual Report. This responsibility includes preparing the statements in accordance with generally accepted accounting principles and necessarily includes estimates that are based on management's best judgments. To help ensure the accuracy and integrity of the Company's financial data, management maintains a system of internal controls which are designed to provide reasonable assurance that transactions are executed as authorized, that they are accurately recorded and that assets are properly safeguarded. Internal financial and operations management monitors these controls. It is essential for all Company employees to conduct their business affairs in keeping with the highest ethical standards as outlined in our code of conduct policy. Careful selection of employees and appropriate divisions of responsibility also help us to achieve our control objectives. The financial statements have been audited by the Company's independent accountants, PricewaterhouseCoopers LLP. Their report is shown on page 45. The Board of Directors, acting through its Audit Committee composed entirely of outside directors, oversees the adequacy of the Company's control environment. The Audit Committee meets periodically with representatives of PricewaterhouseCoopers LLP and internal financial management to review accounting, control, auditing and financial reporting matters. The independent accountants also have full and free access to meet privately with the Audit Committee.
/s/ JAMES W. SWENT III /s/ DAVID N. PILOTTE - --------------------------------------------- --------------------------------------------- James W. Swent III David N. Pilotte CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND VICE PRESIDENT, CORPORATE CONTROLLER DIRECTOR AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER)
44 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of AMERICAN PAD & PAPER COMPANY: In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) and (2) on page 40 present fairly, in all material respects, the financial position of American Pad & Paper Company and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 11 to the consolidated financial statements, the Company is currently in bankruptcy and is in default under substantially all of its debt agreements. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters involve the potential sale of assets as described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. PRICEWATERHOUSECOOPERS LLP April 13, 2000 Dallas, Texas 45 AMERICAN PAD & PAPER COMPANY CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, --------------------- 1999 1998 --------- --------- ASSETS Current assets: Cash...................................................... $ 19,976 $ 1,371 Accounts receivable....................................... 35,385 60,660 Inventories............................................... 93,083 112,169 Income taxes receivable................................... -- 1,700 Prepaid expenses and other current assets................. 3,521 1,240 --------- --------- Total current assets.................................... 151,965 177,140 Property, plant, and equipment............................ 145,982 152,198 Goodwill and intangible assets............................ 173,210 185,805 Other..................................................... 1,071 1,337 --------- --------- Total assets............................................ $ 472,228 $ 516,480 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long-term debt......................... $ 391,567 $ 1,236 Accounts payable.......................................... 39,892 49,598 Accrued expenses.......................................... 60,020 47,078 Deferred income taxes..................................... 2,300 (40) Income taxes payable...................................... 300 300 Restructuring reserve..................................... 1,064 5,660 --------- --------- Total current liabilities............................... 495,143 103,832 Long-term debt.............................................. -- 373,675 Deferred income taxes....................................... 37,067 16,972 Other....................................................... 797 1,288 --------- --------- Total liabilities....................................... 533,007 495,767 --------- --------- Commitments and contingencies Stockholders' equity (deficit): Preferred stock, 150,000 shares authorized, no shares issued and outstanding.................................. -- -- Common Stock, voting $.01 par value, 75,000,000 shares authorized, 28,527,983 and 27,724,045 shares issued and outstanding, respectively............................... 285 277 Additional paid-in-capital................................ 301,329 301,287 Stockholder notes......................................... (1,395) (1,317) Accumulated deficit....................................... (360,998) (279,534) --------- --------- Total stockholders equity (deficit)..................... (60,779) 20,713 --------- --------- Total liabilities and stockholders' equity (deficit).... $ 472,228 $ 516,480 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. 46 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Net sales................................................... $572,616 $662,031 $687,335 Cost of sales............................................... 531,085 597,456 598,416 -------- -------- -------- Gross profit............................................ 41,531 64,575 88,919 -------- -------- -------- Operating expenses: Selling and marketing..................................... 22,204 21,261 22,246 General and administrative................................ 26,780 31,840 19,133 Restructuring charges/(credits)........................... (2,773) 5,741 -- Losses on sales of accounts receivable.................... 3,295 3,226 2,954 Amortization of goodwill and intangible assets............ 5,133 5,939 6,110 Write down of assets--Shade/Allied........................ -- 41,000 Management fees and services.............................. 1,500 2,030 4,871 -------- -------- -------- 56,139 111,037 55,314 -------- -------- -------- Income (loss) from operations............................... (14,608) (46,462) 33,605 Other income (expense): Interest.................................................. (44,865) (44,970) (37,843) Other income, net......................................... 2,005 1,411 389 -------- -------- -------- Loss before income taxes.................................... (57,468) (90,021) (3,849) Provision (benefit) for income taxes........................ 23,270 (11,374) 642 -------- -------- -------- Loss before cumulative effect of a change in accounting principal................................................. (80,738) (78,647) (4,491) Cumulative effect of a change in accounting principal....... (726) -- -- -------- -------- -------- Net loss.................................................... $(81,464) $(78,647) $ (4,491) ======== ======== ======== Basic and diluted loss per share: Loss before cumulative effect of a change in accounting principal............................................... $ (2.89) $ (2.84) $ (0.16) Cumulative effect of a change in accounting principal..... (0.03) -- -- -------- -------- -------- Net loss.................................................. $ (2.92) $ (2.84) $ (0.16) ======== ======== ======== Weighted average shares outstanding: Basic and diluted......................................... 27,944 27,718 27,431
The accompanying notes are an integral part of these consolidated financial statements. 47 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (IN THOUSANDS)
PREFERRED STOCK COMMON STOCK ------------------- ------------------- PAID IN STOCKHOLDER ACCUMULATED SHARES AMOUNT SHARES AMOUNT CAPITAL NOTES DEFICIT TOTAL -------- -------- -------- -------- -------- ----------- ----------- -------- Balance at December 31, 1996..................... -- $ -- 27,400 $274 $300,721 $ (338) $(196,396) $104,261 Common stock sold under the Management stock purchase plan.......... -- -- 36 -- 558 -- -- 558 Reduction in stockholder notes.................. -- -- 49 -- 49 Net loss................. -- -- -- -- -- -- (4,491) (4,491) ---- ---- ------ ---- -------- ------- --------- -------- Balance at December 31, 1997..................... -- -- 27,436 274 301,279 (289) (200,887) 100,377 Exercise of stock options................ -- -- 288 3 8 -- -- 11 Stockholder notes-new.... -- -- -- (1,045) -- (1,045) Reduction in stockholder notes.................. -- -- -- -- -- 17 -- 17 Net loss................. -- -- -- -- -- -- (78,647) (78,647) ---- ---- ------ ---- -------- ------- --------- -------- Balance at December 31, 1998..................... -- -- 27,724 277 301,287 (1,317) (279,534) 20,713 Exercise of stock options................ -- -- 804 8 42 -- -- 50 Addition to stockholder notes.................. -- -- -- -- -- (78) -- (78) Net loss................. -- -- -- -- -- -- (81,464) (81,464) ---- ---- ------ ---- -------- ------- --------- -------- Balance at December 31, 1999..................... -- $ -- 28,528 $285 $301,329 $(1,395) $(360,998) $(60,779) ==== ==== ====== ==== ======== ======= ========= ========
The accompanying notes are an integral part of these consolidated financial statements. 48 AMERICAN PAD & PAPER COMPANY CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net loss.................................................. $(81,464) $(78,647) $ (4,491) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Deferred income taxes................................... 22,436 (11,674) 642 Depreciation............................................ 15,023 13,830 12,529 Amortization of goodwill and intangible assets.......... 5,133 5,939 6,110 Write-down of assets--Shade/Allied...................... -- 41,000 -- Cumulative effect of change in accounting principle..... 726 -- -- Restructuring charges/(credits)......................... (2,773) 5,741 -- Amortization of debt issuance costs..................... 2,771 4,277 2,529 (Gain) loss on sale of assets........................... (1,941) (859) 86 Changes in assets and liabilities, net of effects of acquistions: Accounts receivable................................... 21,275 17,543 (17,300) Income tax receivable................................. 1,700 3,479 (4,059) Inventories........................................... 18,463 42,190 (44,186) Prepaid expenses and other............................ (2,281) 163 598 Income tax payable.................................... -- 300 -- Accounts payable...................................... (9,706) (6,758) 4,553 Accrued expenses...................................... 15,084 6,841 (22,049) Other assets and liabilities.......................... (226) (68) 2,580 -------- -------- -------- Net cash provided by (used in) operating activities........................................ 4,220 43,297 (62,458) -------- -------- -------- Cash flows from investing activities: Purchase of stock and net assets of businesses, including acquisition costs....................................... -- -- (50,677) Purchases of property and equipment....................... (11,877) (14,379) (23,095) Proceeds from sale of assets.............................. 5,634 1,221 4,056 -------- -------- -------- Net cash used in investing activities............... (6,243) (13,158) (69,716) -------- -------- -------- Cash flows from financing activities: Net borrowings on credit agreement........................ 18,343 -- 130,400 Repayment of long-term debt............................... (1,687) (25,826) (2,268) Debt issuance costs....................................... -- (2,780) -- Net proceeds from new accounts receivable financing facility................................................ 4,000 (4,000) 6,000 Stockholder notes......................................... (78) (1,028) 49 Options and management stock purchase plan................ 50 11 558 -------- -------- -------- Net cash provided by (used in) financing activities........................................ 20,628 (33,623) 134,739 -------- -------- -------- Net increase (decrease) in cash............................. 18,605 (3,484) 2,565 -------- -------- -------- Cash, beginning of year..................................... 1,371 4,855 2,290 -------- -------- -------- Cash, end of year........................................... $ 19,976 $ 1,371 $ 4,855 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Interest................................................ $ 32,474 $ 42,807 $ 34,292 Income taxes............................................ $ 489 $ 367 $ 4,519 ======== ======== ======== Supplemental disclosure of noncash investing activity: Notes payable issued to purchase equipment................ $ -- $ 621 $ -- -------- -------- --------
The accompanying notes are an integral part of these consolidated financial statements. 49 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS ORGANIZATION AND BASIS OF PRESENTATION American Pad & Paper Company (formerly Ampad Holding Corporation and referred to hereafter as the "Company") was incorporated on June 2, 1992, as a holding company to acquire all of the outstanding stock of Ampad Corporation ("Ampad"), the surviving entity from the merger between Ampad Acquisition Corporation and Ampad. The Company had no operations through July 31, 1992. On October 3, 1995, the Company agreed to acquire in a merger transaction all of the outstanding stock of WR Acquisition, Inc. ("WR"). In a series of transactions, the Company exchanged 100% of the stock of its wholly owned subsidiary, Ampad, for newly issued shares of WR. WR then contributed Ampad to its wholly owned subsidiary, Williamhouse-Regency of Delaware, Inc., renamed American Pad & Paper Company of Delaware, Inc. (referred to hereafter on a pre-October 31, 1995 basis as "Williamhouse-Regency" and on a post-October 31, 1995 basis as "AP&P Delaware"), in exchange for a right to receive $140.0 million of merger consideration. The Company, principally using bank borrowings by AP&P Delaware aggregating $245.0 million, funded WR's right to receive the merger consideration. WR in turn repurchased 100% of the WR shares not owned by the Company. The Company accounted for the transaction as a purchase of the stock of WR. As a result of the transactions, the Company owns 100% of WR, which in turn owns 100% of AP&P Delaware. The financial statements of the Company include the historical accounts and operations of the Company, AP&P Delaware and Manufacturing. Included in the historical accounts and operations of AP&P Delaware are the accounts and operations of Ampad, the envelope operations of Williamhouse and Niagara, and the continuous form operations of Shade/Allied since their respective dates of acquisition. Additionally, the consolidated financial statements include the accounts of Notepad Funding Corporation ("Notepad"), a special purpose corporation used in the accounts receivable financing facility. All significant intercompany balances have been eliminated. AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC. The Company's wholly owned subsidiary, AP&P Delaware, is the issuer of 13% Senior Subordinated Notes ("Notes"). Terms of the Notes require, among other matters, that AP&P Delaware provide annual audited and quarterly unaudited financial statements to the holders of the Notes. The Company is providing the holders of the Notes with its quarterly and annual consolidated financial statements as well as its periodic reports as filed with the Securities and Exchange Commission. There are no material differences between the financial statements of the Company and those of AP&P Delaware. The composition of AP&P Delaware's stockholders' equity at December 31, 1999, consists of one hundred shares of $0.01 par value common stock, paid in capital of $252.4 million and an accumulated deficit of $217.6 million and, in total, is equal to the stockholders' equity (deficit) of the Company. The Company believes that providing such consolidated financial statements satisfies the financial information and debt compliance reporting needs of the holders of the Notes. DEBT DEFAULT AND CHAPTER 11 FILING On November 12, 1999, the Company was notified by its banking group of a default of its revolving credit facility. The default stemmed from the formation of new subsidiaries in December 1997 related to a reorganization of the Company's corporate structure without proper notification to the banks. The reorganization was implemented primarily for state tax purposes and included the transfer of assets between existing entities and transfers to the new subsidiaries. The default on the revolving credit facility 50 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS (CONTINUED) prevented the Company from paying interest on its publicly traded Notes due November 15, 1999, thereby causing a default on the Notes as well. On January 10, 2000, certain holders of the Company's 13% Senior Subordinated Notes due November 15, 2005 filed an involuntary chapter 11 petition against the Company and all of its subsidiaries except Notepad Funding Corporation (the "Debtors") in the United States Bankruptcy Court for the District of Delaware. On January 14, 2000, each of the Debtors consented to the entry of an Order for Relief and filed voluntary petitions under chapter 11 of title 11 of the United States Code (the "Bankruptcy Code"). The bankruptcy Case Numbers 00-00066 (RRM) through 00-00072 (RRM) are being jointly administered under Case Number 00-00066 (RRM). Each of the Debtors is continuing to operate its business and manage its property as a debtor-in-possession pursuant to sections 1107 (a) and 1108 of the Bankruptcy Code. On January 28, 2000, an Official Committee of Unsecured Creditors was appointed in these cases. No plan of reorganization has yet been proposed by the Company. On January 10, 2000, as a result of the chapter 11 filings, the Company's $60.0 million accounts receivable financing facility terminated and no further sales of receivables occurred. Although no post-termination receivables were sold under this facility, the Company continues to act as servicer under the facility and to collect and remit remaining outstanding receivables as provided in the facility. On February 9, 2000, the Bankruptcy Court entered a final order approving $65 million DIP financing in the form of a revolving credit facility provided by the Company's existing bank group. Availability under the facility is contingent upon a borrowing base of accounts receivable and inventory, and bears interest at a rate of prime plus 2.5%. The revolving credit facility matures July 17, 2000, and may be extended upon satisfaction of certain conditions. In November 1999, the Company announced that it had engaged Lazard Freres & Co. LLC ("Lazard Freres") to investigate the possible sale of its Williamhouse division, as well as other business assets of the Company, in order to reduce debt. In March 2000, the Company announced it had signed a letter of intent to sell its Creative Card division to Taylor Corporation. Negotiations with Taylor Corporation are continuing and the Company expects the sale to be final in the second quarter of 2000. Such sale, subject to the approval of the bankruptcy court, is expected to result in a loss of $5 to $10 million. Efforts by Lazard Freres to sell the Williamhouse division and other business assets are continuing. Although Chapter 11 bankruptcy raises substantial doubt about the Company's ability to continue as a going concern, the accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a company on a going-concern basis which contemplates the continuity of operations, realization of assets and the liquidation of liabilities in the ordinary course of business. As a result of the Chapter 11 filing, realization of assets and liquidation of liabilities are subject to significant uncertainties. Specifically, the financial statements do not present the amount that will be paid to settle liabilities and contingencies that may be allowed in Chapter 11 reorganization. Also the consolidated financial statements do not reflect i) adjustments to assets and liabilities which may occur in accordance with generally accepted accounting principles STATEMENT OF POSITION 90-7, FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE (SOP 90-7) following the confirmation of a plan of reorganization; or ii) the realizable value of assets which would be required to be recorded if the Company presents a plan which, if approved, contemplates the disposal of all or portions of its assets and operations. The filing of a plan of reorganization could materially affect the carrying value of the assets and liabilities currently disclosed in the consolidated financial statements. 51 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION, BASIS OF PRESENTATION AND BUSINESS (CONTINUED) BUSINESS The Company is a leading manufacturer and marketer of nationally branded and private label paper-based office products in North America. The Company operates in one business segment, converting paper into office products, and offers a broad assortment of products through two complementary divisions: Ampad (writing pads, file folders, retail envelopes, and other paper-based office products) and Williamhouse (business envelopes and seasonal greeting cards). The Company's products are distributed through large mass merchant retailers, office product superstores, warehouse clubs, major contract stationers, office products wholesalers, paper merchants, and independent dealers. Since the Company's last acquisition in 1997 revenues have declined, margins have eroded, competitive pressures in the marketplace kept the Company from fully recouping increasing paper prices, and inventory levels were, for a period of time built to an excessive level. Through the rationalization plan initiated in late 1998, three manufacturing plants were closed, inventory levels were reduced and production was better coordinated with sales. Although competitive pressures continued, price increases were initiated which, while not fully recouping prices movements in raw materials, caused amounts absorbed by the Company to be reduced. Despite the progress on operational and pricing issues, the Company's capital structure and high level of debt have limited its abiity to return to profitability. PRO FORMA INFORMATION The pro forma information included in these financial statements and notes is unaudited. QUARTERLY FINANCIAL INFORMATION The quarterly financial information included in these financial statements is unaudited and includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the Company's financial position, its results of operations and its cash flows. Operating results for any particular quarter are not necessarily indicative of results for the full fiscal year. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE The Accounting Standards Executive Committee (AcSEC) issued Statement of Position (SOP) 98-5, which is effective for fiscal years commencing after December 15, 1998. The statement of operations reflects a charge of $0.7 million, net of tax in 1999, for the write off of previously recorded start-up costs. SOP 98-5, "Reporting on the Costs of Start-up Activities", prescribes that start-up costs should be expensed as incurred. The SOP states that its adoption should be reported as a cumulative effect of a change in accounting principle. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies followed in the preparation of the consolidated financial statements are as follows: USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and 52 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) liabilities and disclosure of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid, interest-bearing instruments with an original maturity of three months or less to be cash equivalents. Cash overdrafts of $12.8 million and $28.5 million at December 31, 1999 and 1998, respectively were reclassed to accounts payable. REVENUE RECOGNITION The Company recognizes revenue upon shipment of the product. 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 also offers sales volume rebates or contractual allowance payments to customers based on their level of sales activity or period of time customers agree to sell the Company's products, which period does not exceed three years. The effects of returns, discounts and other incentives are estimated and recorded at the time of shipment. Volume rebates are estimated and recorded based on sales activity or amount of time customers agree to sell the Company's products. CONCENTRATION OF CREDIT RISK The Company sells its products into various wholesale and retail channels, primarily for the commercial office products marketplace. Management believes its credit policies are prudent and reflect normal industry terms and business risks. The Company performs periodic credit evaluations of its customers and does not require collateral. Historically, the Company has not experienced significant losses related to individual customers or groups of customers in any particular industry or geographic area. An allowance is maintained at a level that management believes is sufficient to cover potential credit losses including potential losses on receivables sold with recourse. INVENTORIES Inventories, which consist primarily of paper and converted paper products, are stated at the lower of cost or market. Cost is determined by the last-in, first-out (LIFO) method. Costs include material, labor and overhead. PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the individual assets. Significant repairs or improvements, which extend the useful life of an asset, are capitalized and depreciated over the asset's remaining useful life. Interest costs associated with capital projects during the time that expenditures have been made until the asset is placed in service are capitalized as part of the historical cost of the asset. GOODWILL AND INTANGIBLE ASSETS Goodwill represents the cost in excess of fair value of the net assets of companies acquired in purchase transactions. Goodwill is amortized using the straight-line method over periods ranging from 20 53 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) to 40 years. Intangible assets represent trade names acquired in the WR and Shade/Allied acquisitions and are amortized using the straight-line method. Trade names in the aggregate gross amount of $31.7 million and $6.2 million for WR are amortized over 40 and 15 years, respectively, and originally, trade names totaling $5.6 million for Shade/Allied were amortized over 40 years. In the fourth quarter of 1999, the Company reduced goodwill by $2.7 million and trade names by $1.2 million by reversing certain transition reserves established with the Williamhouse, Niagara, and Shade/Allied acquisitions. In the second quarter of 1998, the Company wrote off $39.9 million of goodwill and $1.1 million of trade names associated with the Shade/Allied continuous forms business. (See footnote 5 "Impairment of Shade/Allied Long-Lived Assets.") Amortization expense was $5.1 million in 1999, $5.9 million in 1998 and $6.1 million in 1997. LONG-LIVED ASSETS The Company periodically reviews the net realizable value of its long-lived assets, including goodwill and intangible assets, through an assessment of the estimated future cash flows related to such assets. In the event that assets are found to be carried at amounts which are in excess of estimated gross future cash flows, the carrying value of the asset is reduced to a level commensurate with a discounted cash flow analysis. Based upon its most recent analysis, the Company does not believe an impairment of long-lived assets exists at December 31, 1999. DEBT ISSUANCE COSTS Costs associated with debt issuance are capitalized and amortized to interest expense using the effective interest method of accounting over the terms of the related debt agreement. INCOME TAXES The Company accounts for income taxes following the liability method, which prescribes an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the future tax consequences of events that have been recognized in the Company's financial statements or tax returns. Deferred tax assets are recognized, net of any valuation allowance, for deductible temporary differences and tax operating loss and credit carryforwards. Deferred tax expense represents the change in the deferred tax asset or liability balances. The Company periodically reviews the realizability of its deferred tax assets and, as needed, records valuation allowances when realizability of the deferred tax asset is not reasonably assured. The Company recorded a deferred tax valuation allowance of $43.3 million and $6.3 million in 1999 and 1998, respectively. DERIVATIVES In January 1996, the Company entered into a four-year interest rate cap that entitles the Company to receive, on a quarterly basis from the counterparty, the amount, if any, by which LIBOR exceeds 6.5% for the first two years of the agreement and 7.5% for the last two years on a notional principal amount of $100.0 million. The counterparty to this agreement is a large financial institution. Premiums are amortized as interest expense over the term of the agreement. Amounts receivable under the agreement are recorded as a reduction of interest expense. There were no amounts received under this agreement in 1999, 1998 or 1997. 54 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying values of cash, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short-term maturities of these assets and liabilities. The carrying value of senior bank debt bearing interest at floating rates approximates fair value. At December 31, 1999 and 1998, the carrying value of the Notes of $130.0 million compares to the Notes' fair value of $14.3 million and $87.1 million, respectively, based on quoted market trades. RECLASSIFICATIONS Certain amounts in the 1998 and 1997 consolidated financial statements have been reclassified in order to conform to the presentation in the 1999 consolidated financial statements. Specifically, stockholder notes totalling $1.4 million were reclassified from other assets to stockholders' deficit at December 31, 1999. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("FAS 133"), ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. FAS 133 requires that all derivative instruments be recorded on the balance sheet at fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated at part of a hedge transaction and the type of hedge transaction. The ineffective portion of all hedges will be recognized in earnings. Adoption of the Statement is not expected to have a material impact on the Division's financial position and results of operations. 3. ACQUISITIONS SHADE/ALLIED, INC. Effective February 11, 1997, the Company acquired all of the outstanding common and preferred stock of Shade/Allied, Inc., ("Shade/Allied"). This acquisition was accounted for under the purchase method of accounting. Accordingly, the aggregate acquisition cost was allocated to the net assets acquired based on the fair value of such net assets. The aggregate acquisition costs totaled $50.7 million, consisting of cash of $49.5 million and direct acquisition costs of $1.2 million. The Company financed this acquisition with proceeds from its revolving credit facility. The aggregate acquisition costs were allocated to the assets acquired and liabilities assumed as follows: accounts receivable of $4.6 million; inventory of $5.8 million; prepaid and other assets of $129,000; property and equipment of $14.5 million; identifiable intangible assets of $5.6 million; other long-term assets of $725,000; accounts payable of $6.9 million; accrued liabilities of $7.2 million; income taxes payable of $215,000; deferred income tax payable of $6.7 million; and pension liability of $1.0 million. The aggregate acquisition costs exceeded the fair market value of net assets acquired by $41.4 million. Accordingly, goodwill was recorded and was amortized on the basis of a 40 year life until it was written off as of June 30, 1998. (SEE FOOTNOTE 5, "IMPAIRMENT OF SHADE/ALLIED LONG- LIVED ASSETS.") The operating results of the acquisition have been included in the accompanying consolidated financial statements since the date of acquisition. 55 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. ACQUISITIONS (CONTINUED) ACQUISITION INTEGRATION COSTS At acquisition, certain costs were expected to be incurred in connection with the Company's plans to integrate and consolidate certain plant, administrative, sales and corporate functions of the acquired division businesses. Such costs, estimated to total $27.5 million, included lease termination expenses, severance and contractual change of control benefits, and the liabilities for such costs were included in the purchase price allocation within accrued expenses. The remaining $0.9 million of the acquisition integration costs at December 31, 1999, is intended to cover the remaining costs of integrating plants, administrative, sales and corporate functions. 4. RESTRUCTURING CHARGES On September 1, 1998, the Company announced a plan to rationalize its manufacturing operations. The plan included plant consolidations, equipment moves, plant/product changes, warehouse consolidations and the addition of new distribution centers. The previously reported third quarter 1998 restructuring charge of $5.7 million shown in the accompanying statement of operations represents the Company's rationalization plan. The Company has closed three plants as part of the rationalization plan. The closing of the Kosciusko, Mississippi plant was announced on November 10, 1998, and final production occurred on April 14, 1999. The closing of the Dallas, Texas plant was announced on January 19, 1999, and final production occurred on April 22, 1999. The closing of the Holland, New York plant was announced on May 10, 1999, and final production occurred on November 30, 1999. As of December 31, 1999, 371 employees have been severed and severance and benefit payments totaling $1.3 million have been charged to the restructuring reserve.
1998 1998 1999 CHANGE IN DEC. 31, 1999 CHARGE EXPENDITURES EXPENDITURES ESTIMATE BALANCE -------- ------------ ------------ --------- ------------- (IN THOUSANDS) Severance and benefits....... $1,848 $(81) $(1,181) $ (584) $ 2 Closing costs to exit facilities................. 2,484 -- (273) (1,440) 771 Lease termination costs...... 468 -- (264) -- 204 Property taxes after ceasing operations................. 941 -- (105) (749) 87 ------ ---- ------- ------- ------ Total........................ $5,741 $(81) $(1,823) $(2,773) $1,064 ====== ==== ======= ======= ======
Restructuring charges recorded in September 1998 of approximately $2.8 million were reversed during the third and fourth quarters of 1999. The original rationalization plan included the consolidation of two existing plants. After attempts to hire additional skilled labor at the receiving plant failed, the decision to close the first plant was reversed. The Company recorded one-time implementation costs associated with the rationalization plan of $9.4 million in cost of sales during 1999. These expenses represent costs to move equipment and inventory, interim warehouse costs, employee retention and relocation, recruiting costs, and other training and efficiency costs. The Company also recorded one-time capital expenditure costs of $2.0 million in 1999 associated with the rationalization plan. The major undertakings of the rationalization plan were completed in 1999. 56 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. IMPAIRMENT OF SHADE/ALLIED LONG-LIVED ASSETS The $41 million charge recorded at June 30, 1998 consisted of $39.9 million write down of goodwill and a $1.1 million write down of trade names. The recorded values of property, plant and equipment and trade names at December 31, 1999, are $9.1 million and $3.3 million, respectively. In November 1998, the continuous forms business was consolidated from six separate manufacturing facilities where forms comprised only a portion of the plant's manufacturing operations into two dedicated continuous forms plants. Although manufacturing efficiencies and margins have improved, in 1999, the Company announced its intentions to sell the Division. At December 31, 1999, an analysis based upon the discounted expected future cash flows of the acquired continuous forms business indicated that no further write down of the carrying value of the long-lived assets was required. 6. RECEIVABLES
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Accounts receivable--trade................................ $36,870 $59,936 Accounts receivable--other................................ 2,592 2,972 Less allowance for doutful accounts and reserves for customer deductions, returns and cash discounts......... (4,077) (2,248) ------- ------- $35,385 $60,660 ======= =======
On May 24, 1996, the Company entered into a $60.0 million accounts receivable facility. Accounts receivable are sold under the Company's accounts receivable financing facility without legal recourse. However, under the terms of the facility, receivables that become past due beyond a predetermined limit are deemed "ineligible receivables" and the Company assumes the credit risk for the collection of such accounts. As such, a portion of the allowance for doubtful accounts covers receivables no longer reflected on the balance sheet. In the event of a termination of the facility, as in the case of the Company's chapter 11 filing, the lenders to the facility bear the risk of uncollectible accounts. Bad debt expense for 1999 and 1998 was $2.1 million and $2.5 million, respectively. 7. INVENTORIES
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Raw material............................................. $28,633 $ 29,892 Work-in-process.......................................... 4,586 5,440 Finished goods........................................... 66,406 77,788 ------- -------- 99,625 113,120 LIFO reserve............................................. (6,542) (951) ------- -------- $93,083 $112,169 ======= ========
57 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. INVENTORIES (CONTINUED) In connection with the acquisitions of WR, Niagara and Shade/Allied, total inventories for financial accounting purposes were written up by $15.8 million to fair market value at the dates of acquisition including the reversal of $7.3 million related to historical LIFO reserves. Using the LIFO method of accounting, such write up formed the historical base year cost for the inventories acquired. In 1999, the liquidation of LIFO layers decreased cost of goods sold by $1.0 million and in 1998, increased cost of goods sold by $1.7 million. 8. PROPERTY AND EQUIPMENT
ESTIMATED DECEMBER 31, USEFUL LIVES ------------------- IN YEARS 1999 1998 ------------ -------- -------- (IN THOUSANDS) Land......................................... $ 4,837 $ 7,002 Buildings.................................... 40 34,796 34,585 Machinery and equipment...................... 3-12 139,640 132,721 Office furniture and fixtures................ 3-7 16,324 12,351 Construction-in-progress..................... 4,477 5,109 -------- -------- 200,074 191,768 Less accumulated depreciation................ 54,092 39,570 -------- -------- $145,982 $152,198 ======== ========
In connection with the Shade/Allied acquisition, acquired property, plant, and equipment was valued at $6.7 million in excess of it historical book value. The land was written down by $34,000; buildings were written down $3.1 million; and machinery and equipment were written up by $9.8 million. The Company capitalized interest expense of $462,000 and $443,000 for 1999 and 1998, respectively. Included in property and equipment is real estate held for sale at closed plants in Dallas, Texas; Gainesville, Georgia and Holland, New York with a combined net book value of $5.7 million at December 31, 1999. No additional loss is expected upon the ultimate disposition of these assets. 9. GOODWILL AND INTANGIBLE ASSETS
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Goodwill................................................ $145,716 $148,460 Intangible assets, primarily tradenames................. 41,545 43,665 Debt issuance costs..................................... 20,048 20,048 -------- -------- 207,309 212,173 Less accumulated amortization........................... 34,099 26,368 -------- -------- $173,210 $185,805 ======== ========
In 1999, the Company reversed transition reserves associated with the Williamhouse and Niagara acquisitions to reduce goodwill and tradenames by $3.9 million. In 1998, the Company wrote-down goodwill and tradenames associated with its Shade/Allied business by $41.0 million. See note 5. 58 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. ACCRUED EXPENSES
DECEMBER 31, 1999 1998 -------- -------- (IN THOUSANDS) Acquisition integration costs............................. $ 900 $ 6,190 Sales volume discounts.................................... 28,022 18,572 Salaries, wages and benefits.............................. 3,756 4,922 Interest.................................................. 16,557 3,808 Insurance reserves........................................ 3,624 5,550 Other..................................................... 7,161 8,036 ------- ------- $60,020 $47,078 ======= =======
11. LONG-TERM DEBT
DECEMBER 31, ------------------- 1999 1998 -------- -------- (IN THOUSANDS) Revolving credit facility............................... $252,650 $235,150 13% Senior Subordinated Notes due 2005.................. 130,000 130,000 Industrial revenue bonds................................ 6,515 7,165 Notes payable........................................... 763 584 Capitalized lease obligations........................... 1,639 2,012 -------- -------- 391,567 374,911 Less current portion.................................... 391,567 1,236 -------- -------- $ -- $373,675 ======== ========
As of December 31, 1999, all indebtedness of the Company is in default and has been classified as a current liability in its balance sheet. REVOLVING CREDIT FACILITY Prior to the Chapter 11 filing, the Company maintained a $275 million revolving credit facility, which was used, in part, to finance the Company's operations. The revolving credit facility required that substantially all of the Company's assets were pledged as collateral. On November 12, 1999, the Company was notified by its banking group of a default of its revolving credit facility. The default stemmed from the formation of new subsidiaries in December 1997 related to a reorganization of the Company's corporate structure without proper notification to the banks. The reorganization was implemented primarily for state tax purposes and included the transfer of assets between existing entities and transfers to the new subsidiaries. On February 9, 2000, the Bankruptcy Court entered a final order approving $65 million DIP financing in the form of a revolving credit facility provided by the Company's existing bank group. Availability under the facility is contingent upon a borrowing base of accounts receivable and inventory, and bears interest at a rate of prime plus 2.5%. The revolving credit facility matures July 17, 2000, and may be extended upon satisfaction of certain conditions. 59 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. LONG-TERM DEBT (CONTINUED) At December 31, 1999 and 1998, the Company had letters of credit outstanding totaling $11.8 million and $12.3 million, respectively. SENIOR SUBORDINATED NOTES In June 1996, AP&P Delaware issued $200 million of publically traded notes ("Notes") of which $130 million remains outstanding. The Notes are unsecured and subordinated to all senior bank debt. Interest is payable semi-annually on May 15 and November 15. The Notes are redeemable on and after November 15, 2000, at AP&P Delaware's option, at redemption prices ranging from 106.5% of the face value of the notes in 2000 to 100% of the face value of the notes in 2003 or thereafter. The Notes are fully and unconditionally guaranteed by all subsidiaries of AP&P Delaware, except Notepad, on a joint, several and senior subordinated basis (AP&P is not a guarantor of the Notes). The Notes contain restrictive covenants which, among other things, limit dividends, repurchase of capital stock and investments, incurrence of additional indebtedness, transactions with affiliates and other matters customarily restricted in such agreements. The default described above on the revolving credit facility prevented AP&P from paying interest on the Notes due November 15, 1999, thereby causing a default on the Notes as well. OTHER At December 31, 1999, the Company had outstanding various industrial revenue bonds in the aggregate of $6.5 million. The bonds bear interest rates ranging from 3.2% to 4.8%. Aggregate annual principal payments ranging from $650,000 to $1.2 million are due through 2010. The payment of principal and interest on the bonds is secured by letters of credit and guarantees by the Company. In addition, at December 31, 1999, the Company had outstanding notes payable contracts totaling $763,000 for the purchase of equipment. 12. PENSION PLAN AND 401(k) PLAN At December 31, 1999, the Company was a sponsor of three qualified defined benefit pension plans and a post retirement plan, all of which were assumed as part of acquisitions. During 1998, two of the qualified defined benefit pension plans were merged. The Company's liabilities under such plans are included in other liabilities in the consolidated balance sheets. The Company maintains retirement plans (401(k) plan) for the benefit of all employees who meet minimum age and service requirements. Company contributions to the plans may be made at the discretion of its Board of Directors. Contributions to the plans were approximately $1.4 million, $2.3 million and $1.2 million for the years ended December 31, 1999, 1998 and 1997, respectively. 13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS In July 1996, the Company sold 12,500,000 shares of common stock in an initial public offering. The net proceeds amounted to $172.8 million after deducting underwriting discounts, legal and accounting fees, registration fees and travel expenses. The Company used the proceeds and working capital to:(i) repay $95.8 million on the indebtedness incurred under the old bank credit agreement, (ii) redeem $70.0 million principal amount of the 13% Notes from the holders thereof on a pro rata basis, and (iii) pay $7.7 million in redemption premium on such Notes. 60 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) Prior to the completion of the initial public offering, the Company's shareholders approved an 8.1192-for-one stock split for all of the then outstanding common stock shares and common stock options. Concurrently with the stock split, all of the outstanding preferred stock and preferred stock options were converted into shares of common stock and common stock options, respectively, using a conversion price determined by dividing the preferred stock liquidation value of $1,948.50 per share by the initial public offering price per share of $15. All common stock share amounts have been restated to reflect the stock split; however, the common stock share amounts have not been restated to reflect the conversion of preferred stock and preferred stock options. The preferred stock has no dividend rights and, except as required by law, is non-voting. There was no preferred stock outstanding during 1999, 1998 and 1997. STOCK OPTIONS 1992 STOCK PLAN. On July 31, 1992, the Board of Directors of the Company adopted the AMPAD HOLDING CORPORATION 1992 KEY EMPLOYEES STOCK OPTION PLAN ("1992 Stock Plan"), which authorized grants of stock options and the sale of common stock to current or future employees, directors, consultants or advisers of the Company or its subsidiaries. During 1992, 1994 and 1995, the Company granted options to purchase 2,839,000 shares of common stock to three of its officers, who were also stockholders, at weighted average purchase prices ranging from $.007 to $1.65 per share. Currently, all options granted pursuant to the 1992 Stock Plan are exercisable and originally expired 15 months after the termination of the option holder's employment with the Company or any of its subsidiaries. The expiration period for certain options granted under this plan were extended in 1998 upon termination of employment of the option holders. The extension of the option terms did not result in compensation expense in excess of that previously recorded upon granting of options. On June 22, 1996, the Board of Directors terminated the 1992 Stock Plan. 1996 STOCK PLAN. On June 22, 1996, the Company adopted the 1996 KEY EMPLOYEES STOCK INCENTIVE PLAN ("1996 Stock Plan"). The 1996 Stock Plan provides for the granting to employees and other key individuals who perform services for the Company the following types of incentive awards: options to purchase common stock, stock appreciation rights with respect to the common stock, restricted shares of common stock, performance grants and other types of awards that the Compensation Committee deems to be consistent with the purposes of the 1996 Stock Plan. The 1996 Stock Plan affords the Company flexibility in tailoring incentive compensation to support corporate and business objectives, and to anticipate and respond to changing business environments and competitive compensation practices. An aggregate of 1,500,000 shares of common stock of the Company has been reserved for issuance under the 1996 Stock Plan. Except for any other adjustments made by the Board of Directors relating to a stock split or certain other changes in the number of shares of common stock, or to reflect extraordinary corporate transactions, further increases in the number of shares authorized for issuance under the 1996 Stock Plan must be approved by the stockholders of the Company. Stock options granted during 1996 under the Stock Plan have a maximum term of ten years and vest equally over three years. During 1996, the Company granted options to purchase 742,000 shares of common stock at a weighted average purchase price of $15.00 per share. During 1998, the Company granted options to purchase 1,221,000 shares of common stock at a weighted averaged purchase price of $3.32 per share. Effective October 1, 1998, all options outstanding under the 1996 Stock Plan were repriced at $4.50 per share. As part of the repricing, options outstanding were reduced using a conversion ratio of .8 repriced option share for each former 61 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) option shares and the vesting period was restarted. In 1999, the Company granted option to purchase 60,000 shares of common stock at a price of $4.50 per share. NON-EMPLOYEE DIRECTOR PLAN. On June 22, 1996, the Company adopted the NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN ("Non-Employee Director Plan"). Pursuant to the Non-Employee Director Plan, each non-employee director will receive a one-time option grant to purchase 25,000 shares of common stock upon election or appointment to the Board. In addition, each director will receive an annual grant of options to purchase 2,000 shares of common stock beginning on the latter of the date of such director's fourth anniversary of being elected to the Board, or four years from the initial public offering date. The initial one-time grants will vest over three years with 50% vesting in the first year and 25% in the subsequent two years. The annual grants will vest in three equal installments. The exercise price for all options granted under the Non-Employee Director Plan will be at fair market value as of the date of grant. Options granted under the Non-Employee Director Plan terminate ten years after the date such options become exercisable. An aggregate of 350,000 shares of common stock has been reserved for issuance under the Non-Employee Director Plan. During 1996, the Company granted options to purchase 125,000 shares of common stock to the Company's non-employee directors at a weighted average purchase price of $17.38 per share. In 1998, the Company granted options to purchase 25,000 shares of common stock to a new director at $4.75 per share. In 1999, the Company granted options to purchase 25,000 shares of common stock to a director at $1.50 per share. MANAGEMENT STOCK PLAN. On June 22, 1996, the Company adopted the MANAGEMENT STOCK PURCHASE PLAN ("Management Stock Plan"). The Management Stock Plan is designed to provide equity incentives to selected members of the Company's management, including employee Directors and executive officers. The Compensation Committee of the Board of Directors, upon the recommendation of the Company's Chief Executive Officer, will select eligible participants. Under the Management Stock Plan, eligible participants will be able to elect to purchase shares of common stock in lieu of up to 25% of their annual incentive bonuses. The common stock will be sold under the Management Stock Plan at a 25% discount from the fair market value on the date of purchase. An aggregate of 250,000 shares of common stock has been reserved under the plan and 36,000 shares were sold in 1997. KEY EMPLOYEES STOCK INCENTIVE PLAN. On April 27, 1999, the Company adopted the 1999 KEY EMPLOYEES STOCK INCENTIVE PLAN ("Key Employee Plan"). The Key Employee Plan is designed to enable the Company to attract, retain and motivate its employees by providing for or increasing the proprietary interests of such employees in the Company. A committee of the Board of Directors of the Company, in its sole and absolute discretion, will select eligible participants. Awards under the plan may include, without limitation, sales or bonuses of stock, restricted stock, restricted stock unit, stock options, reload stock options, stock purchase warrants, other rights to acquire stocks, securities convertible into or redeemable for stock, stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares, and an Award may consist of one or more such security or benefit. 1,500,000 shares, subject to adjustments, have been reserved under the plan, and no one employee shall be granted more than 100,000 shares in any one calendar year. Stock options granted during 1999 under the Key Employee Plan have a maximum term of ten years and vest equally over three years. In 1999, the Company granted options to purchase 1,204,250 shares to various employees at a weighted average purchase price of $1.595 per share. OTHER OPTIONS. During 1998, the Company granted options to purchase 800,000 shares of common stock at $2.00 in connection with the recruiting of executive officers. These options were approved by the 62 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) Board of Directors and issued without stockholder approval pursuant to rules of the New York Stock Exchange. These options were not issued under any of the previously mentioned plans. For the three years ended December 31, 1999, stock option activity is as follows:
WEIGHTED SHARES SUBJECT AVERAGE TO OPTION EXERCISE PRICE -------------- -------------- (SHARES IN THOUSANDS) Balance, December 31, 1996......................... 3,094 $ 4.413 Stock options forfeited............................ (80) $15.000 ----- Balance December 31, 1997.......................... 3,014 $ 4.130 Stock options granted.............................. 2,046 $ 2.826 Stock options exercised............................ (288) $ 0.038 Stock options cancelled due to reprice............. (517) $10.497 Stock options granted due to reprice............... 413 $ 4.500 Stock options forfeited............................ (451) $14.582 ----- Balance December 31, 1998.......................... 4,217 $ 1.919 Stock options granted.............................. 1,289 $ 1.728 Stock options exercised............................ (804) $ 0.062 Stock options forfeited............................ (330) $ 5.991 ----- ------- Balance, December 31, 1999......................... 4,372 $ 1.854 ===== =======
In 1999 all options were granted at fair market value on the date of the grant. As of December 31, 1999, the following information is presented for stock options outstanding.
WEIGHTED AVERAGE WEIGHTED WEIGHTED NUMBER REMAINING AVERAGE NUMBER AVERAGE OUTSTANDING CONTRACTUAL SHARES SUBJECT EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES AT 12/31/99 LIFE IN YEARS TO OPTION AT 12/31/99 PRICE - ------------------------------------ ----------- ------------- -------------- ----------- -------- $ 0.028 1,007 0.7 $ 0.028 1,007 $ 0.028 $ 0.131 $ 1.750 603 8.6 $ 1.442 340 $ 1.681 $ 1.760 $ 1.874 948 9.7 $ 1.870 -- $ -- $ 1.875 $ 2.440 1,299 8.6 $ 2.023 678 $ 2.031 $ 3.125 $ 4.500 380 7.4 $ 4.500 373 $ 4.483 $ 4.750 $ 6.938 85 8.9 $ 4.574 19 $ 4.750 $15.000 $21.375 50 6.7 $18.188 50 $18.188 ----- ------ 4,372 2,467 ----- ------
The average life is the average remaining contractual life of the outstanding options in years. The average fair value at the date of the grant of common stock options granted in 1999 was $1.728 per share. The average fair value at the date of the grant of common stock options granted in 1998 was $1.460 per share. There were no options granted in 1997. 63 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED) In 1996, the Company adopted the disclosure-only option under Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, ("SFAS No. 123"). On a pro forma basis, if the Company had recorded compensation expense in 1999, 1998 and 1997 for the stock options granted in accordance with the accounting provisions of SFAS No. 123, the pro forma net loss before extraordinary item would have been $83.5 million, $80.6 million and $5.8 million, respectively; the basic pro forma net loss per share before extraordinary item would have been $2.99, $2.91 and $0.21, respectively; and the diluted pro forma net loss per share before extraordinary item for 1999, 1998 and 1997 would have been $2.99, $2.91 and $0.21. There was no dilution in 1999, 1998 and 1997 due to the loss. The significant assumptions used to estimate the fair value of the stock options granted in 1999 include risk free rates of return ranging from 4.91% to 6.32%, an expected option life of 5 years, an expected volatility of 76% and no expected dividend payments. The significant assumptions used to estimate the fair value of the stock options granted in 1998 include risk free rates of return ranging from 4.44% to 5.80%, an expected option life of 5 years, an expected volatility of 22.7% and no expected dividend payments. 14. INCOME TAXES
YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Current Federal.......................................... $ -- $ -- $ -- State............................................ 834 300 -- ------- -------- ---- 834 300 -- Deferred provision (benefit)....................... 22,436 (11,674) 642 ------- -------- ---- Provision (benefit) for income taxes............... $23,270 $(11,374) $642 ======= ======== ====
Reconciliation between the statutory U.S. federal income tax rate and the Company's effective income tax rate is as follows:
YEAR ENDED DECEMBER 31, ------------------------------------ 1999 1998 1997 -------- -------- -------- Federal income tax rate......................... -(35.0)% -(35.0)% -(35.0)% Valuation allowance............................. 74.0 % 7.0 % 0.0 % Goodwill and intangible amortization............ 2.2 % 17.6 % 45.2 % State taxes, net................................ -(2.0)% -(2.4)% 2.1 % Other, net...................................... 0.7 % 0.2 % 4.4 % ------ ------ ------ Effective tax rate.............................. 39.9 % -(12.6)% 16.7 % ====== ====== ======
64 AMERICAN PAD & PAPER COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. INCOME TAXES (CONTINUED) Temporary tax differences by balance sheet line item are as follows:
DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (IN THOUSANDS) Current deferred tax assets (liabilities): Accrued expenses............................. $ 92 $ 5,331 $ 4,896 Accounts receivable and allowances........... 505 1,219 6 Inventory valuation.......................... (2,897) (6,510) (6,687) Net operating losses and tax credits......... -- -- 13,777 -------- -------- -------- Current deferred tax asset/(liability), net........................................ $ (2,300) $ 40 $ 11,992 ======== ======== ======== Noncurrent deferred tax assets (liabilities): Trade names and intangibles.................. $(15,187) $(15,614) $(16,347) Net operating losses and tax credits......... 49,509 26,728 -- Property and equipment, net.................. (29,206) (29,153) (30,780) Accrued expenses............................. 7,326 7,400 7,650 -------- -------- -------- Noncurrent deferred tax asset/(liability).... 12,442 (10,639) (39,477) Valuation allowance.......................... (49,509) (6,333) -- -------- -------- -------- Noncurrent deferred tax liability, net....... $(37,067) $(16,972) $(39,477) ======== ======== ========
A deferred tax asset valuation allowance of $43.3 million was recorded in 1999 and a deferred tax asset valuation allowance of $6.3 million was recorded in 1998. 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 effect on the income tax provision related to the valuation allowance was an expense of $43.3 million for the year ended December 31, 1999, and $6.3 million for the year ended December 31, 1998. In future periods, the Company's provision for income taxes may be impacted by adjustments to the valuation allowance. At December 31, 1999, the Company had net operating loses available to reduce future taxable income of approximately $124.5 million which will expire in the years 2007 through 2019. In the event certain changes in ownership occur as defined by Internal Revenue Code Section 382 there would be an annual limitation on the amount of net operating loss carryforwards that could be utilized. In addition, the Company has approximately $1.4 million of alternative minimum tax credit carried forward. The acquisition of WR (Note 1) resulted in a change of control of WR. Consequently, the utilization of these credits in future periods may be subject to limitation. 65 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. COMMITMENTS AND CONTINGENCIES COMMITMENTS The Company is obligated under noncancelable operating leases for office space and machinery and equipment, which expire at various times through 2016. Annual minimum lease commitments under these leases amount to the following:
YEAR AMOUNT - ---- -------------- (IN THOUSANDS) 2000........................................................ $ 6,502 2001........................................................ 5,005 2002........................................................ 4,634 2003........................................................ 3,634 2004........................................................ 3,436 Thereafter.................................................. 29,264 ------- Total....................................................... $52,475 =======
Total rent expense was approximately $7.5 million, $7.9 million, $6.6 million for 1999, 1998 and 1997, respectively. LITIGATION Between March 10, 1998 and April 11, 1998, three complaints were filed in the United States District Court for the Northern District of Texas naming as defendants the Company, certain of its officers and directors and certain of the underwriters and other related entities involved in the Company's initial public offering. The plaintiffs in the first two complaints purport to represent a class of stockholders who acquired shares of the Company's common stock between July 2, 1996 and December 17, 1997. The complaints seek unspecified damages and other relief under the federal securities laws based on allegations that the Company made omissions and misleading disclosures in public reports and press releases and to securities analysts during 1996 and 1997 concerning the Company's financial condition, its future business prospects and the impact of various acquisitions. These two lawsuits were consolidated on July 2, 1998. The third complaint was dismissed without prejudice by the plaintiffs on September 29, 1998. Motions to dismiss have been filed in the consolidated cases and all briefing is complete. Pending a ruling on the motions to dismiss, all proceedings in the consolidated action have been stayed. To the extent that the motions to dismiss are denied in whole or in part, the Company believes that it has meritorious defenses to plaintiff's claims and, subject to actions relating to the lawsuit under the company's bankruptcy proceedings, intends to vigorously defend the action. ENVIRONMENTAL MATTERS The operations of the Company are subject to federal, state and local laws and regulations relating to the environment. Such laws and regulations 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 has made and will continue to make capital and other expenditures to comply with such requirements. The Company has been named a potentially responsible party ("PRP") under CERCLA at five waste disposal sites. The Company settled its liability at four of these sites as a de minimis party. At the Spectron 66 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) site in Elkton, Maryland, the Company paid approximately $1,300 in 1989 as a de minimis settlement for an initial removal action at the site. In 1995, the Company received a notice of a remedial action at the site, and based upon its allocation in 1989, expects to be eligible for a de minimis or de micromis settlement. The Company is aware that Niagara has been named a PRP at the Envirotek II site in Tonawanda, New York with respect to which Niagara expects to be eligible for a de minimis settlement. GENERAL The potential effect of the Company's chapter 11 bankruptcy proceedings will be considered by the Company with regard to any decisions or actions relating to the foregoing Legal Proceedings. The resolution in any reporting period of one or more of the foregoing matters in a manner adverse to the Company could have a material adverse effect on the Company's financial condition or results of operations. The Company is also a party to various other litigation matters incidental to the conduct of its business. Although the outcome of these matters cannot be predicted with certainty, management does not expect the outcome of any of the matters in which it is currently involved to have a material adverse effect on the Company's financial position. 16. RELATED PARTY TRANSACTIONS For the years ended December 31, 1999, 1998 and 1997, the Company expensed $1.7 million, $2.2 million and $2.4 million, respectively, for management and directors' fees and out of pocket expenses payable to the principal stockholder. Unpaid fees of $2.7 million and $.9 million are included in accounts payable and accrued expenses in the consolidated balance sheets at December 31, 1999 and 1998, respectively. The Company's revolving credit facility, as amended through September 30, 1998, prohibits the future payment of management fees pursuant to the Company's Advisory Agreement with its principal stockholder. The principal stockholder has agreed to waive any default arising from such non-payment of fees through December 31, 1999, or until such earlier time as the Company is allowed to pay such fees by its banking group. In September 1998, the Company renegotiated its Advisory Agreement to reduce the fee from $2.0 million to $1.5 million annually. The Company had an outstanding note receivable of approximately $289,000, and $273,000 at December 31, 1999 and 1998, respectively, from its former President and Chief Operating Officer. In 1998, the note was extended to July 2000, and bears interest at 6.00%. On March 31, 1998, the Company's loaned its former Chief Financial Officer, who is also a director, $1.0 million related to the exercise of stock options. The loan is due in March 2001 and bears interest at a rate of 5.89%. The Company had an outstanding note receivable of approximately $1.1 million and $1.0 million at December 31, 1999 and 1998, respectively. The loan is secured by shares of common stock. Mr. Herbert M. Kohn, a former Director of the Company, is also a partner in the law firm of Bryan Cave LLP. The firm provided legal services to the Company valued at approximately $173,400, $424,400 and $444,000 in 1999, 1998 and 1997, respectively. The notes are reflected as adjustments to stockholders' deficit at December 31, 1999 and 1998. 17. OTHER INFORMATION Substantially all of the Company's operations are conducted within the United States. 67 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. OTHER INFORMATION (CONTINUED) One customer accounted for 21%, 15% and 12% of the Company's net sales in 1999, 1998 and 1997, respectively. 18. SUBSEQUENT EVENTS On March 8, 2000, the Company announced that it has signed a letter of intent with Taylor Corporation for the purchase of the Company's Creative Card division located in Chicago. The Company expects the sale to be finalized in the second quarter of 2000. Such sale subject to the approval of the bankruptcy court, is not expected to result in a gain. On March 21, 2000, the Company was notified by one of its major customers of the Ampad division that it intends to move its business to other suppliers. In 1999, that customer accounted for approximately $42 million or 6.4% of the Company's sales. 19. SUMMARIZED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES The 13% Senior Subordinated Notes are guaranteed by all wholly owned subsidiaries of American Pad & Paper Company of Delaware, Inc. except for Notepad. The subsidiary guaranties are full, unconditional and joint and several. The Company is not a guarantor of the Senior Subordinated Notes. Separate financial statements of the guarantor subsidiary are not presented because management has determined that they would not be material to investors. However, summarized financial information as of December 31, 1999 and 1998 and for the years then ended is presented. The summarized financial information is as follows:
FOR THE YEAR ENDED DECEMBER 31, 1999 ---------------------------------------------------------- AP&P DELAWARE & GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ (IN THOUSANDS) Current assets............................. $109,871 $42,094 $ -- $151,965 Non-current assets......................... 362,133 110 (41,980) 320,263 -------- ------- -------- -------- Total assets............................... $472,004 $42,204 $(41,980) $472,228 ======== ======= ======== ======== Current liabilities........................ $494,919 $ 224 $ -- $495,143 Non-current liabilities.................... 37,864 -- -- 37,864 Equity (deficit)........................... (60,779) 41,980 (41,980) (60,779) -------- ------- -------- -------- Total liabilities and equity (deficit)..... $472,004 $42,204 $(41,980) $472,228 ======== ======= ======== ======== Net sales.................................. $572,616 $ -- $ -- $572,616 Gross profit............................... 41,531 -- -- 41,531 Income(loss) from continuing operations.... (16,348) 4,350 (2,610) (14,608) Net income(loss)........................... $(81,464) $ 2,610 $ (2,610) $(81,464)
68 AMERICAN PAD & PAPER COMPANY NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. SUMMARIZED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1998 ---------------------------------------------------------- AP&P DELAWARE & GUARANTOR NONGUARANTOR SUBSIDIARIES SUBSIDIARY ELIMINATIONS CONSOLIDATED ------------- ------------ ------------ ------------ (IN THOUSANDS) Current assets............................. $137,813 $39,327 $ -- $177,140 Non-current assets......................... 378,480 230 (39,370) 339,340 -------- ------- -------- -------- Total assets............................... $516,293 $39,557 $(39,370) $516,480 ======== ======= ======== ======== Current liabilities........................ $103,645 $ 187 $ -- $103,832 Non-current liabilities.................... 391,935 -- -- 391,935 Equity (deficit)........................... 20,713 39,370 (39,370) 20,713 -------- ------- -------- -------- Total liabilities and equity (deficit)..... $516,293 $39,557 $(39,370) $516,480 ======== ======= ======== ======== Net sales.................................. $662,031 $ -- $ -- $662,031 Gross profit............................... 64,575 -- -- 64,575 Income(loss) from continuing operations.... (47,172) 1,774 (1,064) (46,462) Net income(loss)........................... $(78,647) $ 1,064 $ (1,064) $(78,647)
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
1999--QUARTER ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- (IN THOUSANDS) Net sales........................................ $137,631 $134,051 $144,717 $156,217 Gross profit..................................... 12,860 8,576 12,733 7,362 Net loss......................................... (12,767) (14,183) (9,201) (45,313) Basic/diluted loss per share Loss before cumulative effect of change in accounting principle......................... $ (0.43) $ (0.51) $ (0.33) $ (1.59) Cumulative effect of a change in accounting principle.................................... (0.03) 0.00 0.00 (0.00) -------- -------- -------- -------- Net loss....................................... $ (0.46) $ (0.51) $ (0.33) $ (1.59) 1998--QUARTER ENDED ------------------------------------------------ MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- (IN THOUSANDS) Net sales........................................ $161,595 $146,724 $174,160 $179,552 Gross profit..................................... 19,422 3,397 17,698 24,058 Net loss......................................... (2,085) (55,937) (13,394) (7,231) Basic/diluted EPS--net loss per share............ $ (0.08) $ (2.02) $ (0.48) $ (0.26)
69 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant have duly caused this reportto signed on its behalf by the undersigned, thereunto duly authorized, as of March 30, 2000. AMERICAN PAD & PAPER COMPANY as Registrant /s/ JAMES W. SWENT III /s/ DAVID N. PILOTTE - ------------------------------------------- ------------------------------------------- James W. Swent III David N. Pilotte CO-CHAIRMAN AND CHIEF EXECUTIVE OFFICER AND VICE PRESIDENT, CORPORATE CONTROLLER DIRECTOR AND CHIEF FINANCIAL OFFICER (PRINCIPAL ACCOUNTING OFFICER) (PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below as of March 30, 2000, by the following persons on behalf of the registrant and in the capacities indicated. /s/ ROBERT C. GAY /s/ JOHN H. RODGERS - ------------------------------------------- ------------------------------------------- Robert C. Gay John H. Rodgers CO-CHAIRMAN AND DIRECTOR DIRECTOR /s/ SCOTT R. WATTERSON /s/ GREGORY M. BENSON - ------------------------------------------- ------------------------------------------- Scott R. Watterson Gregory M. Benson DIRECTOR DIRECTOR /s/ PAUL B. EDGERLEY /s/ JEFFREY K. HEWSON - ------------------------------------------- ------------------------------------------- Paul B. Edgerley Jeffrey K. Hewson DIRECTOR DIRECTOR
70 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 2.1 Stock Purchase Agreement, dated May 29, 1996, by and among American Pad & Paper Company of Delaware, Inc., Niagara Envelope Company, Inc. and the person named therein.(1) 3.1(i) Restated Certificate of Incorporation of the Company(3) 3.1(ii) Amended and Restricted By-laws of the Company.(3) 4.1 Indenture, dated as of December 1, 1995, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Trustee (including Form of Note).(2) 4.2 Purchase Agreement, dated as of November 17, 1994, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Initial Purchasers.(1) 4.3 Registration Rights Agreement dated as of December 1, 1995, among American Pad & Paper Company of Delaware, Inc., the Subsidiary Guarantors and the Initial Purchasers named therein.(1) 4.7 Notepad Funding Receivables Master Trust Pooling and Servicing Agreement, dated October 31, 1995, among APPC, Notepad Funding Corporation and Manufacturers and Traders Trust Company (the "Pooling and Service Agreement").(1) 4.8 Series 1995-1 Supplement to the Pooling and Service Agreement, dated October 31, 1995.(1) 4.9 Revolving Certificate Purchase Agreement, dated October 31, 1995 among APPC, Notepad Funding Corporation, Bankers Trust Company and the Purchasers described therein.(1) 4.10 Receivables Purchase Agreement, dated October 31, 1995, among APP., Notepad Funding Corporation and certain subsidiaries.(1) 4.11 Credit Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent(3) 4.12 Security Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., certain other subsidiaries of American Pad & Paper Company, and Bankers Trust Company, as Collateral Agent.(3) 4.13 Pledge Agreement, dated as of July 8, 1996, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., the Lenders from time to time party thereto, and Bankers Trust Company, as Agent.(3) 4.14 Form of Revolving and Swingline Note of American Pad & Paper Company of Delaware, Inc.(3) 4.15 Subsidiary Guaranty, dated as of July 8, 1996, among each of the Company's subsidiaries named therein and Bankers Trust Company, as Agent for the Bank.(3) 4.16 Second Amendment to the Credit Agreement, dated as of December 18, 1997, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent.
71
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 4.17 Third Amendment to the Credit Agreement, dated as of February 11, 1998, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent. 4.18 Fourth Amendment to the Credit Agreement, dated as of April 6, 1998, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent(9). 4.19 Fifth Amendment to the Credit Agreement, dated as of June 30, 1998, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent(10). 4.20 Sixth Amendment to the Credit Agreement, dated as of July 24, 1998, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent(10). 4.21 Seventh Amendment to the Credit Agreement, dated as of September 30, 1998, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent(11). 4.22 Eighth Amendment to the Credit Agreement, dated as of March 5, 1999, among the Company, WR Acquisition, Inc., American Pad & Paper Company of Delaware, Inc., various Lending Institutions, Bank of Tokyo-Mitsubishi Trust Company, Bank One, Texas, N.A., The Bank of Nova Scotia and the First National Bank of Boston, as Co-Agents and Bankers Trust Company, as Agent(12). 4.23 Debtor-In-Possession Financing, dated as of January 18, 2000, among American Pad & Paper Company of Delaware, Inc., et al and various Lending Institutions, Bankers Trust, as Agent, First Union National Bank, as Syndication Agent, and Deutsche Bank Securities Inc., as Arranger.(13). 4.24 First Amendment to the Debtor-In-Possession Financing, dated as of January 28, 2000, among American Pad & Paper Company of Delaware, Inc., et al and various Lending Institutions, Bankers Trust, as Agent, First Union National Bank, as Syndication Agent, and Deutsche Bank Securities Inc., as Arranger.(13). 4.25 Second Amendment to the Debtor-In-Possession Financing, dated as of February 9, 2000, among American Pad & Paper Company of Delaware, Inc., et al and various Lending Institutions, Bankers Trust, as Agent, First Union National Bank, as Syndication Agent, and Deutsche Bank Securities Inc., as Arranger.(13). 10.1 Agreement and Plan of Merger, dated as of October 3, 1995, among the Company, WHR Acquisition, Inc. and WR Acquisition, Inc.(1) 10.2 Amendment No. 1 to WHR Merger Agreement, dated as of October 31, 1995, among the Company, WHR Acquisition, Inc. and WR Acquisition, Inc.(1)
72
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 10.3 Stock Purchase Agreement, dated as of October 30, 1995, among WR Acquisition, Inc. and the Company(1) 10.4 Tax Sharing Agreement, dated as of October 30, 1995, among American Pad & Paper Company of Delaware, Inc. and the Subsidiary Guarantors.(1) 10.5 Agreement and Plan of Merger, dated as of October 31, 1995, among Williamhouse Regency of Delaware, Inc. and Ampad Corporation.(1) 10.6 Amended and Restricted Advisory Agreement, dated as of October 31, 1995, among American Pad & Paper Company of Delaware, Inc. and Bain Capital, Inc.(4) 10.7 Ampad Holding Corporation 1992 Key Employees Stock Option Plan.(1) 10.12 Asset Purchase Agreement, dated as of June 29, 1994, by and between Huxley Envelope corp., The Kent Paper Co., Inc. and Williamhouse of California, Inc.(2) 10.13 Lease Agreement for City of Industry, California.(1) 10.14 Lease Agreement for Dubuque, Iowa(1) 10.15 Lease Agreement for Miamisburg, Ohio.(1) 10.16 Lease Agreement for North Salt Lake City, Utah.(1) 10.17 Lease Agreement for Tacoma, Washington.(1) 10.18 Change of Control Agreement between WR Acquisition, Inc. and certain officers of American Pad & Paper Company of Delaware, Inc.(1) 10.19 Registration Rights Agreement, dated as of July 31, 1992, between the Company and the stockholders named therein.(2) 10.20 1996 Key Employee Stock Incentive Plan(3) 10.21 1996 Non-Employee Director Stock Option Plan.(3) 10.22 Employment Agreement between the Company and Charles Hanson III.(2)(A) 10.23 Employment Agreement between the Company and Russell Gard.(2)(A) 10.24 Amended and Restated Advisory Agreement between American Pad & Paper Company and Bain Capital, Inc.(2) 10.25 Management Stock Purchase Plan.(3) 10.26 Employment Agreement between the Company and Timothy Needham.(2)(A) 10.27 Agreement and Plan of Merger by and between Shade/Allied, Inc. and American Pad & Paper Company of Delaware, Inc.(6) 10.28 Indemnification Agreement by and between the Company and its officers and directors(8). 10.29 Release Agreement with Charles Hanson III(10) 10.30 Severance Agreement with Charles Hanson III(10) 10.31 Release Agreement with Russell Gard(10) 10.32 Severance Agreement with Russell Gard(10) 10.33 Employment Agreement between the Company and James W. Swent III(12)(A) 10.34 Release Agreement with Timothy Needham(12) 10.35 Severance Agreement with Timothy Needham(12) 10.36 1999 Key Employees Stock Incentive Plan(13)
73
EXHIBIT NO. DESCRIPTION - --------------------- ----------- 21.1 Subsidiaries of the Company. 23.1 Consent of PricewaterhouseCoopers LLP. 27.1 Financial Data Schedule.
The exhibits listed above are filed with the Securities and Exchange Commission in this Form 10-K or are incorporated by reference as follows: (1) Same-numbered exhibit to the Registration Statement on Form S-1 of American Pad & Paper of Delaware, Inc. (File No. 333-3006); (2) Same-numbered exhibit to the Registration Statement on Form S-1 of American Pad & Paper Company (File No. 333-4000); (3) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended June 30, 1996; (4) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1996; (5) Exhibits to the Annual Report on Form 10-K of the registrants for the year ended December 31, 1996; (6) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended March 31, 1997; (7) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended June 30, 1997 and (8) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1997.(9) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended March 31, 1998, (10) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended June 30, 1998, (11) Exhibits to the Quarterly Report on Form 10-Q of the registrants for the quarter ended September 30, 1998, (12) Exhibits to the Annual Report on Form 10-K of the registrant for the year ended December 31, 1998, (13) Exhibits to the Annual Report on Form 10-K of the registrant for the year ended December 31, 1999. (A) These agreements constitute management compensation contracts for the individuals named. 74 HELPFUL INVESTOR INFORMATION INVESTOR INQUIRIES AND CORRESPONDENCE Investors with questions about AP&P should contact: Mark Lipscomb, Vice President Investor and Corporate Communications American Pad & Paper Company 17304 Preston Road, Suite 700 Dallas, TX 75252 Telephone: (972) 733-5415 Fax: (972) 733-6298 Email: mark.lipscomb@americanpad.com COMPANY WEB SITE American Pad & Paper makes information available on the World Wide Web, our internet address is: www.americanpad.com COMPANY FINANCIAL INFORMATION Several publications including the annual report and forms 10-K and 10-Q filed with the Securities and Exchange Commission are available without charge by contacting: American Pad & Paper Company 17304 Preston Road, Suite 700 Dallas, TX 75252 Telephone: (972) 733-5471 ADMINISTRATIVE INQUIRIES The transfer agent for American Pad & Paper Company is Boston EquiServe. Administrative inquiries relating to stock- Holder records, stock transfer or change of ownership or Address should be directed to: Boston Bank c/o EquiServe PO Box 8040 Boston, MA 02266-8040 Telephone: (781) 575-3120 Web site: www.equiserve.com ANNUAL MEETING Stockholders will be invited to attend the 2000 American Pad & Paper Annual Meeting once the date is set. Formal notice of the meeting will be included with the proxy statement. COMMON STOCK INFORMATION The Company's common stock trades on the OTC Bulletin Board (OTCBB) under the symbol: AMPP At December 31, 1999, there were about 28.5 million shares outstanding and approximately 6,000 total stockholders. INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP Dallas, Texas All other brand names are trademarks or registered trademarks of their respective holders. 75 EX-4.23 2 EXHIBIT 4.23 ================================================================================ DEBTOR-IN-POSSESSION CREDIT AGREEMENT among AMERICAN PAD & PAPER COMPANY, as Debtor-in-Possession, WR ACQUISITION, INC., as Debtor-in-Possession, AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC., as Debtor-in-Possession, THE SUBSIDIARIES OF THE BORROWER, each as a Debtor-in-Possession, VARIOUS LENDING INSTITUTIONS, BANKERS TRUST COMPANY, as Agent, FIRST UNION NATIONAL BANK, as Syndication Agent and DEUTSCHE BANK SECURITIES INC., as Arranger -------------------------------- January 18, 2000 -------------------------------- ================================================================================ TABLE OF CONTENTS Page ---- SECTION 1. Amount and Terms of Credit....................................2 1.1 Commitments...................................................2 1.2 Minimum Borrowing Amounts, etc................................4 1.3 Notice of Borrowing...........................................5 1.4 Disbursement of Funds.........................................6 1.5 Notes.........................................................6 1.6 [Intentionally Omitted].......................................8 1.7 Pro Rata Borrowings...........................................8 1.8 Interest......................................................8 1.9 [Intentionally Omitted].......................................9 1.10 Increased Costs...............................................9 1.11 [Intentionally Omitted].......................................9 1.12 Change of Lending Office......................................9 1.13 [Intentionally Omitted]......................................10 1.14 Priority and Liens...........................................10 1.15 Payment of Obligations.......................................12 1.16 No Discharge; Survival of Claims.............................12 SECTION 2. Letters of Credit............................................12 2.1 Letter of Credit.............................................12 2.2 Letter of Credit Requests; Notice of Issuance................14 2.3 Agreement to Repay Letter of Credit Drawings.................14 2.4 Letter of Credit Participations..............................15 2.5 Increased Costs..............................................18 SECTION 3. Fees; Commitments............................................18 3.1 Fees.........................................................18 3.2 Voluntary Termination or Reduction of Total Unutilized Revolving Loan Commitment....................................20 3.3 Mandatory Reduction of Commitments...........................20 SECTION 4. Payments.....................................................21 4.1 Voluntary Prepayments........................................21 4.2 Mandatory Prepayments; Cash Collateralization................22 4.3 Method and Place of Payment..................................23 4.4 Net Payments.................................................24 SECTION 5. Conditions Precedent.........................................26 5.1 Conditions Precedent to Credit Events on the Initial Borrowing Date...............................................26 5.2 Conditions Precedent to All Credit Events....................31 5.3 Conditions Precedent to Term Loans...........................34 SECTION 6. Representations, Warranties and Agreements...................34 6.1 Corporate Status.............................................35 6.2 Corporate Power and Authority................................35 6.3 No Violation.................................................35 -i- 6.4 Litigation...................................................36 6.5 Use of Proceeds; Margin Regulations..........................36 6.6 Governmental Approvals.......................................37 6.7 Investment Company Act.......................................37 6.8 Public Utility Holding Company Act...........................37 6.9 True and Complete Disclosure.................................37 6.10 Financial Condition; Financial Statements....................37 6.11 [Intentionally Omitted]......................................38 6.12 Transaction..................................................38 6.13 Special Purpose Corporations.................................39 6.14 Compliance with ERISA........................................39 6.15 Capitalization...............................................40 6.16 Subsidiaries.................................................41 6.17 Intellectual Property........................................41 6.18 Compliance with Statutes, etc................................42 6.19 Environmental Matters........................................42 6.20 Properties...................................................43 6.21 Labor Relations..............................................43 6.22 Tax Returns and Payments.....................................43 6.23 Existing Indebtedness........................................44 6.24 Senior Subordinated Notes....................................44 6.25 Year 2000 Compliance.........................................44 6.26 Common Officers, etc.........................................45 6.27 Interim and Final Orders.....................................45 6.28 Accounts Receivable Facility Purchase Agreement..............45 SECTION 7. Affirmative Covenants........................................45 7.1 Information Covenants........................................46 7.2 Books, Records and Inspections...............................52 7.3 Insurance....................................................52 7.4 Payment of Taxes.............................................52 7.5 Corporate Franchises.........................................53 7.6 Compliance with Statutes, etc................................53 7.7 Compliance with Environmental Laws...........................53 7.8 ERISA........................................................54 7.9 Good Repair..................................................55 7.10 End of Fiscal Years; Fiscal Quarters.........................55 7.11 Additional Security; Further Assurances......................55 7.12 Register.....................................................57 7.13 [Intentionally Omitted]......................................57 7.14 Contributions; Payments......................................57 7.15 [Intentionally Omitted]......................................57 7.16 Consultants..................................................58 7.17 Payment of Obligation........................................58 7.18 Cash Collateral Account......................................58 7.19 Operations of Ampad Division.................................59 7.20 Corporate Overhead Reduction.................................59 7.21 Operations of Forms and Creative Cards Divisions.............59 7.22 Crisis Manager...............................................59 7.23 Appraisal....................................................59 7.24 Collateral Access Agreements.................................60 -ii- SECTION 8. Negative Covenants...........................................60 8.1 Changes in Business..........................................60 8.2 Consolidation, Merger, Sale or Purchase of Assets, etc.......61 8.3 Liens........................................................63 8.4 Indebtedness.................................................65 8.5 Designated Senior Debt.......................................66 8.6 Advances, Investments and Loans..............................66 8.7 Dividends, etc...............................................68 8.8 Transactions with Affiliates.................................69 8.9 Capital Expenditures.........................................70 8.10 Minimum Consolidated EBITDA..................................70 8.11 Maximum Inventory Amount.....................................70 8.12 [Intentionally Omitted]......................................70 8.13 Limitation on Voluntary Payments and Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements; Issuances of Capital Stock; etc..............................70 8.14 Limitation on Certain Restrictions on Subsidiaries...........71 8.15 Limitation on the Creation of Subsidiaries...................72 8.16 [Intentionally Omitted]......................................72 8.17 Additional Bank Accounts.....................................72 8.18 Securities Accounts..........................................72 8.19 Chapter 11 Claims............................................72 8.20 Use of Proceeds..............................................73 8.21 Prepetition Payments.........................................73 8.22 Employment Matters...........................................73 8.23 Leases.......................................................73 8.24 Reclamation Claims; Bankruptcy Code " 546(g) Agreements......74 8.25 Excess Cash..................................................74 8.26 Refinancing of Revolving Loans...............................74 SECTION 9. Events of Default............................................74 9.1 Payments.....................................................74 9.2 Representations, etc.........................................75 9.3 Covenants....................................................75 9.4 Default Under Other Agreements...............................75 9.5 Bankruptcy, etc..............................................75 9.6 ERISA........................................................77 9.7 Security Documents...........................................77 9.8 Guaranties...................................................78 9.9 Judgments....................................................78 9.10 Ownership....................................................78 9.11 Environmental Violations.....................................78 9.12 Net Cash Flow Deviation......................................78 9.13 Disbursements Deviation......................................78 9.14 Material Adverse Effect......................................78 SECTION 10. Definitions..................................................81 -iii- SECTION 11. The Agent...................................................112 11.1 Appointment.................................................112 11.2 Delegation of Duties........................................113 11.3 Exculpatory Provisions......................................113 11.4 Reliance by Agent...........................................114 11.5 Notice of Default...........................................114 11.6 Nonreliance on Agent and Other Lenders......................115 11.7 Indemnification.............................................115 11.8 Agent in its Individual Capacity............................116 11.9 Holders.....................................................116 11.10 Resignation of the Agent; Successor Agent...................116 11.11 No Duties of Arranger or Syndication Agent..................117 SECTION 12. Miscellaneous...............................................117 12.1 Payment of Expenses, etc....................................117 12.2 Right of Setoff.............................................118 12.3 Notices.....................................................119 12.4 Benefit of Agreement........................................119 12.5 No Waiver; Remedies Cumulative..............................121 12.6 Payments Pro Rata...........................................122 12.7 Calculations; Computations..................................122 12.8 Governing Law; Submission to Jurisdiction; Venue............123 12.9 Counterparts, etc...........................................124 12.10 Effectiveness...............................................124 12.11 Headings Descriptive........................................124 12.12 Amendment or Waiver; etc....................................124 12.13 Survival....................................................126 12.14 Domicile of Loans...........................................126 12.15 Confidentiality.............................................126 12.16 Waiver of Jury Trial........................................127 12.17 Absence of Prejudice to the Existing Lenders with Respect to Matters Before the Bankruptcy Court..............127 12.18 [Intentionally Omitted].....................................127 12.19 Application of Proceeds; Priority of Revolving Loans and Letter of Credit Outstandings...............................127 12.20 Remedies Cumulative.........................................128 12.21 Discontinuance of Proceedings...............................129 12.22 Existing Credit Agreement...................................129 12.23 Addition of Term Lenders....................................129 SECTION 13. Parent's Guaranty...........................................129 13.1 The Guaranty................................................129 13.2 Nature of Liability.........................................130 13.3 Independent Obligation......................................131 13.4 Authorization...............................................131 13.5 Reliance....................................................132 13.6 Subordination...............................................132 13.7 Waiver......................................................133 iv ANNEX I List of Lenders and Commitments ANNEX II Lender Addresses ANNEX III Bank Accounts ANNEX IV Real Properties ANNEX V Existing Investments ANNEX VI Subsidiaries ANNEX VII Existing Indebtedness ANNEX VIII Existing Letters of Credit ANNEX IX Existing Liens ANNEX X Existing Litigation ANNEX XI Environmental Matters EXHIBIT A-1 -- Form of Notice of Borrowing EXHIBIT A-2 -- Form of Letter of Credit Request EXHIBIT B-1 -- Form of Revolving Note EXHIBIT B-2 -- Form of Swingline Note EXHIBIT B-3 -- Form of Term Note EXHIBIT C -- Form of Section 4.4(b)(ii) Certificate EXHIBIT D -- Form of Opinion of Gibson, Dunn & Crutcher EXHIBIT E -- Form of Officers' Certificate EXHIBIT F -- Form of Pledge Agreement EXHIBIT G -- Form of Security Agreement EXHIBIT H -- Form of Subsidiary Guaranty EXHIBIT I -- Form of Collateral Access Agreement EXHIBIT J -- Form of Subordination Provisions EXHIBIT K -- Form of Assignment and Assumption Agreement EXHIBIT L -- Form of Intercompany Note EXHIBIT M -- Form of Shareholder Subordinated Note EXHIBIT N -- Form of Borrowing Base Certificate EXHIBIT O -- Form of Blocked Account Agreement EXHIBIT P -- Form of Concentration Account Agreement -v- EXHIBIT 4.23 THIS DEBTOR-IN-POSSESSION CREDIT AGREEMENT, dated as of January 18, 2000, among AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC., a Delaware corporation and a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code (the "Borrower"), AMERICAN PAD & PAPER COMPANY, a Delaware corporation and a debtor and debtor-in-possession in a case under Chapter 11 of the Bankruptcy Code ("Holdings"), WR ACQUISITION, INC., a Delaware corporation and a debtor and debtor-in-possession in a case under Chapter 11 of the Bankruptcy Code ("WR Acquisition"), the Subsidiary Guarantors, each of which is a debtor and debtor-in-possession in their respective cases pending under Chapter 11 of the Bankruptcy Code (the cases of the Borrower and the Guarantors, each a "Case" and collectively, the "Cases"), the lenders from time to time party hereto (each, a "Lender" and, collectively, the "Lenders"), BANKERS TRUST COMPANY, as Agent (in such capacity, the "Agent"), FIRST UNION NATIONAL BANK, as Syndication Agent (in such capacity, the "Syndication Agent"), and DEUTSCHE BANK SECURITIES INC., as Arranger (the "Arranger"). Unless otherwise defined herein, all capitalized terms shall have the same meanings given to them in Section 10. W I T N E S S E T H : - - - - - - - - - - WHEREAS, on the Petition Date, involuntary petitions were filed against the Borrower and each of the Guarantors with the Bankruptcy Court commencing the Cases and the Borrower and the Guarantors have continued in possession of their assets and in the management of their businesses pursuant to Sections 1107 and 1108 of the Bankruptcy Code; WHEREAS, the Borrower, Holdings, WR Acquisition, the Existing Lenders and the Prepetition Agent are party to the Credit Agreement, dated as of July 8, 1996 (as amended, supplemented or otherwise modified prior to the Petition Date, the "Existing Credit Agreement"); WHEREAS, under the Existing Credit Agreement, the Existing Lenders provided the Borrower with revolving credit loans and other financial accommodations in an aggregate principal amount (including letters of credit) of $264,473,176.27 (the "Existing Lender Debt" and, together with all accrued and unpaid interest, fees, costs, expenses obligations and other charges related thereto, the "Prepetition Obligations"); WHEREAS, to secure the Prepetition Obligations, the Borrower and the Guarantors granted the Prepetition Agent, for the benefit of the Existing Lenders, security interests in substantially all of their respective assets which were properly perfected and are subject to no prior liens or security interests except as provided in the Existing Credit Agreement; WHEREAS, the Borrower has requested that the Lenders (i) provide a revolving credit and letter of credit facility (subject to mandatory and optional reductions and a limit on advances pending entry of the Final Order) and (ii) provide a term loan facility for the purpose of converting the Existing Lender Debt into term loans (subject to mandatory and optional reductions); WHEREAS, the Lenders are willing to extend such postpetition credit to the Borrower in accordance with the terms and conditions set forth in this Agreement including, without limitation, the requirement that the Obligations be afforded the treatment, rights and protections set forth in sections 364(c)(1), 364(c)(3), 364(d)(1) and 364(e) of the Bankruptcy Code; and WHEREAS, on or about January 18, 2000, the Bankruptcy Court entered the Interim Order authorizing the Borrower to borrow up to $20,000,000 of Loans from the Lenders on an interim basis pending entry of the Final Order on the terms and conditions set forth in the Interim Order and this Agreement. NOW, THEREFORE, IT IS AGREED: SECTION 1. Amount and Terms of Credit. 1.1 Commitments. (a) Subject to and upon the terms and conditions herein set forth, each Lender severally agrees, at any time and from time to time on and after the Initial Borrowing Date and prior to the Final Maturity Date, to make a revolving loan or loans (each a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower, which Revolving Loans (i) shall be denominated in U.S. Dollars, (ii) shall be incurred and maintained as Base Rate Loans, (iii) may be repaid and reborrowed in accordance with the provisions hereof; (iv) shall not exceed for any Lender at any time outstanding that aggregate principal amount which, when combined with such Lender's Percentage of all Other Revolving Exposure, equals the Revolving Loan Commitment of such Lender at such time; (v) shall not exceed for all Lenders at any time outstanding that aggregate principal amount which, when added to all Other Revolving Exposure, equals the lesser of (1) the Total Revolving Loan Commitment and (2) the Borrowing Base at such time; and (vi) in the case of Revolving Loans made prior to the entry of the Final Order, shall not exceed the lesser of (A) $20,000,000 and (B) the aggregate maximum amount authorized pursuant to the Interim Order. -2- (b) Subject to and upon the terms and conditions herein set forth, BTCo in its individual capacity agrees to make at any time and from time to time on and after the Initial Borrowing Date and prior to the Swingline Expiry Date, a loan or loans to the Borrower (each a "Swingline Loan" and, collectively, the "Swingline Loans"), which Swingline Loans (i) shall be made and maintained as Base Rate Loans, (ii) shall be denominated in U.S. Dollars, (iii) may be repaid and reborrowed in accordance with the provisions hereof, (iv) shall not exceed in aggregate principal amount at any time outstanding, when combined with the aggregate principal amount of all Revolving Loans then outstanding and the Letter of Credit Outstandings (exclusive of Unpaid Drawings relating to Letters of Credit which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) at such time, an amount equal to the lesser of (a) the Total Revolving Loan Commitment and (b) the Borrowing Base then in effect; and (v) shall not exceed in aggregate principal amount at any time outstanding the Maximum Swingline Amount. BTCo shall not be obligated to make any Swingline Loans at a time when a Lender Default exists unless BTCo has entered into arrangements satisfactory to it and the Borrower to eliminate BTCo's risk with respect to the Defaulting Lender's or Lenders' participation in such Swingline Loans, including by cash collateralizing such Defaulting Lender's or Lenders' Percentage of the outstanding Swingline Loans. BTCo will not make a Swingline Loan after it has received written notice from the Borrower or the Required Lenders stating that a Default or an Event of Default exists until such time as BTCo shall have received a written notice of (i) rescission of such notice from the party or parties originally delivering the same or (ii) a waiver of such Default or Event of Default from the Required Lenders. -3- (c) On any Business Day, BTCo may, in its sole discretion, give notice to the Lenders that its outstanding Swingline Loans shall be funded with a Borrowing of Revolving Loans (provided that each such notice shall be deemed to have been automatically given upon the exercise of any of the remedies provided in the last two paragraphs of Section 9), in which case a Borrowing of Revolving Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the immediately succeeding Business Day by all Revolving Lenders pro rata based on each Lender's Percentage, and the proceeds thereof shall be applied directly to repay BTCo for such outstanding Swingline Loans. Each Lender hereby irrevocably agrees to make Revolving Loans upon one Business Day's notice pursuant to each Mandatory Borrowing in the amount and in the manner specified in the preceding sentence and on the date specified in writing by BTCo notwithstanding (i) that the amount of the Mandatory Borrowing may not comply with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any conditions specified in Section 5 are then satisfied, (iii) whether a Default or an Event of Default has occurred and is continuing, (iv) the date of such Mandatory Borrowing and (v) any reduction in the Total Revolving Loan Commitment after any such Swingline Loans were made. In the event that any Mandatory Borrowing cannot for any reason be made on the date otherwise required above, each Lender (other than BTCo) hereby agrees that it shall forthwith purchase from BTCo (without recourse or warranty) such assignment of the outstanding Swingline Loans as shall be necessary to cause the Lenders to share in such Swingline Loans ratably based upon their respective Percentages, provided that all interest payable on the Swingline Loans shall be for the account of BTCo until the date the respective assignment is purchased and, to the extent attributable to the purchased assignment, shall be payable to the Lender purchasing the same from and after such date of purchase. (d) The Agent, at any time in the exercise of its Permitted Discretion, may (i) establish and increase or decrease reserves against Eligible Accounts Receivable and Eligible Inventory, (ii) reduce the advance rates provided for in the definitions of Accounts Borrowing Base and Inventory Borrowing Base, or restore such advance rates to any level equal to or below the advance rates in effect as of the date of this Agreement, and (iii) impose additional restrictions (or eliminate the same) to the standards of eligibility set forth in the definitions of Eligible Accounts Receivable and Eligible Inventory. The Agent may, but shall not be obligated to, rely solely on each Borrowing Base Certificate and any other schedules or reports in determining the eligibility of Accounts and Inventory. -4- (e) On the Term Loan Effective Date, (i) a portion of each Lender's Term Loan Commitment shall be deemed to be utilized to irrevocably and unconditionally purchase a participation, to the extent of such Lender's Term Loan Percentage, in each Existing Letter of Credit and the terms and provisions of the Existing Credit Agreement shall be incorporated herein by reference to the extent they are applicable to the Existing Letters of Credit and (ii) each Lender shall be deemed to have made a term loan (collectively, the "Term Loans") to the Borrower in an amount equal to the remaining Term Loan Commitment of such Lender and the Existing Lender Debt (excluding the Existing Letters of Credit) shall be deemed to be paid in full with the proceeds of all such Term Loans. All Term Loans (i) shall be maintained as Base Rate Loans, (ii) shall be subject to mandatory prepayment in accordance with the terms hereof, and (iii) shall not exceed in aggregate principal amount the Total Term Loan Commitment. Once repaid, the Term Loans may not be reborrowed. 1.2 Minimum Borrowing Amounts, etc. The aggregate principal amount of each Borrowing of Revolving and Swingline Loans shall not be less than the Minimum Borrowing Amount applicable to such Loans. 1.3 Notice of Borrowing. (a) Whenever the Borrower desires to incur Loans hereunder (excluding Borrowings of Swingline Loans, Revolving Loans incurred pursuant to Mandatory Borrowings and Term Loans), it shall give the Agent at its Notice Office, prior to 11:00 A.M. (New York time), at least one Business Day's prior written notice (or telephonic notice promptly confirmed in writing) of each Borrowing of Loans to be made hereunder. Each such notice (each a "Notice of Borrowing") shall be irrevocable, and, in the case of each written notice and each confirmation of telephonic notice, shall be in the form of Exhibit A-1, appropriately completed to specify (i) the aggregate principal amount of the Loans to be made pursuant to such Borrowing and (ii) the date of such Borrowing (which shall be a Business Day). The Agent shall promptly give each Lender written notice (or telephonic notice promptly confirmed in writing) of each proposed Borrowing, of such Lender's proportionate share thereof and of the other matters covered by the Notice of Borrowing. -5- (b) (i) Whenever the Borrower desires to incur Swingline Loans hereunder, it shall give BTCo not later than 12:00 Noon (New York time) on the day such Swingline Loan is to be made, written notice (or telephonic notice promptly confirmed in writing) of each Swingline Loan to be made hereunder. Each such notice shall be irrevocable and shall specify in each case (x) the date of such Borrowing (which shall be a Business Day) and (y) the aggregate principal amount of the Swingline Loan to be made pursuant to such Borrowing. (ii) Mandatory Borrowings shall be made upon the notice specified in Section 1.1(c), with the Borrower irrevocably agreeing, by its incurrence of any Swingline Loan, to the making of Mandatory Borrowings as set forth in such Section 1.1(c). (c) Without in any way limiting the obligation of the Borrower to confirm in writing any telephonic notice permitted to be given hereunder, the Agent or BTCo (in the case of a Borrowing of Swingline Loans) or the Letter of Credit Issuer (in the case of the issuance of Letters of Credit), as the case may be, may prior to receipt of written confirmation act without liability upon the basis of such telephonic notice, believed by the Agent, BTCo or the Letter of Credit Issuer, as the case may be, in good faith to be from an Authorized Officer of the Borrower. In each such case, the Borrower hereby waives the right to dispute the Agent's, BTCo's or the Letter of Credit Issuer's record of the terms of such telephonic notice. -6- 1.4 Disbursement of Funds. (a) Not later than 1:00 P.M. (New York time) on the date specified in each Notice of Borrowing (or (x) in the case of Swingline Loans, not later than 2:00 P.M. (New York time) on the date specified in Section 1.3(b)(i) or (y) in the case of Mandatory Borrowings, not later than 12:00 Noon (New York time) on the date specified in Section 1.1(c)), each Lender will make available its pro rata share, if any, of each Borrowing requested to be made on such date (or in the case of Swingline Loans, BTCo shall make available the full amount thereof) in the manner provided below. All amounts shall be made available to the Agent in U.S. Dollars and in immediately available funds at the Payment Office and the Agent promptly will make available to the Borrower by depositing to its account at the Payment Office the aggregate of the amounts so made available in the type of funds received. Unless the Agent shall have been notified by any Lender prior to the date of Borrowing that such Lender does not intend to make available to the Agent its portion of the Borrowing or Borrowings to be made on such date, the Agent may assume that such Lender has made such amount available to the Agent on such date of Borrowing, and the Agent, in reliance upon such assumption, may (in its sole discretion and without any obligation to do so) make available to the Borrower a corresponding amount. If such corresponding amount is not in fact made available to the Agent by such Lender and the Agent has made available same to the Borrower, the Agent shall be entitled to recover such corresponding amount from such Lender. If such Lender does not pay such corresponding amount forthwith upon the Agent's demand therefor, the Agent shall promptly notify the Borrower, and the Borrower shall immediately pay such corresponding amount to the Agent. The Agent shall also be entitled to recover from the Lender or the Borrower, as the case may be, interest on such corresponding amount in respect of each day from the date such corresponding amount was made available by the Agent to the Borrower to the date such corresponding amount is recovered by the Agent, at a rate per annum equal to (x) if paid by such Lender, the overnight Federal Funds Rate or (y) if paid by the Borrower, the then applicable rate of interest, calculated in accordance with Section 1.8. (b) Nothing herein shall be deemed to relieve any Lender from its obligation to fulfill its Commitments hereunder or to prejudice any rights which the Borrower may have against any Lender as a result of any default by such Lender hereunder. -7- 1.5 Notes. (a) The Borrower's obligation to pay the principal of, and interest on, all the Loans made to it by each Lender shall be evidenced (i) if Revolving Loans, by a promissory note substantially in the form of Exhibit B-1 with blanks appropriately completed in conformity herewith (as amended, supplemented or otherwise modified from time to time, each a "Revolving Note" and, collectively, the "Revolving Notes"), (ii) if Swingline Loans, by a promissory note substantially in the form of Exhibit B-2 with blanks appropriately completed in conformity herewith (as amended, supplemented or otherwise modified from time to time, the "Swingline Note") and (iii) if Term Loans, by a promissory note duly executed and delivered by the Borrower substantially in the form of Exhibit B-3, with blanks appropriately completed in conformity herewith (as amended, supplemented or otherwise modified from time to time, each a "Term Note" and, collectively, the "Term Notes"). (b) The Revolving Note issued to each Revolving Lender shall (i) be executed by the Borrower, (ii) be payable to such Lender or its registered assigns and be dated the Initial Borrowing Date, (iii) be in a stated principal amount equal to the Revolving Loan Commitment of such Lender and be payable in the principal amount of the outstanding Revolving Loans evidenced thereby, (iv) mature on the Final Maturity Date, (v) bear interest as provided in Section 1.8, (vi) be subject to voluntary prepayment as provided in Section 4.1 and mandatory repayment as provided in Section 4.2, and (vii) be entitled to the benefits of this Agreement, the other Credit Documents and the Orders. (c) The Swingline Note issued to BTCo shall (i) be executed by the Borrower, (ii) be payable to BTCo or its registered assigns and be dated the Initial Borrowing Date, (iii) be in a stated principal amount equal to the Maximum Swingline Amount and be payable in the principal amount of the outstanding Swingline Loans evidenced thereby, (iv) mature on the Swingline Expiry Date, (v) bear interest as provided in Section 1.8, (vi) be subject to voluntary prepayment as provided in Section 4.1 and mandatory repayment as provided in Section 4.2, and (vii) be entitled to the benefits of this Agreement, the other Credit Documents and the Orders. -8- (d) The Term Note issued to each Term Lender shall (i) be executed by the Borrower, (ii) be payable to such Lender or its registered assigns and be dated the Initial Borrowing Date (or, if issued after the Initial Borrowing Date, be dated the date of issuance thereof), (iii) be in a stated principal amount equal to the difference between the Term Loan Commitment of such Lender and such Lender's Term Loan Percentage of the aggregate Stated Amount of all Existing Letters of Credit, and be payable in the outstanding principal amount of the Term Loans evidenced thereby, (iv) mature on the Final Maturity Date, (v) bear interest as provided in the appropriate clause of Section 1.8, (vi) be subject to mandatory repayment as provided in Section 4.2, and (vii) be entitled to the benefits of this Agreement, the other Credit Documents and the Orders. (e) Each Lender will note on its internal records the amount of each Loan made by it and each payment in respect thereof and will prior to any transfer of any of its Notes endorse on the reverse side thereof the outstanding principal amount of Loans evidenced thereby. Failure to make any such notation shall not affect the Borrower's obligations in respect of such Loans. 1.6 [Intentionally Omitted]. 1.7 Pro Rata Borrowings. All Borrowings of Revolving Loans and Term Loans under this Agreement shall be made by the Lenders pro rata on the basis of their Revolving Loan Commitments or Term Loan Commitments, respectively. It is understood that no Lender shall be responsible for any default by any other Lender of its obligation to make Loans hereunder and that each Lender shall be obligated to make the Loans to be made by it hereunder, regardless of the failure of any other Lender to fulfill its commitments hereunder. 1.8 Interest. (a) The unpaid principal amount of each Loan shall bear interest from the date of the Borrowing thereof until the maturity (whether by acceleration or otherwise) of such Loan at a rate per annum which shall at all times be the Applicable Base Rate Margin plus the Base Rate in effect from time to time. -9- (b) [Intentionally Omitted] (c) Upon the occurrence and during the continuance of an Event of Default, principal and, to the extent permitted by law, overdue interest in respect of each Loan shall bear interest at a rate per annum equal to the rate which is 2% in excess of the rate otherwise applicable to Base Rate Loans from time to time. Interest which accrues under this Section 1.8(c) shall be payable on demand. (d) Interest shall accrue from and including the date of any Borrowing to but excluding the date of any repayment thereof. Interest on all Loans (other than the Term Loans) shall be payable monthly in arrears on the last Business Day of each month, on the Termination Date (whether by acceleration or otherwise) and, after the Termination Date, on demand. Interest on the Term Loans shall be payable on the Term Loan Interest Payment Date and, after the occurrence and during the continuance of an Event of Default, on demand. -10- (e) All computations of interest hereunder shall be made in accordance with Section 12.7(b). 1.9 [Intentionally Omitted]. 1.10 Increased Costs. If any Lender shall have determined that after the date hereof, the adoption or effectiveness of any applicable law, rule or regulation regarding capital adequacy, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's or such other corporation's capital or assets as a consequence of such Lender's Commitments or obligations hereunder to a level below that which such Lender or such other corporation could have achieved but for such adoption, effectiveness, change or compliance (taking into consideration such Lender's or such other corporation's policies with respect to capital adequacy), then from time to time, upon written demand by such Lender (with a copy to the Agent), accompanied by the notice referred to in the last sentence of this Section 1.10, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such other corporation for such reduction. Each Lender, upon determining in good faith that any additional amounts will be payable pursuant to this Section 1.10, will give prompt written notice thereof to the Borrower, which notice shall set forth the basis of the calculation of such additional amounts, although the failure to give any such notice shall not release or diminish the Borrower's obligations to pay additional amounts pursuant to this Section 1.10 upon the subsequent receipt of such notice. -11- 1.11 [Intentionally Omitted]. 1.12 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Section 1.10, 2.5 or 4.4 with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans or Letters of Credit affected by such event; provided, that such designation is made on such terms that, in the sole judgment of such Lender, such Lender and its lending office suffer no economic, legal or regulatory disadvantage, with the object of avoiding the consequences of the event giving rise to the operation of any such Section. Nothing in this Section 1.12 shall affect or postpone any of the obligations of the Borrower or the right of any Lender provided in Section 1.10, 2.5 or 4.4. -12- 1.13 [Intentionally Omitted]. 1.14 Priority and Liens. -13- (a) The Borrower and each of the Guarantors hereby covenants, represents and warrants that, upon entry of the Interim Order (and the Final Order, as applicable), the Postpetition Obligations of the Borrower and the Guarantors hereunder and under the Credit Documents and, on or after the Term Loan Effective Date and subject to Section 1.14(c), the Prepetition Obligations, (i) pursuant to Section 364(c)(1) of the Bankruptcy Code, shall at all times constitute allowed Super-priority Claims, (ii) pursuant to Section 364(c)(2) of the Bankruptcy Code, shall at all times be secured by a perfected first priority Lien on all Collateral (except property acquired by the Credit Parties pursuant to the exercise of their avoiding powers under the Bankruptcy Code), including, without limitation, all cash maintained in the Cash Collateral Account, the Concentration Account and the Blocked Account, and any direct investment of the funds contained therein that is otherwise not encumbered by a valid and perfected Lien as of the Petition Date, (iii) pursuant to Section 364(c)(3) of the Bankruptcy Code, shall be secured by a perfected junior Lien upon all Collateral (other than Collateral that is subject to existing Liens that, prior to the Term Loan Effective Date, secure the Prepetition Obligations, as to which the Lien in favor of the Collateral Agent and the Lenders will be as described in clause (iv) of this sentence) that is subject to valid and perfected Liens in existence on the Petition Date or valid Liens perfected (but not granted) thereafter to the extent such post-Petition Date perfection in respect of a pre-Petition Date claim is expressly permitted under the Bankruptcy Code, and to other valid and perfected Liens which are senior (after giving effect to the Interim Order and the Final Order, as applicable) to the Liens granted to the Collateral Agent and the Lenders pursuant to the Interim Order (and the Final Order, as applicable) and (iv) shall be secured by a perfected first priority, senior priming Lien on all Prepetition Collateral and any property of the Debtors on which a Lien is granted after the Petition Date to provide adequate protection in respect of the Prepetition Obligations, subject and subordinate in each case with respect to subclauses (i) through (iv) above, only to (x) following the occurrence and during the continuance of a Default or an Event of Default, the payment (as the same may be due and payable) of professional fees and disbursements allowed by order of the Bankruptcy Court and incurred by the Credit Parties and any statutory committee of unsecured creditors appointed in the Cases and any disbursements of any member of such committee in an aggregate amount not to exceed $5,000,000 (in addition to compensation previously awarded whether or not paid), (y) the unfunded portion of Retention Payments and (z) the payment of unpaid fees pursuant to 28 U.S.C. " 1930 and any fees payable to the Clerk of the Bankruptcy Court (collectively, the "Carve-Out"), provided further that following the Termination Date amounts in the Cash Collateral Account shall not be subject to the Carve-Out. The Lenders agree that so long as no Default or Event of Default shall have occurred and be -14- continuing, the Borrower and the Guarantors shall be permitted to pay compensation and reimbursement of expenses allowed and payable under Sections 330 and 331 of the Bankruptcy Code, as the same may be payable, and the amounts so paid shall not reduce the Carve-Out. Nothing herein shall limit the rights of the Agent and the Prepetition Agent to object to any request to the Bankruptcy Court for payment or reimbursement of fees and expenses of professionals. The Borrowers and the Guarantors shall not be in default of their representations and warranties with respect to the Prepetition Obligations under this Section 1.14(a) solely by virtue of a successful challenge by a Person (other than a Credit Party) to the priority of the Liens securing the Prepetition Obligations, in accordance with Section 16 of the Interim Order. (b) The Borrower and the Guarantors acknowledge and agree that, as adequate protection for the Existing Lenders' interests in the Liens that are being primed as set forth in subsection 1.14(a)(iv), the use of the Cash Collateral in which the Existing Lenders have an interest and the imposition of the automatic stay pursuant to Section 362(a) of the Bankruptcy Code, the Existing Lenders shall, pursuant to the Interim Order (and the Final Order, as applicable), receive during the period from the Petition Date until the Term Loan Effective Date (i) a Super-priority Claim junior only to the Super-priority Claim granted to the Collateral Agent and the Lenders hereunder, (ii) a replacement Lien on the Collateral having a priority immediately junior to the priming and other Liens granted in favor of the Collateral Agent and the Lenders hereunder and under the other Credit Documents and the Orders (subject and subordinate, in the case of clauses (i) and (ii) above, to the Carve-Out and valid and perfected Liens which are senior (after giving effect to the Interim Order and the Final Order, as applicable) to the Liens granted to the Collateral Agent and the Lenders pursuant to the Interim Order (and the Final Order, as applicable), (iii) the payment on the Effective Date of all other fees, costs and charges owing in respect thereof under the Existing Credit Agreement on such date (including, without limitation, the fees and expenses of attorneys and financial consultants of the Prepetition Agent) and (iv) the right to accrue interest on the Existing Lender Debt at the non-default rate determined in accordance with Section 1.08 of the Existing Credit Agreement. (c) The Liens and Super-priority Claims granted to the Revolving Lenders to secure the Revolving Loans, Swingline Loans and Letter of Credit Outstandings shall be senior and prior to the Liens and Super-priority Claims granted to secure the Prepetition Obligations prior to the Term Loan Effective Date and the Term Loans and the Existing Letters of Credit on and after the Term Loan Effective Date. -15- 1.15 Payment of Obligations. Upon the maturity (whether by acceleration or otherwise) of any of the Obligations under this Agreement or any of the other Credit Documents, the Lenders shall be entitled to immediate payment of such Obligations without further application to or order of the Bankruptcy Court, subject to the remedial provisions in Section 9. 1.16 No Discharge; Survival of Claims. Each of the Borrower and the Guarantors agrees that to the extent its Obligations hereunder are not satisfied in full, (i) its Obligations arising hereunder shall not be discharged by the entry of a Confirmation Order (and each of the Borrower and the Guarantors pursuant to Section 1141(d)(4) of the Bankruptcy Code, hereby waives any such discharge) and (ii) the Super-priority Claim and Liens granted to the Collateral Agent and the Lenders pursuant to the Orders and described in Section 1.14 shall not be affected in any manner by the entry of a Confirmation Order. SECTION 2. Letters of Credit. 2.1 Letter of Credit. (a) Subject to and upon the terms and conditions herein set forth, the Borrower may request a Letter of Credit Issuer at any time and from time to time on or after the Initial Borrowing Date and prior to the Business Day (or the 30th day in the case of trade Letters of Credit) preceding the Final Maturity Date to issue, for the account of the Borrower and in support of (x) trade obligations of the Borrower or any of its Subsidiaries that arise in the ordinary course of business and are in respect of purchases of raw materials and inventory of the Borrower or any of its Subsidiaries, as the case may be, and/or (y) on a standby basis, L/C Supportable Indebtedness of the Borrower or any of its Subsidiaries to any other Person, irrevocable letters of credit in such form as may be approved by such Letter of Credit Issuer (each such letter of credit, a "Letter of Credit" and, collectively, the "Letters of Credit"). Notwithstanding the foregoing, no Letter of Credit Issuer shall be under any obligation to issue any Letter of Credit if at the time of such issuance: (i) any order, judgment or decree of any governmental authority or arbitrator shall purport by its terms to enjoin or restrain such Letter of Credit Issuer from issuing such Letter of Credit or any requirement of law applicable to such Letter of Credit Issuer or any request or directive (whether or not having the force of law) from any governmental authority with jurisdiction over such Letter of Credit Issuer shall prohibit, or request that such Letter -16- of Credit Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Letter of Credit Issuer with respect to such Letter of Credit any restriction or reserve or capital requirement (for which such Letter of Credit Issuer is not otherwise compensated) not in effect on the date hereof, or any unreimbursed loss, cost or expense which was not applicable, in effect or known to such Letter of Credit Issuer as of the date hereof and which such Letter of Credit Issuer in good faith deems material to it; or (ii) such Letter of Credit Issuer shall have received notice from the Borrower or the Required Lenders prior to the issuance of such Letter of Credit of the type described in clause (v) of Section 2.1(b). -17- (b) Notwithstanding the foregoing, (i) no Letter of Credit shall be issued the Stated Amount of which, when added to the Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on the date of, and prior to the issuance of, the respective Letter of Credit) at such time, would exceed either (x) the Letter of Credit Sublimit or (y) when added to the aggregate principal amount of all Revolving Loans and Swingline Loans then outstanding, the lesser of (I) Total Revolving Loan Commitment or (II) the Borrowing Base at such time; (ii) no Letter of Credit shall have an expiry date occurring later than the Final Maturity Date; provided that if the Final Maturity Date occurs prior to the expiration of any Letter of Credit, the Borrower, on or prior to the Final Maturity Date shall (A) cause such Letter of Credit to be replaced and returned to the Letter of Credit Issuer undrawn and marked "cancelled," or (B) to the extent the Borrower is unable to so replace and return such Letter of Credit in accordance with clause (A), either (x) provide a "back to back" letter of credit to the Letter of Credit Issuer in a form satisfactory to the Letter of Credit Issuer, issued by a bank satisfactory to the Letter of Credit Issuer, in an amount equal to 105% of the Stated Amount of such Letter of Credit or (y) pay to the Agent at the Payment Office an amount of cash or Cash Equivalents, to be held in the Cash Collateral Account as security by the Agent, as is equal to 105% of the Stated Amount of such Letter of Credit; (iii) each Letter of Credit shall be denominated in U.S. Dollars; (iv) the Stated Amount of each Letter of Credit shall not be less than $100,000 or such lesser amount as is acceptable to the respective Letter of Credit Issuer; (v) no Letter of Credit Issuer will issue any Letter of Credit after it has received written notice from the Borrower or the Required Lenders stating that a Default or an Event of Default exists until such time as such Letter of Credit Issuer shall have received a written notice of (x) rescission of such notice from the party or parties originally delivering the same or (y) a waiver of such Default or Event of Default by the Required Lenders; and (vi) no Letter of Credit Issuer will issue any Letter of Credit unless the need for such Letter of Credit has been identified in the then effective Budget and such Letter of Credit has been approved by the Agent. (c) Notwithstanding the foregoing, in the event a Lender Default exists, no Letter of Credit Issuer shall be required to issue any Letter of Credit unless the respective Letter of Credit Issuer has entered into arrangements satisfactory to it and the Borrower to eliminate such Letter of Credit Issuer's risk with respect to the participation in Letters of Credit of the Defaulting Lender or Lenders, including by cash collateralizing such Defaulting Lender's or Lenders' Percentage of the Letter of Credit Outstandings, as the case may be. -18- 2.2 Letter of Credit Requests; Notice of Issuance. (a) Whenever the Borrower desires that a Letter of Credit be issued, the Borrower shall give the Agent and the respective Letter of Credit Issuer written notice (or telephonic notice confirmed in writing) thereof prior to 12:00 Noon (New York time) at least five Business Days (or such shorter period as may be acceptable to the respective Letter of Credit Issuer) prior to the proposed date of issuance (which shall be a Business Day) which written notice shall be in the form of Exhibit A-2 (each, a "Letter of Credit Request"). Each Letter of Credit Request shall include any other documents as such Letter of Credit Issuer customarily requires in connection therewith. (b) Each Letter of Credit Issuer shall, promptly after each issuance of, or amendment or modification to, a Letter of Credit issued by it, give the Agent, each Revolving Lender and the Borrower written notice of the issuance of, or amendment or modification to, such Letter of Credit, accompanied by a copy to the Agent of the Letter of Credit or Letters of Credit issued by it and each such amendment or modification thereto. 2.3 Agreement to Repay Letter of Credit Drawings. (a) The Borrower hereby agrees to reimburse each Letter of Credit Issuer, by making payment to the Agent in immediately available funds at the Payment Office, for any payment or disbursement made by such Letter of Credit Issuer under any Letter of Credit issued by it (each such amount so paid or disbursed until reimbursed, an "Unpaid Drawing") no later than one Business Day following the date of such payment or disbursement, with interest on the amount so paid or disbursed by such Letter of Credit Issuer, to the extent not reimbursed prior to 1:00 P.M. (New York time) on the date of such payment or disbursement, from and including the date paid or disbursed to but not including the date such Letter of Credit Issuer is reimbursed therefor at a rate per annum which shall be the Applicable Base Rate Margin for Revolving Loans in excess of the Base Rate as in effect from time to time (plus an additional 2% per annum if not reimbursed by the third Business Day after the date of such payment or disbursement), such interest also to be payable on demand. Each Letter of Credit Issuer shall provide the Borrower prompt notice of any payment or disbursement made by it under any Letter of Credit issued by it, although the failure of, or delay in, giving any such notice shall not release or diminish the obligations of the Borrower under this Section 2.3(a) or under any other Section of this Agreement. -19- (b) The Borrower's obligation under this Section 2.3 to reimburse the respective Letter of Credit Issuer with respect to Unpaid Drawings (including, in each case, interest thereon) shall be absolute and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense to payment which the Borrower or any of its Subsidiaries may have or have had against such Letter of Credit Issuer, the Agent or any Lender, including, without limitation, any defense based upon the failure of any drawing under a Letter of Credit issued by it to conform to the terms of the Letter of Credit or any nonapplication or misapplication by the beneficiary of the proceeds of such drawing; provided, however, that the Borrower shall not be obligated to reimburse such Letter of Credit Issuer for any wrongful payment made by such Letter of Credit Issuer under a Letter of Credit issued by it as a result of acts or omissions constituting willful misconduct or gross negligence on the part of such Letter of Credit Issuer. 2.4 Letter of Credit Participations. (a) Immediately upon the issuance by a Letter of Credit Issuer of any Letter of Credit, such Letter of Credit Issuer shall be deemed to have sold and transferred to each other Revolving Lender, and each such Revolving Lender (each a "Participant") shall be deemed irrevocably and unconditionally to have purchased and received from such Letter of Credit Issuer, without recourse or warranty, an undivided interest and participation, to the extent of such Participant's Percentage, in such Letter of Credit, each substitute Letter of Credit, each drawing made thereunder and the obligations of the Borrower under this Agreement with respect thereto (although Letter of Credit Fees shall be payable directly to the Agent for the account of the Revolving Lenders as provided in Section 3.1(b) and the Participants shall have no right to receive any portion of any Facing Fees with respect to such Letters of Credit) and any security therefor or guaranty pertaining thereto. Upon any change in the Revolving Loan Commitments of the Lenders pursuant to Section 1.13 or 12.4(b), it is hereby agreed that, with respect to all outstanding Letters of Credit and Unpaid Drawings with respect thereto, there shall be an automatic adjustment to the participations pursuant to this Section 2.4 to reflect the new Percentages of the assigning and assignee Lender. -20- (b) In determining whether to pay under any Letter of Credit, no Letter of Credit Issuer shall have any obligation relative to the Participants other than to determine that any documents required to be delivered under such Letter of Credit have been delivered and that they appear to substantially comply on their face with the requirements of such Letter of Credit. Any action taken or omitted to be taken by any Letter of Credit Issuer under or in connection with any Letter of Credit issued by it if taken or omitted in the absence of gross negligence or willful misconduct, shall not create for such Letter of Credit Issuer any resulting liability. -21- (c) In the event that any Letter of Credit Issuer makes any payment under any Letter of Credit issued by it and the Borrower shall not have reimbursed such amount in full to the Letter of Credit Issuer pursuant to Section 2.3(a), such Letter of Credit Issuer shall promptly notify the Agent, and the Agent shall promptly notify each Participant of such failure, and each such Participant shall promptly and unconditionally pay to the Agent for the account of such Letter of Credit Issuer, the amount of such Participant's Percentage of such payment in U.S. Dollars and in same day funds; provided, however, that no Participant shall be obligated to pay to the Agent its Percentage of such unreimbursed amount if the Letter of Credit was issued or the payment was made as a result of acts or omissions constituting willful misconduct or gross negligence on the part of the Letter of Credit Issuer. If the Agent so notifies any Participant required to fund a payment under a Letter of Credit prior to 11:00 A.M. (New York time) on any Business Day, such Participant shall make available to the Agent for the account of the respective Letter of Credit Issuer such Participant's Percentage of the amount of such payment on such Business Day in same day funds (and, to the extent such notice is given after 11:00 A.M. (New York time) on any Business Day, such Participant shall make such payment on the immediately following Business Day). If and to the extent such Participant shall not have so made its Percentage of the amount of such payment available to the Agent for the account of the respective Letter of Credit Issuer, such Participant agrees to pay to the Agent for the account of such Letter of Credit Issuer, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Agent for the account of the Letter of Credit Issuer at the overnight Federal Funds Rate. The failure of any Participant to make available to the Agent for the account of the respective Letter of Credit Issuer its Percentage of any payment under any Letter of Credit issued by it shall not relieve any other Participant of its obligation hereunder to make available to the Agent for the account of such Letter of Credit Issuer its applicable Percentage of any payment under any such Letter of Credit on the date required, as specified above, but no Participant shall be responsible for the failure of any other Participant to make available to the Agent for the account of such Letter of Credit Issuer such other Participant's Percentage of any such payment. -22- (d) Whenever any Letter of Credit Issuer receives a payment of a reimbursement obligation as to which the Agent has received for the account of such Letter of Credit Issuer any payments from the Participants pursuant to clause (c) above, such Letter of Credit Issuer shall pay to the Agent and the Agent shall promptly pay to each Participant which has paid its Percentage thereof, in U.S. Dollars and in same day funds, an amount equal to such Participant's Percentage of the principal amount thereof and interest thereon accruing after the purchase of the respective participations. (e) The obligations of the Participants to make payments to the Agent for the account of the respective Letter of Credit Issuer with respect to Letters of Credit issued by it shall be irrevocable and not subject to counterclaim, set-off or other defense or any other qualification or exception whatsoever and shall be made in accordance with the terms and conditions of this Agreement under all circumstances, including, without limitation, any of the following circumstances: (i) any lack of validity or enforceability of this Agreement or any of the other Credit Documents; (ii) the existence of any claim, set-off, defense or other right which the Borrower or any of its Subsidiaries may have at any time against a beneficiary named in a Letter of Credit, any transferee of any Letter of Credit (or any Person for whom any such transferee may be acting), the Agent, any Letter of Credit Issuer, any Lender, or other Person, whether in connection with this Agreement, any Letter of Credit, the transactions contemplated herein or any unrelated transactions (including any underlying transaction between the Borrower or any of its Subsidiaries and the beneficiary named in any such Letter of Credit); (iii) any draft, certificate or other document presented under the Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) the surrender or impairment of any security for the performance or observance of any of the terms of any of the Credit Documents; or (v) the occurrence of any Default or Event of Default. -23- 2.5 Increased Costs. If, after the date hereof, the adoption or effectiveness of any applicable law, rule or regulation, or any change therein, or any change in the interpretation or administration thereof by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Letter of Credit Issuer or any Participant with any request or directive (whether or not having the force of law) by any such authority, central bank or comparable agency shall either (i) impose, modify or make applicable any reserve, deposit, capital adequacy or similar requirement against Letters of Credit issued by such Letter of Credit Issuer or such Participant's participation therein, or (ii) impose on any Letter of Credit Issuer or any Participant any other conditions affecting this Agreement, any Letter of Credit or such Participant's participation therein; and the result of any of the foregoing is to increase the cost to such Letter of Credit Issuer or such Participant of issuing, maintaining or participating in any Letter of Credit, or to reduce the amount of any sum received or receivable by such Letter of Credit Issuer or such Participant hereunder, then, upon written demand to the Borrower by such Letter of Credit Issuer or such Participant (a copy of which notice shall be sent by such Letter of Credit Issuer or such Participant to the Agent), accompanied by the certificate described in the last sentence of this Section 2.5, the Borrower shall pay to such Letter of Credit Issuer or such Participant such additional amount or amounts as will compensate such Letter of Credit Issuer or such Participant for such increased cost or reduction. A certificate submitted to the Borrower by such Letter of Credit Issuer or such Participant, as the case may be (a copy of which certificate shall be sent by such Letter of Credit Issuer or such Participant to the Agent), setting forth the basis for the determination of such additional amount or amounts necessary to compensate such Letter of Credit Issuer or such Participant as aforesaid shall be final and conclusive and binding on the Borrower absent manifest error, although the failure to deliver any such certificate shall not release or diminish the Borrower's obligations to pay additional amounts pursuant to this Section 2.5 upon subsequent receipt of such certificate. -24- SECTION 3. Fees; Commitments. 3.1 Fees. (a) The Borrower shall pay to the Agent for distribution to each Revolving Lender that is a Non-Defaulting Lender a commitment fee (the "Commitment Fee") for the period from the date of the entry of the Interim Order to but not including the Final Maturity Date (or such earlier date as the Total Revolving Loan Commitment shall have been terminated), computed at a rate for each day equal to the Applicable Commitment Fee Percentage on the average daily Unutilized Revolving Loan Commitment of such Lender. Accrued Commitment Fees shall be due and payable monthly in arrears on the last Business Day of each month and the date upon which the Total Revolving Loan Commitment is terminated. (b) The Borrower shall pay to the Agent for the account of the Revolving Lenders pro rata on the basis of their Percentages, a fee in respect of each Letter of Credit (the "Letter of Credit Fee") computed at a rate per annum equal to 2.50% of the daily Stated Amount of such Letter of Credit. Accrued Letter of Credit Fees shall be due and payable monthly in arrears on the last Business Day of each month and upon the first day on or after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. (c) The Borrower shall pay to the Agent for the account of each Letter of Credit Issuer a facing fee in respect of each Letter of Credit issued by such Letter of Credit Issuer (the "Facing Fee") computed at the rate of 1/4 of 1% per annum on the daily Stated Amount of such Letter of Credit, provided, that in no event shall the annual Facing Fee with respect to each Letter of Credit be less than $500; it being agreed that, on the date of issuance of any Letter of Credit and on each anniversary thereof prior to the termination of such Letter of Credit, if $500 will exceed the amount of Facing Fees that will accrue with respect to such Letter of Credit for the immediately succeeding 12-month period, the full $500 shall be payable on the date of issuance of such Letter of Credit and on each such anniversary thereof prior to the termination of such Letter of Credit. Except as provided in the immediately preceding sentence, accrued Facing Fees shall be due and payable monthly in arrears on the last Business Day of each month and upon the first day on or after the termination of the Total Revolving Loan Commitment upon which no Letters of Credit remain outstanding. -25- (d) The Borrower shall pay directly to each Letter of Credit Issuer upon each issuance of, payment under, and/or amendment of, a Letter of Credit issued by such Letter of Credit Issuer such amount as shall at the time of such issuance, payment or amendment be the administrative charge which such Letter of Credit Issuer is customarily charging for issuances of, payments under or amendments of, letters of credit issued by it. (e) On the Effective Date the Borrower shall pay to the Agent, for the account of the Revolving Lenders pro rata on the basis of their Percentages, a closing fee of $1,787,500. (f) On the Effective Date the Borrower shall pay to the Agent (i) for the Account of the Arranger, an arrangement fee of $162,500 and (ii) for the account of the Agent, an agent's fee of $75,000. (g) All computations of Fees shall be made in accordance with Section 12.7(b). 3.2 Voluntary Termination or Reduction of Total Unutilized Revolving Loan Commitment. Upon at least two Business Days' prior written notice (or telephonic notice promptly confirmed in writing) to the Agent at its Notice Office (which notice the Agent shall promptly transmit to each of the Lenders), the Borrower shall have the right, without premium or penalty, to terminate or partially reduce the Total Unutilized Revolving Loan Commitment, provided that (x) any such termination or partial reduction shall apply to proportionately and permanently reduce the Revolving Loan Commitment of each of the Lenders and (y) any partial reduction pursuant to this Section 3.2 shall be in the amount of at least $500,000 and in integral multiples of $100,000 in excess thereof. 3.3 Mandatory Reduction of Commitments. (a) [Intentionally Omitted]. (b) In addition to any other mandatory commitment reductions pursuant to this Section 3.3, (i) on the Term Loan Effective Date, the Total Term Loan Commitment shall be reduced by the amount of the Term Loans and (ii) the Total Term Loan Commitment (and the Term Loan Commitment of each Lender) shall be deemed to be fully drawn and utilized as of the date of entry of the Final Order and no further Borrowings constituting Term Loans shall be permitted hereunder (but nothing herein shall limit the obligations of each Term Lender with respect to its participation in each Existing Letter of Credit to the extent of its Term Loan Percentage). -26- (c) In addition to any other mandatory commitment reductions pursuant to this Section 3.3, on each date on or after the Initial Borrowing Date on which Holdings or any of its Subsidiaries receives any cash proceeds from any incurrence of Indebtedness (other than Indebtedness permitted to be incurred pursuant to Section 8.4 as in effect on the Effective Date) by Holdings or any of its Subsidiaries, the Total Revolving Loan Commitment shall be permanently reduced by an amount equal to 100% of the cash proceeds (net of all underwriting discounts, fees and commissions and other costs and expenses associated therewith) of the respective incurrence of Indebtedness. (d) In addition to any other mandatory commitment reductions pursuant to this Section 3.3, on each date on or after the Initial Borrowing Date on which Holdings or any of its Subsidiaries receives any Cash Proceeds from any Asset Sale, the Total Revolving Loan Commitment shall be permanently reduced in accordance with Section 4.2(d). (e) In addition to any other mandatory commitment reductions pursuant to this Section 3.3, within 10 days following each date on or after the Initial Borrowing Date on which Holdings or any of its Subsidiaries receives any cash proceeds from any Recovery Event, the Total Revolving Loan Commitment shall be permanently reduced by an amount equal to 100% of such cash proceeds of such Recovery Event (net of all costs, expenses and taxes incurred in connection with such Recovery Event). (f) [Intentionally Omitted] (g) The Total Commitment (and the Commitment of each Lender) shall terminate in its entirety on the Termination Date. (h) Each reduction of the Total Revolving Loan Commitment pursuant to this Section 3.3 shall apply proportionately to reduce the Revolving Loan Commitment of each Revolving Lender. -27- SECTION 4. Payments. 4.1 Voluntary Prepayments. The Borrower shall have the right to prepay the Loans, in whole or in part, without premium or penalty except as otherwise provided in this Agreement, from time to time on the following terms and conditions: (i) the Borrower shall give the Agent at its Notice Office written notice (or telephonic notice promptly confirmed in writing) of its intent to prepay the Loans, whether such Loans are Revolving Loans, Term Loans or Swingline Loans and the amount of such prepayment, which notice shall be given by the Borrower prior to 11:00 A.M. (New York time) (x) at least one Business Day prior to the date of such prepayment in the case of Revolving Loans and Term Loans, and (y) on the date of such prepayment in the case of Swingline Loans which notice shall, except in the case of Swingline Loans, promptly be transmitted by the Agent to each of the Lenders; (ii) each partial prepayment of Revolving Loans and Term Loans shall be in an aggregate principal amount of at least $500,000 and in integral multiples of $100,000 in excess thereof (or $50,000 and in integral multiples of $50,000 in excess thereof in the case of Swingline Loans); and (iii) each prepayment in respect of any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among such Revolving Loans, provided, that at the Borrower's election in connection with any prepayment of Loans pursuant to this Section 4.1, such prepayment shall not be applied to any Loans of a Defaulting Lender. -28- 4.2 Mandatory Prepayments; Cash Collateralization. (a) If on any date the sum of (i) the aggregate outstanding principal amount of Revolving Loans and Swingline Loans (after giving effect to all other repayments thereof on such date) plus (ii) the Letter of Credit Outstandings on such date exceeds the lesser of (x) the Total Revolving Loan Commitment and (y) the Borrowing Base as then in effect, the Borrower shall repay on such date the principal of Swingline Loans, and if no Swingline Loans are or remain outstanding, Revolving Loans in an aggregate amount equal to such excess. If, after giving effect to the prepayment of all outstanding Swingline Loans and Revolving Loans, the aggregate amount of Letter of Credit Outstandings exceeds the lesser of (x) the Total Revolving Loan Commitment and (y) the Borrowing Base as then in effect, the Borrower shall pay to the Agent on such date an amount in cash and/or Cash Equivalents equal to such excess (up to the aggregate amount of Letter of Credit Outstandings at such time) and the Agent shall hold such payment in the Cash Collateral Account as security for the obligations of the Borrower hereunder pursuant to a cash collateral agreement to be entered into in form and substance reasonably satisfactory to the Agent (which shall permit certain investments in Cash Equivalents reasonably satisfactory to the Agent until the proceeds are applied to the secured obligations). (b) Each repayment of Revolving Loans required by this Section 4.2 shall be applied pro rata among such Revolving Loans. (c) Notwithstanding anything to the contrary contained elsewhere in this Agreement, (i) all then outstanding Swingline Loans shall be repaid in full on the Swingline Expiry Date and (ii) all then outstanding Revolving Loans and Term Loans shall be repaid in full on the Final Maturity Date, in each case together with all accrued and unpaid interest thereon. -29- (d) In addition to any other mandatory repayments pursuant to this Section 4.2, on any Business Day on or after the Initial Borrowing Date on which Holdings or any of its Subsidiaries receives Cash Proceeds from any Asset Sale, an amount equal to 100% of the Net Cash Proceeds from such Asset Sale shall be applied first, as a mandatory repayment of outstanding Revolving Loans, second, to the payment in full of any Unpaid Drawings in respect of Letters of Credit, third, to deposit in the Cash Collateral Account an amount equal to 105% of the aggregate Stated Amount of all outstanding Letters of Credit, fourth, if the Term Loan Effective Date has occurred, as a mandatory repayment of outstanding Term Loans, together with accrued and unpaid interest thereon, fifth, if the Term Loan Effective Date has occurred, to the payment in full of any reimbursement obligation in respect of Existing Letters of Credit, and sixth, if the Term Loan Effective Date has occurred, to deposit in the Cash Collateral Account an amount equal to 105% of the aggregate Stated Amount of all outstanding Existing Letters of Credit; provided, that if Holdings or any of its Subsidiaries receives Cash Proceeds from any Asset Sale prior to the Term Loan Effective Date, then the Net Cash Proceeds from such Asset Sale shall be applied to the payment in full of the Prepetition Obligations after the application of such Net Cash Proceeds to the Postpetition Obligations. Unless otherwise agreed by the Required Lenders, the Total Revolving Loan Commitment shall be permanently reduced by the aggregate amount applied pursuant to clauses "first," "second," and "third" of the immediately preceding sentence. Notwithstanding the foregoing, the Credit Parties may pay out of such Net Cash Proceeds retention bonuses to the key employees of the Credit Parties in an aggregate amount not to exceed $6,500,000, which have been authorized by the Bankruptcy Court after appropriate notice and an opportunity to be heard (the "Retention Payments"); it being agreed that the aggregate amount of Retention Payments is within the range of reasonableness. (e) In addition to any other mandatory repayments pursuant to this Section 4.2, if, on or before the thirtieth day following the Petition Date, the Final Order, in form and substance acceptable to the Agent, the Required Lenders and counsel to the Agent, shall not have been entered, not be in full force and effect and not otherwise have been stayed, reversed, vacated or otherwise modified, all then outstanding Loans (together with all accrued and unpaid interest thereon) shall be repaid in full on such date. -30- (f) In addition to any other mandatory repayments pursuant to this Section 4.2, on each Business Day, after giving effect on such Business Day to anticipated receipts by, and disbursements of, Holdings and its Subsidiaries, the Borrower shall apply cash on deposit in the Concentration Account in excess of $1,000,000 first, to the prepayment in full of the Revolving Loans, second, to the payment in full of any Unpaid Drawings in respect of Letters of Credit and, third, to deposit in the Cash Collateral Account an amount equal to 105% of the aggregate Stated Amount of all outstanding Letters of Credit. 4.3 Method and Place of Payment. Except as otherwise specifically provided herein, all payments under this Agreement or under any Note shall be made to the Agent for the ratable account of the Lenders entitled thereto, not later than 12:00 Noon (New York time) on the date when due and shall be made in immediately available funds and in U.S. Dollars at the Payment Office, it being understood that written, telex or facsimile transmission notice by the Borrower to the Agent to make a payment from the funds in the Borrower's account at the Payment Office shall constitute the making of such payment to the extent of such funds held in such account. Any payments under this Agreement or under any Note which are made later than 12:00 Noon (New York time) shall be deemed to have been made on the next succeeding Business Day. Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest shall be payable during such extension at the applicable rate in effect immediately prior to such extension. -31- 4.4 Net Payments. (a) All payments made by the Borrower hereunder or under any Note will be made without setoff, counterclaim or other defense. Except as provided in Section 4.4(b), all such payments will be made free and clear of, and without deduction or withholding for, any present or future taxes, levies, imposts, duties, fees, assessments or other charges of whatever nature now or hereafter imposed by any jurisdiction or by any political subdivision or taxing authority thereof or therein with respect to such payments (but excluding, except as provided in the second succeeding sentence, any tax imposed on or measured by the net income or net profits of a Lender pursuant to the laws of the jurisdiction in which it is organized or the jurisdiction in which the principal office or applicable lending office of such Lender is located or any subdivision thereof or therein) and all interest, penalties or similar liabilities with respect thereto (all such nonexcluded taxes, levies, imposts, duties, fees, assessments or other charges being referred to collectively as "Taxes"). If any Taxes are so levied or imposed, the Borrower agrees to pay the full amount of such Taxes, and such additional amounts as may be necessary so that every payment of all amounts due under this Agreement or under any Note, after withholding or deduction for or on account of any Taxes, will not be less than the amount provided for herein or in such Note. If any amounts are payable in respect of Taxes pursuant to the preceding sentence, the Borrower agrees to reimburse each Lender, upon the written request of such Lender, for taxes imposed on or measured by the net income or net profits of such Lender pursuant to the laws of the jurisdiction in which the principal office or applicable lending office of such Lender is located or under the laws of any political subdivision or taxing authority of any such jurisdiction in which the principal office or applicable lending office of such Lender is located and for any withholding of taxes as such Lender shall determine are payable by, or withheld from, such Lender in respect of such amounts so paid to or on behalf of such Lender pursuant to the preceding sentence and in respect of any amounts paid to or on behalf of such Lender pursuant to this sentence. The Borrower will furnish to the Agent within 45 days after the date the payment of any Taxes is due pursuant to applicable law certified copies of tax receipts evidencing such payment by the Borrower. The Borrower agrees to indemnify and hold harmless each Lender, and reimburse such Lender upon its written request, for the amount of any Taxes so levied or imposed and paid by such Lender. -32- -33- (b) Each Lender that is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) agrees to deliver to the Borrower and the Agent on or prior to the Effective Date, or in the case of a Lender that is an assignee or transferee of an interest under this Agreement pursuant to Section 1.13 or 12.4 (unless the respective Lender was already a Lender hereunder immediately prior to such assignment or transfer), on the date of such assignment or transfer to such Lender, (i) two accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001 (or successor forms) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments to be made under this Agreement and under any Note, or (ii) if the Lender is not a "bank" within the meaning of Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate substantially in the form of Exhibit C (any such certificate, a "Section 4.4(b)(ii) Certificate") and (y) two accurate and complete original signed copies of Internal Revenue Service Form W-8 (or successor form) certifying to such Lender's entitlement to a complete exemption from United States withholding tax with respect to payments of interest to be made under this Agreement and under any Note. In addition, each Lender agrees that from time to time after the Effective Date, when a lapse in time or change in circumstances renders the previous certification obsolete or inaccurate in any material respect, it will deliver to the Borrower and the Agent two new accurate and complete original signed copies of Internal Revenue Service Form 4224 or 1001, or Form W-8 and a Section 4.4(b)(ii) Certificate, as the case may be, and such other forms as may be required in order to confirm or establish the entitlement of such Lender to a continued exemption from or reduction in United States withholding tax with respect to payments under this Agreement and any Note, or it shall immediately notify the Borrower and the Agent of its inability to deliver any such Form or Certificate in which case such Lender shall not be required to deliver any such Form or Certificate pursuant to this Section 4.4(b). Notwithstanding anything to the contrary contained in Section 4.4(a), but subject to Section 12.4(b) and the immediately succeeding sentence, (x) the Borrower shall be entitled, to the extent it is required to do so by law, to deduct or withhold income or similar taxes imposed by the United States (or any political subdivision or taxing authority thereof or therein) from interest, fees or other amounts payable hereunder for the account of any Lender which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes to the extent that such Lender has not provided to the Borrower U.S. Internal Revenue Service Forms that establish a complete exemption from such deduction or withholding and (y) the Borrower shall not be obligated pursuant to Section 4.4(a) hereof to gross-up payments to be made to a Lender in respect of income or similar taxes imposed by the -34- United States if (I) such Lender has not provided to the Borrower the Internal Revenue Service Forms required to be provided to the Borrower pursuant to this Section 4.4(b) or (II) in the case of a payment, other than interest, to a Lender described in clause (ii) above, to the extent that such Forms do not establish a complete exemption from withholding of such taxes. Notwithstanding anything to the contrary contained in the preceding sentence or elsewhere in this Section 4.4 and except as set forth in Section 12.4(b), the Borrower agrees to pay additional amounts and to indemnify each Lender in the manner set forth in Section 4.4(a) (without regard to the identity of the jurisdiction requiring the deduction or withholding) in respect of any amounts deducted or withheld by it as described in the immediately preceding sentence as a result of any changes after the Effective Date in any applicable law, treaty, governmental rule, regulation, guideline or order, or in the interpretation thereof, relating to the deducting or withholding of income or similar Taxes. SECTION 5. Conditions Precedent. 5.1 Conditions Precedent to Credit Events on the Initial Borrowing Date. The obligation of each Lender to make Loans, and the obligation of the Letter of Credit Issuer to issue Letters of Credit, on the Initial Borrowing Date, is subject at the time of the making of such Loans or the issuance of such Letters of Credit to the satisfaction of the following conditions: (a) Interim Order. The Agent shall have received, with a copy to each Lender, a copy of the Interim Order which shall have been entered no later than 15 days after the Petition Date and shall, among other things, approve the Credit Documents, grant Super-priority Claim status and Liens and find that the Lenders are extending credit to the Credit Parties in good faith within the meaning of Section 364(e) of the Bankruptcy Code, which shall also (i) be in form and substance satisfactory to the Agent, the Required Lenders and counsel to the Agent, (ii) have been entered upon an application of the Borrower and the Guarantors reasonably satisfactory in form and substance to the Agent, (iii) prior to the entry of the Final Order, be in full force and effect and (iv) not have been stayed, reversed, vacated, rescinded, modified or amended in any respect without the prior written consent of the Agent and the Required Lenders and, if the Interim Order is the subject of a pending appeal in any respect, neither the making of such Loan nor the performance by the Borrower or any of the Guarantors of any of their respective obligations hereunder or under the other Credit Documents or under any other instrument or agreement referred to herein shall be the subject of a presently effective stay pending appeal. -35- (b) First Day Orders. All orders entered by the Bankruptcy Court (other than the Interim Order which is dealt with in Section 5.1(a)) on the date of the conversion of the Cases from involuntary cases to voluntary cases shall be in form and substance satisfactory to the Agent, including providing for the continuation of the cash management system of the Borrower and the Guarantors, as modified in accordance with this Agreement. (c) Budget. The Agent shall have received, with a copy to each Lender, a copy of the initial Budget covering the four-week period commencing on the Petition Date and other cash flow and financial projections which the Agent may request that itemize, on a weekly basis, all material expenditures proposed to be made (including payments proposed to be made in respect of pre-Petition Date trade payables), all in form and substance satisfactory to the Agent and the Required Revolving Lenders. (d) Due Diligence. The Agent and the Lenders shall have received such information (financial or otherwise) as may be reasonably requested by the Agent or the Lenders, and the Agent shall have completed, and shall be satisfied with the results of, all due diligence deemed reasonably necessary by it. (e) Corporate Documents; Proceedings; etc. (i) On the Initial Borrowing Date, the Agent shall have received a certificate from each Credit Party, dated the Initial Borrowing Date, signed by the Chairman of the Board, the President or any Vice President of such Credit Party, and attested to by the Secretary or any Assistant Secretary of such Credit Party, in the form of Exhibit E with appropriate insertions, together with copies of the certificate of incorporation (or equivalent organizational document) and by-laws of such Credit Party and the resolutions of such Credit Party referred to in such certificate, and the foregoing shall be in form and substance reasonably acceptable to the Agent. (ii) All corporate and legal proceedings and all instruments and agreements in connection with the Cases and the transactions contemplated by this Agreement and the other Credit Documents shall be reasonably satisfactory in form and substance to the Agent and the Required Lenders, and the Agent shall have received all information and copies of all documents and papers, including records of corporate proceedings, governmental approvals, good standing certificates and bring-down telegrams or facsimiles, if any, which the Agent reasonably may have requested in -36- connection therewith, such documents and papers where appropriate to be certified by proper corporate or governmental authorities. (f) Tax Sharing Agreements. On or prior to the Initial Borrowing Date, the Agent shall have received certified copies of all tax sharing, tax allocation and other similar agreements entered into by Holdings or any of its Subsidiaries, including the Holdings Tax Allocation Agreement (collectively, the "Tax Agreements"), which shall be in form and substance reasonably satisfactory to the Agent and the Required Lenders. (g) Approvals, Consents, etc. On or prior to the Initial Borrowing Date, all necessary governmental (domestic and foreign) and third party approvals and/or consents in connection with the transactions contemplated by the Credit Documents and otherwise referred to herein or therein shall have been obtained and remain in effect and all applicable waiting periods with respect thereto shall have expired without any action being taken by any competent authority which restrains, prevents or imposes materially adverse conditions upon, the consummation of the transactions contemplated by the Credit Documents or otherwise referred to herein or therein. Additionally, there shall not exist any judgment, order, injunction or other restraint issued or filed or a hearing seeking injunctive relief or other restraint pending or notified prohibiting or imposing materially adverse conditions upon, or materially delaying, or making economically unfeasible, the consummation of the transactions contemplated by the Credit Documents or otherwise required to be consummated herein or therein. (h) Litigation. On the Initial Borrowing Date, other than the commencement of the Cases and any actions commenced in the Cases by Persons other than the Credit Parties and except as set forth on Annex X, there shall be no actions, suits or proceedings pending or threatened (i) with respect to this Agreement or any other Credit Document or (ii) which the Agent or the Required Lenders shall reasonably determine could reasonably be expected to have a material adverse effect on (a) the business, operations, property, assets, liabilities, condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole, (b) the rights or remedies of the Lenders or the Agent hereunder or under any other Credit Document or (c) the ability of any Credit Party to perform its respective obligations to the Lenders or the Agent hereunder or under any other Credit Document. -37- (i) Financial Statements and Projections. On or prior to the Initial Borrowing Date, the Agent shall have received projected balance sheets and cash flow statements of the Borrower and its Subsidiaries on a consolidated basis and projected income statements of the Borrower and its Subsidiaries on a consolidating basis by division (including corporate, Williamhouse, Ampad, Forms and Creative Card), prepared by or under the supervision of the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer (prior to the Borrower's retention of the Crisis Manager) in accordance with GAAP consistently applied, for the three-month period commencing on the date of such projections (the "Projections"), which shall be in form and substance reasonably satisfactory to the Agent and the Required Lenders. (j) Pledge Agreement. On the Initial Borrowing Date, each Credit Party shall have duly authorized, executed and delivered the Pledge Agreement in the form of Exhibit F (as amended, modified or supplemented from time to time, the "Pledge Agreement") and shall have delivered to the Collateral Agent, as pledgee thereunder, all of the Pledged Securities referred to therein and owned by such Credit Party, (x) endorsed in blank in the case of promissory notes constituting Pledged Securities and (y) together with executed and undated stock powers in the case of capital stock constituting Pledged Securities. (k) Security Agreement. On the Initial Borrowing Date, each Credit Party shall have duly authorized, executed and delivered the Security Agreement in the form of Exhibit G (as modified, supplemented or amended from time to time, the "Security Agreement") covering all of such Credit Party's present and future Security Agreement Collateral, together with proper Financing Statements (Form UCC-1 or the equivalent) fully executed for filing under the UCC or other appropriate filing offices as may be necessary or, in the reasonable opinion of the Collateral Agent, desirable to perfect the security interests purported to be created by the Security Agreement. -38- (l) Execution of Agreement; Revolving Notes and Other Credit Documents. On or prior to the Initial Borrowing Date, (i) the Effective Date shall have occurred and (ii) there shall have been delivered to the Agent (A) for the account of each of the Revolving Lenders the appropriate Revolving Notes, duly executed by the Borrower and to the Swingline Lender, the Swingline Note executed by the Borrower, in each case, in the amount, maturity and as otherwise provided herein, (B) the Subsidiary Guaranty, in the form of Exhibit H (as amended, supplemented or otherwise modified from time to time, the "Subsidiary Guaranty"), duly executed by the Subsidiary Guarantors, (C) the Blocked Account Agreement, duly executed by all parties thereto, (D) the Concentration Account Agreement, duly executed by all parties thereto and (E) a Borrowing Base Certificate, duly executed by an Authorized Officer of the Borrower. (m) Opinion of Counsel. The Agent shall have received an opinion from Gibson, Dunn & Crutcher LLP, special counsel to the Credit Parties, covering the matters set forth in Exhibit D and such other matters incident to the transaction contemplated herein as the Agent may reasonably request. (n) Insurance Certificates. The Agent shall have received certificates of insurance complying with the requirements of Section 7.3 for the business and properties of Holdings and its Subsidiaries, in form and substance reasonably satisfactory to the Agent and naming the Collateral Agent as an additional insured and as loss payee, and stating that such insurance shall not be cancelled without at least 30 days prior written notice by the insurer to the Collateral Agent (or such shorter period of time as a particular insurance company generally provides). (o) [Intentionally Omitted.] (p) Adequate Protection Payment. The Borrower shall have paid to the Prepetition Agent for the benefit of the Existing Lenders and the issuer of the Existing Letters of Credit all accrued and unpaid fees, costs and charges owing to the Prepetition Agent, such issuer and the Existing Lenders under the Existing Credit Agreement. -39- (q) Lien Searches. The Agent shall have received UCC lien searches (dated as of a date reasonably satisfactory to the Agent) conducted in the jurisdictions in which the Credit Parties conduct business or maintain assets and reflecting the absence of Liens on the assets of each of the Credit Parties that are senior in priority to the Liens securing the Obligations (other than such Liens as may be permitted under the Existing Credit Agreement or otherwise acceptable to the Agent), all in form and substance satisfactory to the Agent. (r) Year 2000 Program. The Agent shall have received a copy of the Y2K Compliance Plan, in form and substance reasonably acceptable to the Agent. (s) Consultants. The Credit Parties shall have engaged Lazard Freres & Co. LLC pursuant to a retention letter in form and substance acceptable to the Agent. (t) Fees. The Borrower shall have paid to the Agent and each Lender all costs, fees and expenses and other amounts (including, without limitation fees payable in accordance with Section 3 and all reasonable fees and expenses of professionals engaged by the Agent and the Lenders) incurred through the Petition Date, that are then due and payable and authorized by the Bankruptcy Court in the Interim Order. (u) Termination or Amendment of Receivables Program. The Accounts Receivable Facility Purchase Agreement shall have been terminated or amended, on terms and conditions satisfactory to the Agent and the Required Lenders. (v) Cash Management System. The Agent shall have received satisfactory evidence that (i) all cash of the Credit Parties shall have been transferred to the Concentration Account, except for cash on deposit in the Blocked Account and payroll accounts and disbursement accounts that are permitted under Section 8.17 and (ii) the Credit Parties shall have irrevocably directed Manufacturers and Traders Trust Company to transfer all amounts otherwise payable to the Receivables Entity to the Concentration Account. (w) Williamhouse Sale Plan. The Agent and the Required Revolving Lenders shall (i) be satisfied with the Borrower's plan to consummate the Williamhouse Sale during the pendency of the Cases (the "Sale Proposal"), and (ii) the Agent and the Lenders shall have received a copy of the book or other materials prepared by Lazard Freres & Co. that will be circulated to potential purchasers of the assets of the Williamhouse division. -40- 5.2 Conditions Precedent to All Credit Events. The obligation of each Lender to make Loans (including Loans made on the Initial Borrowing Date), and the obligation of the Letter of Credit Issuer to issue Letters of Credit, is subject, at the time of each such Credit Event (except as hereinafter indicated), to the satisfaction of the following conditions: (a) No Default; Representations and Warranties. At the time of each such Credit Event and also after giving effect thereto (i) there shall exist no Default or Event of Default and (ii) all representations and warranties contained herein and in the other Credit Documents shall be true and correct in all material respects with the same effect as though such representations and warranties had been made on the date of such Credit Event (it being understood and agreed that any representation or warranty which by its terms is made as of a specified date shall be required to be true and correct in all material respects only as of such specified date). (b) Notice of Borrowing; Letter of Credit Request. (i) Prior to the making of each Loan (other than a Term Loan, a Swingline Loan and a Revolving Loan made pursuant to a Mandatory Borrowing), the Agent shall have received a Notice of Borrowing meeting the requirements of Section 1.3(a). Prior to the making of each Swingline Loan, the Swingline Lender shall have received the notice referred to in Section 1.3(b)(i). (ii) Prior to the issuance of each Letter of Credit, the Agent and the Letter of Credit Issuer shall have received a Letter of Credit Request meeting the requirements of Section 2.2(a). (c) Bankruptcy Court Approval. The Interim Order shall be in full force and effect or, if the date of the requested Loan is more than 30 days after the Initial Borrowing Date, or the amount of such requested Loan, together with the amount of all Loans outstanding as of such date, shall exceed the maximum amount authorized pursuant to the Interim Order, the Final Order shall have been entered in form and substance satisfactory to the Agent, the Required Revolving Lenders and counsel to the Agent, and shall be in full force and effect and shall not have been stayed, reversed, vacated or otherwise modified without the prior written consent of the Agent and the Required Revolving Lenders. The Bankruptcy Court shall have converted the Cases from involuntary cases to voluntary cases under chapter 11 of the Bankruptcy Code. -41- (d) Borrowing Certificate. The Agent shall have received a certificate, in form and substance satisfactory to the Agent and executed by the Crisis Manager (after the Borrower's retention of the Crisis Manager) or an Authorized Officer (before the Borrower's retention of the Crisis Manager) of the Borrower, certifying that (i) the requested Loan or Letter of Credit and the intended use of proceeds thereof are consistent with the terms of this Agreement and will be used solely for expenditures, and in the approximate amounts, set forth in the then applicable Budget, (ii) the proceeds thereof are necessary, after utilization and application of the Borrower's and the Guarantors' available Cash Collateral, in order for the Borrower and the Guarantors to satisfy their obligations with respect to the items set forth in the then applicable Budget, (iii) all of the representations and warranties contained in Section 6 are true and correct in all material respects (except for those that expressly relate to a specific date, in which case they shall be true and correct in all material respects as of such date), (iv) the Borrower and the Guarantors have observed and performed all applicable covenants and agreements contained herein, in the other Credit Documents and the Interim Order or the Final Order (as applicable) and satisfied in all material respects each condition to the making of such Loan or the issuance of such Letter of Credit contained herein, in the other Credit Documents or in the Interim Order or the Final Order (as applicable) to be observed, performed or satisfied by the Credit Parties, (v) the making of any requested Revolving Loan or the issuance of any requested Letter of Credit would not cause the aggregate principal amount of all Revolving Loans, when added to all Other Revolving Exposure, to exceed the lesser of (x) the Total Revolving Loan Commitment, (y) the Borrowing Base then in effect and (z) the amount of loans and letters of credit set forth in the Budget for the period in which such Revolving Loan is to be borrowed or such Letter of Credit is to be issued, (vi) such officer or the Crisis Manager, as the case may be, has no knowledge of the existence of any Default or Event of Default, (vii) the information provided in the then applicable Budget continues to be true and correct in all material respects and (viii) the requested Loan or Letter of Credit will not result in the Credit Parties exceeding any amounts in the then applicable Budget. -42- (e) Adverse Change, etc. Nothing shall have occurred since the date of the most recent Credit Event with respect to the Borrower or the Guarantors (and neither any Lender nor the Agent shall have become aware of any facts or conditions not previously known) which either the Agent or the Required Lenders shall determine has had, or is reasonably likely to have, in each case as of the date of the requested Credit Event, (i) a Material Adverse Effect or (ii) a material adverse effect on the rights or remedies of the Lenders or the Agent hereunder or under any other Credit Documents, or on the ability of the Borrower of any of the Guarantors to perform their obligations to the Lenders and the Agent (in any event, other than any change occurring as a direct result of the commencement of the Cases). (f) Pleadings. No pleading shall have been filed in the Bankruptcy Court by or on behalf of any Credit Party or its Affiliates which is not withdrawn, dismissed or denied within 15 days after filing, and no pleading shall have been filed in the Bankruptcy Court by any Person if any of the following relief is granted, in either case seeking (i) to dismiss or convert any of the Cases to a Chapter 7 case, (ii) the appointment of a Chapter 11 trustee in any of the Cases, (iii) the appointment of an examiner having enlarged powers relating to the operation of the business of the Borrower or any of the Guarantors (beyond those set forth under Section 1106(a)(3) and (4) of the Bankruptcy Code) under Section 1106(b) of the Bankruptcy Code, (iv) the allowance of a Super-priority Claim or a Lien pari passu or senior to that of the Agent, the Prepetition Agent, the Lenders or the Existing Lenders granted pursuant to any Security Document, (v) to stay, reverse, vacate, or otherwise modify the Interim Order or the Final Order without the prior written consent of the Agent and the Required Lenders or, if required by Section 12.12(a), all of the Lenders, or (vi) relief from the automatic stay so as to allow a third party to proceed against any material property or assets of the Borrower or any Guarantor. (g) Fees. The Borrower shall have paid to the Agent and each Lender all costs, fees and expenses and other amounts (including, without limitation, all reasonable fees and expenses of professionals engaged by the Agent and the Lenders) payable to the Agent and such Lender to the extent then due and authorized by the Bankruptcy Court. (h) Cash Management System. Unless otherwise consented to by the Agent and Required Lenders, there shall have been no change to the Borrower's cash management system (including the requirement to maintain the Concentration Account with BTCo). The acceptance of the benefits of each Credit Event shall constitute a representation and warranty by each Credit -43- Party to the Agent and each of the Lenders that all of the applicable conditions specified above exist as of the date of such Credit Event. All of the certificates, legal opinions and other documents and papers referred to in this Section 5, unless otherwise specified, shall be delivered to the Agent at its Notice Office for the account of each of the Lenders and, except for the Notes, in sufficient counterparts for each of the Lenders and shall be reasonably satisfactory in form and substance to the Agent and the Required Lenders. 5.3 Conditions Precedent to Term Loans. The utilization of the Term Loan Commitments in accordance with Section 1.1(e) is subject to the satisfaction of the following conditions: (a) Execution of Agreement; Term Notes. On or prior to the date of the entry of the Final Order, there shall have been delivered to the Agent (i) counterparts of this Agreement executed by each Existing Lender in its capacity as a Term Lender and (ii) for the account of each Term Lender, the Term Notes executed by the Borrower. (b) Bankruptcy Court Approval. The Final Order shall have been entered. SECTION 6. Representations, Warranties and Agreements. In order to induce the Lenders to enter into this Agreement and to make the Loans and issue and/or participate in the Letters of Credit provided for herein, each of Holdings, WR Acquisition and the Borrower makes the following representations, warranties and agreements with the Lenders in each case after giving effect to the transactions contemplated hereby, all of which shall survive the execution and delivery of this Agreement, the making of the Loans and the issuance of the Letters of Credit (with the occurrence of each Credit Event being deemed to constitute a representation and warranty that the matters specified in this Section 6 are true and correct in all material respects on and as of the date of each such Credit Event, unless stated to relate to a specific earlier date in which case such representations and warranties shall be true and correct in all material respects as of such earlier date): 6.1 Corporate Status. Each of Holdings and each of its Subsidiaries (i) is a duly organized and validly existing corporation in good standing under the laws of the jurisdiction of its organization, (ii) has the corporate power and authority to own its property and assets and to transact the business in which it is engaged and presently proposes to engage and (iii) is duly qualified and is authorized to do business and is in good standing in all jurisdictions where it is required to be so qualified and where the failure to be so qualified would have a Material Adverse Effect. -44- 6.2 Corporate Power and Authority. Subject to the entry by the Bankruptcy Court of the Interim Order or the Final Order (when applicable), each Credit Party has the corporate power and authority to execute, deliver and carry out the terms and provisions of the Documents to which it is a party and has taken all necessary corporate action to authorize the execution, delivery and performance of the Credit Documents to which it is a party. Each Credit Party has duly executed and delivered each Credit Document to which it is a party and each such Credit Document constitutes the legal, valid and binding obligation of such Credit Party enforceable in accordance with its terms. 6.3 No Violation. Subject to the entry by the Bankruptcy Court of the Interim Order or the Final Order (when applicable), neither the execution, delivery or performance by any Credit Party of the Credit Documents to which it is a party nor compliance by any Credit Party with the terms and provisions thereof, nor the consummation of the transactions contemplated herein or therein, (i) will contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, injunction or decree of any court or governmental instrumentality, (ii) will conflict or be inconsistent with or result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, or (other than pursuant to the Security Documents and the Accounts Receivable Facility Documents) result in the creation or imposition of (or the obligation to create or impose) any Lien upon any of the property or assets of Holdings or any of its Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust, loan agreement, credit agreement or any other material agreement or instrument to which Holdings or any of its Subsidiaries is a party or by which it or any of its property or assets are bound or to which it may be subject or (iii) will violate any provision of the Certificate of Incorporation or By-Laws of Holdings or any of its Subsidiaries. 6.4 Litigation. Other than the commencement of the Cases and any actions commenced in the Cases by Persons other than the Credit Parties and except as set forth in Annex X, there are no actions, suits or proceedings pending or, to the knowledge of Holdings or any of its Subsidiaries, threatened, with respect to Holdings or any of its Subsidiaries (i) that are likely to have a Material Adverse Effect or (ii) that could reasonably be expected to have a material adverse effect on the rights or remedies of the Agent or the Lenders or on the ability of any Credit Party to perform its respective obligations to the Agent or the Lenders hereunder and under the other Credit Documents to which it is, or will be, a party. Additionally, there does not exist any judgment, order or injunction prohibiting or imposing material adverse conditions upon the occurrence of any Credit Event. -45- 6.5 Use of Proceeds; Margin Regulations. (a) The proceeds of all Revolving Loans and Swingline Loans (and in the case of (ii) below, Term Loans) shall be used, all in accordance with this Agreement and the then applicable Budget, (i) to fund general corporate purposes relating to post-Petition Date operations, to make payments to critical prepetition vendors (which have been approved by the Bankruptcy Court) and to make Retention Payments (which have been approved by the Bankruptcy Court) in accordance with, and limited by, those items set forth in the then applicable Budget, (ii) to repay the Existing Lender Debt in accordance with Section 1.1(e) and the Obligations, (iii) to pay all reasonable legal fees and expenses incurred in connection with the preparation, negotiation and documentation of this Agreement by the Prepetition Agent and each Existing Lender, (iv) to pay all legal and other professional fees and expenses of the Agent and the Lenders incurred in connection with the preparation, negotiation, documentation and enforcement of this Agreement and (v) to repay the emergency loan of $3,000,000 made by BTCo and authorized by the Emergency Order on January 14, 2000, together with accrued and unpaid interest thereon (the "Emergency Loan"); it being agreed that the proceeds of the initial Loan made hereunder shall be used to repay the Emergency Loan. (b) Neither the making of any Loan, nor the use of the proceeds thereof, will violate the provisions of Regulation T, U or X of the Board of Governors of the Federal Reserve System and no part of the proceeds of any Loan will be used to purchase or carry any Margin Stock or to extend credit for the purpose of purchasing or carrying any Margin Stock. 6.6 Governmental Approvals. Except for the entry by the Bankruptcy Court of the Interim Order and the Final Order (when applicable), no order, consent, approval, license, authorization, or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance of any Credit Document or (ii) the legality, validity, binding effect or enforceability of any Credit Document. -46- 6.7 Investment Company Act. Neither Holdings nor any of its Subsidiaries is an "investment company" or a company "controlled" by an "investment company," within the meaning of the Investment Company Act of 1940, as amended. 6.8 Public Utility Holding Company Act. Neither Holdings nor any of its Subsidiaries is a "holding company," or a "subsidiary company" of a "holding company," or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company," within the meaning of the Public Utility Holding Company Act of 1935, as amended. 6.9 True and Complete Disclosure. All factual information (taken as a whole) heretofore or contemporaneously furnished by or on behalf of Holdings or any of its Subsidiaries in writing to the Agent, any Lender or the Bankruptcy Court (including, without limitation, all information contained in the Documents) for purposes of or in connection with this Agreement or any transaction contemplated herein is, and all other such factual information (taken as a whole) hereafter furnished by or on behalf of any such Persons in writing to the Agent, any Lender or the Bankruptcy Court will be, true and accurate in all material respects on the date as of which such information is dated or certified and not incomplete by omitting to state any material fact necessary to make such information (taken as a whole) not misleading at such time in light of the circumstances under which such information was provided. 6.10 Financial Condition; Financial Statements. (a) The statements of financial condition of Holdings and its Subsidiaries at December 31, 1998 and September 30, 1999 and the related statements of income and cash flows and changes in shareholders' equity of Holdings and its Subsidiaries for the fiscal year or nine-month period, as the case may be, ended as of said dates, copies of which have heretofore been furnished to each Lender, present fairly in all material respects the consolidated financial condition of Holdings and its Subsidiaries at the dates of said statements and the results for the periods covered thereby. All such financial statements have been prepared in accordance with GAAP consistently applied except to the extent provided in the notes to said financial statements and subject, in the case of the September 30, 1999 statements, to normal year-end audit adjustments and the absence of footnotes. -47- (b) Except as fully reflected in the financial statements described in Section 6.10(a) and the Indebtedness incurred under this Agreement, (i) there were as of the Initial Borrowing Date (and after giving effect to any Loans made on such date), no liabilities or obligations (excluding current obligations incurred in the ordinary course of business) with respect to Holdings or any of its Subsidiaries of any nature whatsoever (whether absolute, accrued, contingent or otherwise and whether or not due), and (ii) neither Holdings nor the Borrower knows of any basis for the assertion against Holdings or any of its Subsidiaries of any such liability or obligation which, either individually or in the aggregate, are or would be reasonably likely to have, a Material Adverse Effect. (c) The Projections are based on good faith estimates and assumptions made by the management of Holdings, and on the Initial Borrowing Date such management believed that the Projections were reasonable and attainable, it being recognized by the Lenders, however, that projections as to future events are not to be viewed as facts and that the actual results during the period or periods covered by the Projections probably will differ from the projected results and that the differences may be material. There is no fact known to Holdings or any of its Subsidiaries which would have a Material Adverse Effect, which has not been disclosed herein or in such other documents, certificates and statements furnished to the Lenders for use in connection with the transactions contemplated hereby. 6.11 [Intentionally Omitted]. 6.12 Transaction. At the time of consummation thereof, the transactions contemplated by this Agreement have been or will be consummated in accordance with all applicable laws. At the time of consummation thereof, all consents and approvals of, and filings and registrations with, and all other actions in respect of, all governmental agencies, authorities or instrumentalities required to make or consummate the transactions contemplated by this Agreement have been obtained, given, filed or taken or waived and are or will be in full force and effect (or effective judicial relief with respect thereto has been obtained) except where the failure to obtain, give, file, or take would not reasonably be expected to have a Material Adverse Effect. Additionally, there does not exist any judgment, order or injunction prohibiting or imposing material adverse conditions upon the transactions contemplated by this Agreement, or the occurrence of any Credit Event or the performance by Holdings and its Subsidiaries of their obligations under the Documents and all applicable laws. -48- 6.13 Special Purpose Corporations. (a) Holdings has no assets (other than the capital stock of WR Acquisition and Foreign Sales and immaterial assets used for the performance of those activities permitted to be performed by Holdings pursuant to Section 8.1(b) and any obligations held by it to the extent permitted by Section 8.6(e)) or liabilities (other than those liabilities under this Agreement, the other Documents to which it is a party and the Shareholder Subordinated Notes). (b) WR Acquisition has no assets (other than the capital stock of the Borrower and immaterial assets used for the performance of those activities permitted to be performed by WR Acquisition pursuant to Section 8.1(c)) or liabilities (other than those liabilities under this Agreement and the other Documents to which it is a party). (c) Foreign Sales has no assets (other than immaterial assets used for the performance of those activities permitted to be performed by Foreign Sales pursuant to Section 8.1(e)) or liabilities (other than those liabilities under this Agreement and the other Documents to which it is a party). -49- 6.14 Compliance with ERISA. (a) Each Plan is in substantial compliance with ERISA and the Code; no Reportable Event has occurred with respect to a Plan; no Plan is insolvent or in reorganization; no Plan has an Unfunded Current Liability; no Plan has an accumulated or waived funding deficiency, has permitted decreases in its funding standard account or has applied for a waiver of the minimum funding standard or an extension of any amortization period within the meaning of Section 412 of the Code; all contributions required to be made with respect to a Plan and a Foreign Pension Plan have been timely made; neither Holdings nor any Subsidiary of Holdings nor any ERISA Affiliate has incurred any material liability to or on account of a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971, 4975 or 4980 of the Code or reasonably expects to incur any material liability (including any indirect, contingent or secondary liability) under any of the foregoing Sections with respect to any Plan (other than liabilities of any ERISA Affiliate which could not, by operation of law or otherwise, become a liability of Holdings or any of its Subsidiaries); no proceedings have been instituted to terminate, or to appoint a trustee to administer, any Plan; no condition exists which presents a material risk to Holdings or any Subsidiary of Holdings or any ERISA Affiliate of incurring a liability to or on account of a Plan pursuant to the foregoing provisions of ERISA and the Code; using actuarial assumptions and computation methods consistent with subpart 1 of subtitle E of Title IV of ERISA, the aggregate liabilities of Holdings and its Subsidiaries and its ERISA Affiliates to all Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA) in the event of a complete withdrawal therefrom, as of the close of the most recent fiscal year of each such Plan ended prior to the date of the most recent Credit Event, would not result in a Material Adverse Effect; no lien imposed under the Code or ERISA on the assets of Holdings or any Subsidiary of Holdings or any ERISA Affiliate exists or is likely to arise on account of any Plan; and Holdings and its Subsidiaries do not maintain or contribute to any employee welfare benefit plan (as defined in Section 3(1) of ERISA) which provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2) of ERISA) the obligations with respect to which could reasonably be expected to have a Material Adverse Effect. -50- (b) Each Foreign Pension Plan has been maintained in substantial compliance with its terms and with the requirements of any and all applicable laws, statutes, rules, regulations and orders and has been maintained, where required, in good standing with applicable regulatory authorities. Neither Holdings nor any of its Subsidiaries has incurred any material obligation in connection with the termination of or withdrawal from any Foreign Pension Plan. The present value of the accrued benefit liabilities (whether or not vested) under each Foreign Pension Plan which is funded, determined as of the end of the most recently ended fiscal year of the Borrower on the basis of actuarial assumptions, each of which is reasonable, did not exceed the current value of the assets of such Foreign Pension Plan, and for each Foreign Pension Plan which is not funded, the obligations of such Foreign Pension Plan are properly accrued. 6.15 Capitalization. (a) On the Initial Borrowing Date, the authorized capital stock of Holdings shall consist of (i) 75,000,000 shares of common stock, $.01 par value per share (the "Holdings Common Stock") and (ii) 150,000 shares of preferred stock, $.01 par value per share, none of which shares of preferred stock shall be issued and outstanding. All outstanding shares of Holdings Common Stock have been duly and validly issued, and are fully paid and nonassessable. Holdings does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock except for options to purchase Holdings Common Stock issued or to be issued to management of Holdings and its Subsidiaries. (b) On the Initial Borrowing Date, the authorized capital stock of WR Acquisition shall consist of 1,000 shares of common stock, $.01 par value per share, all of which shares shall be issued and outstanding and owned by Holdings. All such outstanding shares have been duly and validly issued, and are fully paid and nonassessable. WR Acquisition does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. -51- (c) On the Initial Borrowing Date, the authorized capital stock of the Borrower shall consist of 200 shares of common stock, $.01 par value per share, all of which shares shall be issued and outstanding and owned by WR Acquisition. All such outstanding shares have been duly and validly issued, and are fully paid and nonassessable. The Borrower does not have outstanding any securities convertible into or exchangeable for its capital stock or outstanding any rights to subscribe for or to purchase, or any options for the purchase of, or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to, its capital stock. 6.16 Subsidiaries. On and as of the Initial Borrowing Date, Holdings has no Subsidiaries other than Foreign Sales and WR Acquisition and its Subsidiaries, WR Acquisition has no Subsidiaries other than the Borrower and its Subsidiaries, Foreign Sales has no Subsidiaries, the Borrower has no Subsidiaries other than those Subsidiaries listed on Annex VI and the Borrower has no Foreign Subsidiaries other than Foreign Sales. Annex VI correctly sets forth, as of the Initial Borrowing Date, a list of all Persons that own 5% or more of any class of any shares of capital stock of any Credit Party, the percentage ownership (direct and indirect) of Holdings in each class of capital stock of each of its Subsidiaries and also identifies the direct owner thereof. 6.17 Intellectual Property. Each of Holdings and each of its Subsidiaries owns or holds a valid license to use all the material patents, trademarks, permits, service marks, trade names, technology, know-how and formulas or other rights with respect to the foregoing, free from restrictions that are materially adverse to the use thereof, that are used in the operation of the business of Holdings and each of its Subsidiaries as presently conducted. -52- 6.18 Compliance with Statutes, etc. Each of Holdings and each of its Subsidiaries is in compliance with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including compliance with all applicable Environmental Laws with respect to any Real Property or governing its business and the requirements of any permits issued under such Environmental Laws with respect to any such Real Property or the operations of Holdings or any of its Subsidiaries), except such non-compliance as is not likely to, individually or in the aggregate, have a Material Adverse Effect. 6.19 Environmental Matters. (a) Except as set forth on Annex XI, each of Holdings and each of its Subsidiaries has complied with, and on the date of each Credit Event is in compliance with, all applicable Environmental Laws and the requirements of any permits issued under such Environmental Laws. There are no pending or, to the best knowledge of Holdings and the Borrower, past or threatened Environmental Claims against Holdings or any of its Subsidiaries or any Real Property owned or operated by Holdings or any of its Subsidiaries. There are no facts, circumstances, conditions or occurrences on any Real Property owned or operated by Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, on any property adjoining or in the vicinity of any such Real Property that would reasonably be expected (i) to form the basis of an Environmental Claim against Holdings or any of its Subsidiaries or any such Real Property or (ii) to cause any such Real Property to be subject to any restrictions on the ownership, occupancy, use or transferability of such Real Property by Holdings or any of its Subsidiaries under any applicable Environmental Law. (b) Except as set forth on Annex XI, Hazardous Materials have not at any time been generated, used, treated or stored on, or transported to or from, any Real Property owned or operated by Holdings or any of its Subsidiaries where such generation, use, treatment or storage has violated or would reasonably be expected to violate any Environmental Law. Hazardous Materials have not at any time been Released on or from any Real Property owned or operated by Holdings or any of its Subsidiaries. There are not now any underground storage tanks located on any Real Property owned or operated by Holdings or any of its Subsidiaries. -53- (c) Notwithstanding anything to the contrary in this Section 6.19, the representations made in this Section 6.19 shall only be untrue if the aggregate effect of all conditions, failures, noncompliances, Environmental Claims, Releases and presence of underground storage tanks, in each case of the types described above, would reasonably be expected to have a Material Adverse Effect. 6.20 Properties. All Real Property owned by Holdings or any of its Subsidiaries and all material Leaseholds leased by Holdings or any of its Subsidiaries, in each case as of the Initial Borrowing Date, and the nature of the interest therein, is correctly set forth in Annex IV. Each of Holdings and each of its Subsidiaries has good and marketable title to, or a validly subsisting leasehold interest in, all material properties owned or leased by it, including all Real Property reflected in Annex IV or in the financial statements referred to in Section 6.10(a), free and clear of all Liens, other than Permitted Liens. 6.21 Labor Relations. Neither Holdings nor any of its Subsidiaries is engaged in any unfair labor practice that could reasonably be expected to have a Material Adverse Effect. There is (i) no unfair labor practice complaint pending against Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or arbitration proceeding arising out of or under any collective bargaining agreement is so pending against Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against Holdings or any of its Subsidiaries or, to the best knowledge of Holdings and the Borrower, threatened against Holdings or any of its Subsidiaries and (iii) to the best knowledge of Holdings and the Borrower, no union representation question existing with respect to the employees of Holdings or any of its Subsidiaries and, to the best knowledge of Holdings and the Borrower, no union organizing activities are taking place, except (with respect to any matter specified in clause (i), (ii) or (iii) above, either individually or in the aggregate) such as is not reasonably likely to have a Material Adverse Effect. -54- 6.22 Tax Returns and Payments. All Federal, material state and other material returns, statements, forms and reports for taxes (the "Returns") required to be filed by or with respect to the income, properties or operations of Holdings and/or any of its Subsidiaries have been timely filed with the appropriate taxing authority. The Returns accurately reflect all liability for taxes of Holdings and its Subsidiaries for the periods covered thereby. Holdings and each of its Subsidiaries have paid all taxes payable by them other than immaterial taxes and other taxes which are not yet due and payable, and other than taxes contested in good faith and for which adequate reserves have been established in accordance with GAAP. Except as disclosed in the financial statements referred to in Section 6.10(a), there is no material action, suit, proceeding, investigation, audit, or claim now pending or, to the knowledge of Holdings and the Borrower, threatened by any authority regarding any taxes relating to Holdings or any of its Subsidiaries. As of the Initial Borrowing Date, neither Holdings nor any of its Subsidiaries has entered into an agreement or waiver or been requested to enter into an agreement or waiver extending any statute of limitations relating to the payment or collection of taxes of Holdings or any of its Subsidiaries, or is aware of any circumstances that would cause the taxable years or other taxable periods of Holdings or any of its Subsidiaries not to be subject to the normally applicable statute of limitations. Neither Holdings nor any of its Subsidiaries has provided, with respect to themselves or property held by them, any consent under Section 341 of the Code. Neither Holdings nor any of its Subsidiaries has incurred, or will incur, any material tax liability in connection with the transactions contemplated hereby. 6.23 Existing Indebtedness. Annex VII sets forth a true and complete list of all Indebtedness of Holdings and its Subsidiaries (other than Indebtedness which in the aggregate does not exceed $100,000) as of the Initial Borrowing Date and which is to remain outstanding after giving effect to the incurrence of Loans on such date (excluding the Loans, the Letters of Credit, the Accounts Receivable Facility, the Existing Credit Agreement and the Senior Subordinated Notes, the "Existing Indebtedness"), in each case showing the aggregate principal amount thereof and the name of the respective borrower and any other entity which directly or indirectly guaranteed such debt. -55- 6.24 Senior Subordinated Notes. The subordination provisions contained in the Senior Subordinated Note Indenture, the Senior Subordinated Note Guarantees and the Senior Subordinated Notes are enforceable against the Borrower, the respective Guarantors and the holders thereof, and all Obligations and Guaranteed Obligations (as defined herein and in the Subsidiary Guaranty) are within the definition of "Senior Debt" or "Guarantor Senior Debt," as the case may be, included in such subordination provisions. This Agreement constitutes the "Bank Credit Agreement" under (and as defined in) the Senior Subordinated Note Indenture. 6.25 Year 2000 Compliance. Any reprogramming required to permit the proper functioning in and following the year 2000 of (i) the computer systems of the Credit Parties and (ii) equipment containing embedded microchips (including systems and equipment supplied by others or with which the systems of the Credit Parties interface) and the testing of all such systems and equipment, as so reprogrammed, has been completed in accordance with the Y2K Compliance Plan. The cost to the Credit Parties of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Credit Parties (including, without limitation, reprogramming errors and the failure of others' systems or equipment) has not resulted and will not result in a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Credit Parties are and, with ordinary course upgrading and maintenance, will continue to be, sufficient to permit the Credit Parties to conduct business without the occurrence of a Material Adverse Effect. -56- 6.26 Common Officers, etc. (a) Holdings issues consolidated financial statements that include each of the Credit Parties (including, without limitation, the Additional Subsidiaries) in the consolidation, and each of the Credit Parties (including, without limitation, the Additional Subsidiaries) are fully consolidated by virtue of Holdings' direct or indirect 100% ownership of the capital stock of each of the other Credit Parties (including, without limitation, the Additional Subsidiaries); (b) the Credit Parties (including, without limitation, the Additional Subsidiaries) have common officers and directors; (c) the Credit Parties (including, without limitation, the Additional Subsidiaries) share office space and do not maintain separate books and records in all instances; (d) a significant portion of the assets of Borrower, Holdings, WR Acquisition and the Additional Subsidiaries are commingled and would be difficult to segregate; and (e) the businesses of the Credit Parties (including, without limitation, the Additional Subsidiaries) are managed along divisional reporting lines without giving effect to the separate legal entities whose assets comprise such divisions, and the Ampad and Williamhouse divisions are divisions of more than one Credit Party. 6.27 Interim and Final Orders. As of the Initial Borrowing Date, each of the Emergency Order and the Interim Order has been entered and has not been stayed, amended, vacated, reversed, rescinded or otherwise modified in any respect. As of the date of the making of a subsequent Loan hereunder, the Interim Order and/or the Final Order, as the case may be, have been entered and have not been stayed, amended (except in accordance with the terms hereof), reversed, vacated, rescinded or otherwise modified (except in accordance with the terms hereof) in any respect. 6.28 Accounts Receivable Facility Purchase Agreement. The Accounts Receivable Facility Purchase Agreement was terminated. SECTION 7. Affirmative Covenants. Holdings, WR Acquisition and the Borrower hereby covenant and agree that as of the Effective Date and thereafter for so long as this Agreement is in effect and until the Total Commitment has terminated, no Letters of Credit (other than Letters of Credit, together with all Fees that have accrued and will accrue thereon through the stated termination date of such Letters of Credit, which have been supported in a manner satisfactory to the Letter of Credit Issuer in its sole and absolute discretion) or Notes are outstanding and the Loans and Unpaid Drawings, together with interest, Fees and all other Obligations (other than any indemnities described in Section 12.13 which are not then due and payable) incurred hereunder, are paid in full: -57- 7.1 Information Covenants. Holdings will furnish to each Lender: (a) Monthly Reports. Within 30 days after the end of each fiscal month of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such fiscal month and the related consolidated statements of income and retained earnings of cash flows for such fiscal month and for the elapsed portion of the fiscal year ended with the last day of such fiscal month, in each case setting forth comparative figures for the corresponding fiscal month in the prior fiscal year and comparable budgeted figures for such fiscal month as reflected in the Bankruptcy Forecast dated as of December 30, 1999, all of which shall be certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager), subject to normal year-end audit adjustments and the absence of footnotes. Each monthly report delivered pursuant to this Section 7.1(a) shall include a management discussion and summary of operating results for such month, which shall be prepared in a form substantially similar to the form provided under the Existing Credit Agreement and shall describe in reasonable detail the results of operations of Holdings and its Subsidiaries on a consolidated basis and of each division (including corporate, Williamhouse, Ampad, Forms and Creative Card) on a consolidating basis. (b) Quarterly Financial Statements. (i) Within 45 days after the close of the first three quarterly accounting periods in each fiscal year of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such quarterly accounting period and the related consolidated statements of income and retained earnings and of cash flows for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period; all of which shall be in reasonable detail and certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) that they fairly present in all material respects the financial condition of Holdings and its Subsidiaries as of the dates indicated and the results of their operations and changes in their cash flows for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes. (ii) Within 45 days after the close of the -58- first three quarterly accounting periods in each fiscal year of Holdings, the sales and operating income (before corporate overhead) for each division of Holdings and its Subsidiaries (including corporate, Williamhouse, Ampad, Forms and Creative Card) for such quarterly accounting period and for the elapsed portion of the fiscal year ended with the last day of such quarterly accounting period; all of which shall be in reasonable detail and certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) that they fairly represent in all material respects the information contained therein for the periods indicated, subject to normal year-end audit adjustments and the absence of footnotes. (c) Annual Financial Statements. (i) Within 90 days after the close of each fiscal year of Holdings, the consolidated balance sheet of Holdings and its Subsidiaries as at the end of such fiscal year and the related consolidated statements of income and retained earnings and of cash flows for such fiscal year and setting forth comparative consolidated figures for the preceding fiscal year and comparable budgeted figures for such fiscal year and (except for such comparable budgeted figures) certified by PriceWaterhouseCoopers or such other independent certified public accountants of recognized national standing as shall be reasonably acceptable to the Agent, in each case to the effect that such statements fairly present in all material respects the financial condition of Holdings and its Subsidiaries as of the dates indicated and the results of their operations and changes, together with a certificate of such accounting firm stating that in the course of its regular audit of the business of Holdings and its Subsidiaries, which audit was conducted in accordance with GAAP, no Default or Event of Default which has occurred and is continuing has come to their attention insofar as such Default or Event of Default relates to financial and accounting matters or, if such a Default or an Event of Default has come to their attention, a statement as to the nature thereof. (ii) Within 90 days after the close of each fiscal year of Holdings, the sales and operating income (before corporate overhead) for each division of the Holdings and its Subsidiaries (including corporate, Williamhouse, Ampad, Forms and Creative Card) for such fiscal year; all of which shall be in reasonable detail -59- and certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) that they fairly present in all material respects the information contained therein for the periods indicated. (d) Budgets, Projections and Variance Reports. (i) Within 15 days after the end of each month, updated Projections for the three-month period commencing on the first day of the succeeding month, which shall be prepared on a monthly basis; (ii) Within 15 days after the end of each month, a comparison of the financial statements of the Borrower and its Subsidiaries for the three-month period ended on the last day of such month to the Projections for such three-month period, which in each case shall be in form and substance satisfactory to the Agent; (iii) Not later than 5:00 P.M. (New York time) on Tuesday of each week, (A) a Budget covering the four-week period commencing on the first Business Day of the next week, in form and substance satisfactory to the Agent reflecting (on a line-item basis) anticipated weekly cash receipts and expenditures for the succeeding four weeks, which shall be itemized in sufficient detail including line items for vendor payments, payroll, interest, professional fees, capital expenditures, rationalization costs, retention payments and payments of prepetition and "involuntary gap" liabilities to critical vendors, it being understood that each such Budget shall take into consideration reduced cash needs and reduced expenses resulting from the sale of assets, and (B) a copy of a Variance Report reflecting (on a line-item basis) the actual cash receipts and disbursement for the preceding week and the percentage variance of such actual results from those reflected in the Budget for the preceding week; (iv) Weekly, before 12:00 noon on the second Business Day of each week (except the last week of each month); monthly, within two (2) Business Days after the last Business Day of each month, and at any other time requested by the Agent during the continuance of a Default or Event of Default, a borrowing base certificate, substantially in the form of Exhibit N (the "Borrowing Base Certificate"), which shall: (A) detail the Credit Parties' Eligible Accounts Receivable and the Credit Parties' Eligible Inventory -60- as of each Saturday of the immediately preceding week and as of the last day of each month, as applicable (or as of such other date as the Agent may request); (B) prepared by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of the Borrower (prior to the Borrower's retention of the Crisis Manager) and certified by such officer subject only to adjustment upon completion of the normal year-end audit of physical inventory; and (C) attach thereto such additional schedules and other information as the Agent may reasonably request (including, without limitation, a monthly aging of Accounts); (v) Not later than the last day of each week, a report describing the then current status of the Credit Parties' relationships with their vendors, which description shall be on a vendor-by-vendor basis; and (vi) Not later than the last Business Day of each week, Holdings shall deliver to the Agent a certificate of the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) to the effect that the Credit Parties (i) are keeping separate records of post-Petition Date Accounts and payments thereon, (ii) are not applying payments on post-Petition Date Accounts to pre-Petition Date Accounts and (iii) are not allowing offsets against post-Petition Date Accounts on account of pre-Petition Date rebates, allowances or offsets (excluding certain pre-Petition Date and post-Petition Date rebates and volume discounts which are payable to customers after the Petition Date and which are described in such certificate). (e) Officer's Certificates. At the time of the delivery of the financial statements provided for in Section 7.1(b) and (c), a certificate of the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) to the effect that no Default or Event of Default exists or, if any Default or Event of Default does exist, specifying the nature and extent thereof, which certificate shall set forth the calculations required to establish whether Holdings and its Subsidiaries were in compliance with the provisions of Sections 8.5, 8.6 and 8.9, as at the end of such fiscal quarter or year, as the case may be. -61- (f) Notice of Default or Litigation. Promptly, and in any event within five Business Days (or 10 Business Days in the case of clause (y) below) after any executive or senior officer of Holdings, WR Acquisition or the Borrower obtains knowledge thereof, notice of (x) the occurrence of any event which constitutes a Default or an Event of Default, which notice shall specify the nature thereof, the period of existence thereof and what action Holdings, WR Acquisition or the Borrower proposes to take with respect thereto and (y) the commencement of, or threat of, or any significant development in, any litigation or governmental proceeding pending against Holdings or any of its Subsidiaries which is likely to have a Material Adverse Effect, or a material adverse effect on the ability of any Credit Party to perform its respective obligations hereunder or under any other Credit Document. (g) Auditors' Reports. Promptly upon receipt thereof, a copy of each report or "management letter" submitted to Holdings or any of its Subsidiaries by its independent accountants in connection with any annual, interim or special audit made by them of the books of Holdings or any of its Subsidiaries. (h) Environmental Matters. Promptly after obtaining knowledge of any of the following (but only to the extent that any of the following, either individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect), written notice of: (i) any pending or threatened Environmental Claim against Holdings or any of its Subsidiaries or any Real Property owned or operated by Holdings or any of its Subsidiaries; (ii) any condition or occurrence on any Real Property owned or operated by Holdings or any of its Subsidiaries that (x) results in material noncompliance by Holdings or any of its Subsidiaries with any applicable Environmental Law or (y) could reasonably be anticipated to form the basis of an Environmental Claim against Holdings or any of its Subsidiaries or any such Real Property; (iii) any condition or occurrence on any Real Property owned or operated by Holdings or any of its Subsidiaries that could reasonably be anticipated to cause such Real Property to be subject to any material restrictions on the ownership, occupancy, use or transferability by Holdings or its Subsidiary, as the case may be, of its interest in such Real Property under any Environmental Law; and -62- (iv) the taking of any material removal or remedial action in response to the actual or alleged presence of any Hazardous Material on any Real Property owned or operated by Holdings or any of its Subsidiaries. All such notices shall describe in reasonable detail the nature of the claim, investigation, condition, occurrence or removal or remedial action and Holdings' or the Borrower's response thereto. In addition, Holdings agrees to provide the Lenders with copies of all material written communications by Holdings or any of its Subsidiaries with any Person, government or governmental agency relating to any of the matters set forth in clauses (i)-(iv) above, and such detailed reports relating to any of the matters set forth in clauses (i)-(iv) above as may reasonably be requested by the Agent or the Required Lenders. (i) Sale Proposal. On or before the first Business Day of each week, a written report from the Consultants, in form and substance satisfactory to the Agent, summarizing the status of the Borrower's efforts to consummate the Sale Proposal; provided that Holdings shall promptly deliver a written report summarizing all material developments relating to the Sale Proposal. In addition, if requested by the Agent, the Borrower shall conduct bi-weekly conference calls with the Lenders to report on the status of the Sale Proposal. (j) Other Information. Promptly upon transmission thereof, copies of any filings and registrations with, and reports to, the SEC by Holdings or any of its Subsidiaries and copies of all financial statements, proxy statements, notices and reports as Holdings or any of its Subsidiaries shall send generally to analysts, the holders of their capital stock or of the Senior Subordinated Notes in their capacity as such holders or the purchasers under the Accounts Receivable Facility in their capacity as such purchasers (in each case to the extent not theretofore delivered to the Lenders pursuant to this Agreement) and, with reasonable promptness, such other information or documents (financial or otherwise) as the Agent on its own behalf or on behalf of the Required Lenders may reasonably request from time to time. (k) Bankruptcy Information. Promptly after the same is available, the Borrower shall furnish to counsel for the Agent all pleadings, motions, applications, judicial information, financial information and other documents filed by or on behalf of any Credit Party with the Bankruptcy Court or the United States Trustee in the Cases, or distributed by or on behalf of any Credit Party to any official committee appointed in the Cases. -63- (l) Bankruptcy Schedules. Holdings and each of its Subsidiaries shall file their respective bankruptcy schedules and statements of financial affairs no later than the date set forth in the Federal Rules of Bankruptcy Procedure or in any order entered by the Bankruptcy Court with respect to an extension of time to file such schedules and statements and shall promptly deliver a copy thereof to the Agent and its counsel. (m) Accounts Collection Report. Within two Business Days of the receipt of any check or other remittance payable to any Credit Party, such Credit Party shall deliver to the Agent a report describing whether such check or remittance is in respect of the payment of Accounts arising before the Petition Date or arising on or after the Petition Date. 7.2 Books, Records and Inspections. Holdings will, and will cause each of its Subsidiaries to, permit officers and designated representatives of the Agent or the Required Lenders to visit and inspect any of the properties or assets of Holdings and any of its Subsidiaries in whomsoever's possession, and to examine the books and records and books of account of Holdings and any of its Subsidiaries and discuss the affairs, finances and accounts of Holdings and of any of its Subsidiaries with, and be advised as to the same by, their officers, advisors and independent accountants, all at such times during normal business hours as the Agent or the Required Lenders may desire. 7.3 Insurance. Holdings will, and will cause each of its Subsidiaries to, at all times maintain in full force and effect insurance with reputable and solvent insurance carriers in such amounts, covering such risks and liabilities and with such deductibles or self-insured retentions as are in accordance with normal industry practice. Holdings will furnish to the Agent on the Initial Borrowing Date and on each such later date as the Agent or the Required Lenders may reasonably request a summary of the insurance carried in respect of Holdings and its Subsidiaries and the assets of Holdings and its Subsidiaries together with certificates of insurance and other evidence of such insurance, if any, naming the Collateral Agent as an additional insured and/or loss payee. -64- 7.4 Payment of Taxes. Holdings will pay and discharge, and will cause each of its Subsidiaries to pay and discharge, all taxes, assessments and governmental charges or levies imposed upon it or upon its income or profits, or upon any properties belonging to it, prior to the date on which material penalties attach thereto, and all lawful claims for sums that have become due and payable which, if unpaid, might become a Lien not otherwise permitted under Section 8.3(a) or charge upon any properties of Holdings or any of its Subsidiaries; provided, that neither Holdings nor any of its Subsidiaries shall be required to pay any such tax, assessment, charge, levy or claim (i) which is being contested in good faith and by proper proceedings if it has maintained adequate reserves with respect thereto in accordance with GAAP or (ii) the payment of which is excused or stayed as a result of Holdings' or its Subsidiaries' status as a debtor-in-possession in the Cases. 7.5 Corporate Franchises. Holdings will do, and will cause each of its Subsidiaries to do, or cause to be done, all things necessary to preserve and keep in full force and effect its existence and its material rights, franchises and authority to do business; provided, however, that any transaction permitted by Section 8.2 will not constitute a breach of this Section 7.5. 7.6 Compliance with Statutes, etc. Holdings will, and will cause each of its Subsidiaries to, comply with all applicable statutes, regulations and orders of, and all applicable restrictions imposed by, all governmental bodies, domestic or foreign, in respect of the conduct of its business and the ownership of its property (including applicable statutes, regulations, orders and restrictions relating to environmental standards and controls) except for such noncompliance as (a) is excused or stayed as a result of Holdings' or its Subsidiaries' status as a debtor-in-possession in the Cases or (b) would not have a Material Adverse Effect or a material adverse effect on the ability of any Credit Party to perform its obligations under any Credit Document to which it is a party. -65- 7.7 Compliance with Environmental Laws. (a) Holdings will pay, and will cause each of its Subsidiaries to pay, all costs and expenses incurred by it in keeping in compliance with all Environmental Laws, and will keep or cause to be kept all Real Properties owned or operated by Holdings or any of its Subsidiaries free and clear of any Liens imposed pursuant to such Environmental Laws; and (b) neither Holdings nor any of its Subsidiaries will generate, use, treat, store, release or dispose of, or permit the generation, use, treatment, storage, release or disposal of, Hazardous Materials on any Real Property owned or operated by Holdings or any of its Subsidiaries, or transport or permit the transportation of Hazardous Materials to or from any such Real Property, unless the failure to comply with the requirements specified in clause (a) or (b) above, either individually or in the aggregate, would not reasonably be expected to have a Material Adverse Effect. If Holdings or any of its Subsidiaries, or any tenant or occupant of any Real Property owned or operated by Holdings or any of its Subsidiaries, cause or permit any intentional or unintentional act or omission resulting in the presence or Release of any Hazardous Material (except in compliance with applicable Environmental Laws), each of Holdings, WR Acquisition and the Borrower agrees to undertake, and/or to cause any of its Subsidiaries, tenants or occupants to undertake, at their sole expense, any clean up, removal, remedial or other action required pursuant to Environmental Laws to remove and clean up any Hazardous Materials from any Real Property except where the failure to do so would not reasonably be expected to have a Material Adverse Effect; provided that neither Holdings nor any of its Subsidiaries shall be required to comply with any such order or directive which is being contested in good faith and by proper proceedings so long as it has maintained adequate reserves with respect to such compliance to the extent required in accordance with GAAP. -66- -67- 7.8 ERISA. As soon as possible and, in any event, within 10 days after Holdings or any Subsidiary of Holdings or any ERISA Affiliate knows or has reason to know of the occurrence of any of the following events to the extent that one or more of such events is reasonably likely to result in a material liability to Holdings or any Subsidiary of Holdings, Holdings will deliver to each of the Lenders a certificate of the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) setting forth details as to such occurrence and the action, if any, which Holdings, such Subsidiary or such ERISA Affiliate is required or proposes to take, together with any notices required or proposed to be given to or filed with or by Holdings, the Subsidiary, the ERISA Affiliate, the PBGC, a Plan participant or the Plan administrator with respect thereto: that a Reportable Event has occurred, that an accumulated funding deficiency has been incurred or an application may be or has been made to the Secretary of the Treasury for a waiver or modification of the minimum funding standard (including any required installment payments) or an extension of any amortization period under Section 412 of the Code with respect to a Plan; that a contribution required to be made to a Plan or Foreign Pension Plan has not been timely made; that a Plan has been or may be terminated, reorganized, partitioned or declared insolvent under Title IV of ERISA; that a Plan has an Unfunded Current Liability giving rise to a lien under ERISA or the Code; that proceedings may be or have been instituted to terminate or appoint a trustee to administer a Plan; that a proceeding has been instituted pursuant to Section 515 of ERISA to collect a delinquent contribution to a Plan; that Holdings, any Subsidiary of Holdings or any ERISA Affiliate will or may incur any material liability (including any contingent or secondary liability) to or on account of the termination of or withdrawal from a Plan under Section 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section 401(a)(29), 4971, 4975 or 4980 of the Code or Section 409, 502(i) or 502(l) of ERISA; or that Holdings or any Subsidiary of Holdings has or may incur any material liability under any employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) that provides benefits to retired employees or other former employees (other than as required by Section 601 of ERISA) or any employee pension benefit plan (as defined in Section 3(2) of ERISA). At the request of any Lender, Holdings will deliver to such Lender a complete copy of the annual report (Form 5500) of each Plan required to be filed with the Internal Revenue Service. In addition to any certificates or notices delivered to the Lenders pursuant to the first sentence hereof, at the request of the Agent or any Lender, copies of annual reports and any notices received by Holdings or any Subsidiary of Holdings or any ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be delivered to the Lenders no later than 10 days after the date such report has been filed with -68- the Internal Revenue Service or received by Holdings or the Subsidiary or the ERISA Affiliate. 7.9 Good Repair. Holdings will, and will cause each of its Subsidiaries to, ensure that its material properties and equipment used in its business are kept in good repair, working order and condition, normal wear and tear and damage by casualty excepted, and, subject to Section 8.9, that from time to time there are made in such properties and equipment all needful and proper repairs, renewals, replacements, extensions, additions, betterments and improvements thereto, to the extent and in the manner useful or customary for companies in similar businesses. 7.10 End of Fiscal Years; Fiscal Quarters. Holdings will, for financial reporting purposes, cause (i) each of its, and each of its Subsidiaries', fiscal years to end on December 31 of each year and (ii) each of its, and each of its Subsidiaries', fiscal quarters to end on March 31, June 30, September 30 and December 31 of each year. 7.11 Additional Security; Further Assurances. (a) Holdings will, and will cause each of its Subsidiaries (other than the Receivables Entity) to, grant to the Collateral Agent security interests and mortgages in such assets and real property of Holdings and its Subsidiaries as are not covered by the original Security Documents, and as may be requested from time to time by the Agent or the Required Lenders (collectively, the "Additional Security Documents"). All such security interests and mortgages shall be granted pursuant to documentation reasonably satisfactory in form and substance to the Agent and shall constitute valid and enforceable perfected security interests and mortgages superior to and prior to the rights of all third Persons and subject to no other Liens except for Permitted Liens. The Credit Parties acknowledge that, pursuant to the Orders, the Liens granted from time to time pursuant to the Additional Security Documents shall be perfected without recordation of any financing statements, notices of security interest or other similar instruments. In addition, the Additional Security Documents or instruments related thereto shall have been duly recorded or filed in such manner and in such places as the Agent deems necessary or desirable to establish, perfect, preserve and protect the Liens in favor of the Collateral Agent required to be granted pursuant to the Additional Security Documents and all taxes, fees and other charges payable in connection therewith shall have been paid in full. -69- (b) Holdings will, and will cause each of its Subsidiaries (other than the Receivables Entity) to, at the expense of Holdings, WR Acquisition and the Borrower, make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent from time to time such vouchers, invoices, schedules, confirmatory assignments, conveyances, financing statements, transfer endorsements, powers of attorney, certificates, real property surveys, reports and other assurances or instruments and take such further steps relating to the Collateral covered by any of the Security Documents as the Collateral Agent may reasonably require. Furthermore, Holdings shall cause to be delivered to the Collateral Agent such opinions of counsel, title insurance and other related documents as may be reasonably requested by the Agent to assure themselves that this Section 7.11 has been complied with. (c) If the Agent or the Required Lenders determine that they are required by law or regulation to have appraisals prepared in respect of the Real Property of Holdings and its Subsidiaries constituting Collateral, the Borrower shall provide to the Agent appraisals which satisfy the applicable requirements of the Real Estate Appraisal Reform Amendments of the Financial Institution Reform, Recovery and Enforcement Act of 1989 and which shall be in form and substance reasonably satisfactory to the Agent. (d) Holdings, WR Acquisition and the Borrower agree that each action required above by this Section 7.11 shall be completed within 30 days after such action is either requested to be taken by the Agent or the Required Lenders or required to be taken by Holdings and its Subsidiaries pursuant to the terms of this Section 7.11; provided that in no event shall Holdings, WR Acquisition or the Borrower be required to take any action, other than using its best efforts, to obtain consents from third parties with respect to its compliance with this Section 7.11. -70- 7.12 Register. The Borrower hereby designates the Agent to serve as the Borrower's agent, solely for purposes of this Section 7.12, to maintain a register (the "Register") on which it will record the Commitments from time to time of each of the Lenders, the Loans made by each of the Lenders and each repayment in respect of the principal amount of the Loans of each Lender. Failure to make any such recordation, or any error in such recordation shall not affect the Borrower's obligations in respect of such Loans. With respect to any Lender, the transfer of the Commitments of such Lender and the rights to the principal of, and interest on, any Loan made pursuant to such Commitment shall not be effective until such transfer is recorded on the Register maintained by the Agent with respect to ownership of such Commitment and Loans and prior to such recordation all amounts owing to the transferor with respect to such Commitment and Loans shall remain owing to the transferor. The registration of assignment or transfer of all or part of any Commitment and Loans shall be recorded by the Agent on the Register only upon the acceptance by the Agent of a properly executed and delivered Assignment and Assumption Agreement pursuant to Section 12.4(b). Coincident with the delivery of such an Assignment and Assumption Agreement to the Agent for acceptance and registration of assignment or transfer of all or part of a Loan, or as soon thereafter as practicable, the assigning or transferor Lender shall surrender the Note evidencing such Loan, and thereupon one or more new Notes in the same aggregate principal amount shall be issued to the assigning or transferor Lender and/or the new Lender. The Borrower agrees to indemnify the Agent from and against any and all losses, claims, damages and liabilities of whatsoever nature which may be imposed on, asserted against or incurred by the Agent in performing its duties under this Section 7.12. 7.13 [Intentionally Omitted]. 7.14 Contributions; Payments. Holdings will contribute as an equity contribution to the capital of WR Acquisition, and WR Acquisition will contribute as an equity contribution to the capital of the Borrower, in each case upon its receipt thereof, any cash proceeds (net of reasonable costs associated with any sale or issuance) received by Holdings and/or WR Acquisition from any asset sale, any incurrence of Indebtedness, any Recovery Event, any sale or issuance of its preferred or common equity or any cash capital contributions received by Holdings and/or WR Acquisition. -71- 7.15 [Intentionally Omitted]. 7.16 Consultants. Holdings and its Subsidiaries shall continue to retain the Consultants pursuant to engagement letters approved by the Bankruptcy Court after the Agent and the Lenders have received notice and an opportunity to be heard; provided, that this Section 7.16 shall not apply to the Crisis Manager until 10 days after the entry of the Interim Order and provided further, that nothing herein shall be deemed to be a waiver of the right of the Agent or any Lender to object to the terms of either of the engagement letters. 7.17 Payment of Obligation. Except as provided in the Bankruptcy Code or an applicable order of the Bankruptcy Court, each Credit Party shall pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature that constitute administrative expenses under Section 503(b) of the Bankruptcy Code in the Cases, except, so long as no material property or assets (other than money for such obligation and the interest or penalty accruing thereon) of the Credit Parties is in danger of being lost or forfeited as a result thereof, no such obligation need be paid if the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of each Credit Party. 7.18 Cash Collateral Account. (a) Each Credit Party hereby reaffirms its grant to the Collateral Agent for the benefit of the Lenders of a security interest in the Cash Collateral Account. Each of the Credit Parties agrees that it will continue to maintain the Cash Collateral Account which is under the sole dominion and control of the Collateral Agent. None of the Credit Parties nor any representative of any Credit Party will have any right to withdraw, transfer or give any directions with respect to any amounts on deposit in the Cash Collateral Account. No Credit Party will deposit any amounts into the Cash Collateral Account other than tax refunds, proceeds of the Collateral and other amounts required to be deposited therein in accordance with the terms of this Agreement and the other Credit Documents. The Collateral Agent will apply amounts on deposit in the Cash Collateral Account from time to time to the repayment of the Obligations in accordance with the provisions of this Agreement and the other Credit Documents. -72- (b) Each Credit Party will (i) take all such action as may be required or advisable, in the reasonable opinion of the Agent or the Required Lenders, to have the proceeds of any United States federal tax refunds to any Credit Party may be entitled deposited directly by the payor of such refunds into the Cash Collateral Account and (ii) immediately deposit in the Cash Collateral Account on the date of receipt, any United States federal tax refunds received by any Credit Party. 7.19 Operations of Ampad Division. Within 45 days after the entry of the Interim Order, the Borrower shall advise the Agent as to its plan for the interim maintenance of operations of the Ampad division, which shall be satisfactory to the Agent and the Required Revolving Lenders or, if the Borrower shall have determined to cease operations of the Ampad division, the Borrower shall advise the Agent as to its plan for the sale of the assets of such division, which shall be satisfactory to the Agent and the Required Revolving Lenders. After the Borrower's retention of the Crisis Manager, any such plan shall be prepared by or under the supervision of the Crisis Manager. 7.20 Corporate Overhead Reduction. Within 45 days after the entry of the Interim Order, the Borrower shall advise the Agent as to its plan for the permanent reduction of unallocated corporate overhead expenses, which shall be reasonably satisfactory to the Agent and the Required Revolving Lenders. After the Borrower's retention of the Crisis Manager, such plan shall be prepared by or under the supervision of the Crisis Manager. 7.21 Operations of Forms and Creative Cards Divisions. Within twenty-one days after the entry of the Interim Order, the Borrower shall advise the Agent as to its plan for the interim maintenance of the operations of the Forms division or the Creative Cards divisions, which shall be satisfactory to the Agent and the Required Revolving Lenders or, if the Borrower shall have determined to cease operations of any such division, the Borrower shall advise the Agent as to its plan for the sale of the assets of such division, which shall be satisfactory to the Agent and the Required Revolving Lenders. After the Borrower's retention of the Crisis Manager, any such plan shall be prepared by or under the supervision of the Crisis Manager. 7.22 Crisis Manager. Within 10 days after the entry of the Interim Order, the Borrower shall retain a crisis manager acceptable to the Agent and the Required Revolving Lenders (the "Crisis Manager") to advise and assist the Credit Parties in connection with the bankruptcy process and creditor relations, pursuant to a retention letter satisfactory to the Agent and the Required Revolving Lenders. -73- 7.23 Appraisal. Holdings shall deliver to the Agent, as soon as available and in any event within 15 days after the Effective Date, copies of the interim report and final report prepared by Norman Levy & Associates with respect to the appraisal of the assets (excluding real estate) of Holdings and its Subsidiaries. Each of the Credit Parties hereby irrevocably authorizes Norman Levy & Associates to discuss such reports and give the Agent and the Lenders access to the records of Norman Levy & Associates relating to such reports. 7.24 Collateral Access Agreements. With respect to Eligible Inventory that is located on property that is either leased by a Borrowing Base Party or leased or owned by a warehousemen, such Borrowing Base Party shall use commercially reasonable efforts to deliver to the Agent a Collateral Access Agreement executed by the lessor or the warehousemen, as the case may be, of such property. SECTION 8. Negative Covenants. Holdings, WR Acquisition and the Borrower hereby covenant and agree that as of the Effective Date and thereafter for so long as this Agreement is in effect and until the Total Commitment has terminated, no Letters of Credit (other than Letters of Credit, together with all Fees that have accrued and will accrue thereon through the stated termination date of such Letters of Credit, which have been supported in a manner satisfactory to the Letter of Credit Issuer in its sole and absolute discretion) or Notes are outstanding and the Loans, together with interest, Fees and all other Obligations (other than any indemnities described in Section 12.13 which are not then due and payable) incurred hereunder, are paid in full: 8.1 Changes in Business. (a) Holdings and its Subsidiaries will not, and will not apply to the Bankruptcy Court for authority to, engage in any business other than the businesses in which Holdings and its Subsidiaries are engaged in as of the Petition Date and activities directly related thereto, and similar or related businesses. -74- (b) Holdings will not engage in any business other than its ownership of the capital stock of WR Acquisition and Foreign Sales and those obligations of officers and employees of Holdings permitted by Section 8.6(e) and having those liabilities which it is responsible for under this Agreement, the other Documents to which it is a party and under any Permitted Holdings PIK Securities issued by it, provided that Holdings may engage in those activities that are incidental to (x) the maintenance of its corporate existence in compliance with applicable law, (y) legal, tax and accounting matters in connection with any of the foregoing activities and (z) the entering into, and performing its obligations under, this Agreement and the other Documents to which it is a party. (c) WR Acquisition will not engage in any business other than its ownership of the capital stock of the Borrower and having those liabilities which it is responsible for under this Agreement and the other Documents to which it is a party, provided that WR Acquisition may engage in those activities that are incidental to (x) the maintenance of its corporate existence in compliance with applicable law and (y) the entering into, and performing its obligations under, this Agreement and the other Documents to which it is a party. (d) The Receivables Entity will not engage in any business. (e) Foreign Sales will not engage in any business other than having those liabilities which it is responsible for under this Agreement and the other Documents to which it is a party, provided that Foreign Sales may engage in those activities that are incidental to (x) the maintenance of its corporate existence in compliance with applicable law and (y) entering into, and performing its obligations under, this Agreement and the other Documents to which it is a party. 8.2 Consolidation, Merger, Sale or Purchase of Assets, etc. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, wind up, liquidate or dissolve its affairs or enter into any transaction of merger or consolidation, or convey, sell, lease or otherwise dispose of (or agree to do any of the foregoing at any future time) all or any part of its property or assets (other than inventory in the ordinary course of business), or enter into any partnerships, joint ventures or sale-leaseback transactions, or purchase or otherwise acquire (in one or a series of related transactions) any part of the property or assets (other than purchases or other acquisitions of inventory, materials and equipment in the ordinary course of business) of any Person, except that the following shall be permitted: -75- (a) the Borrower and its Subsidiaries may, as lessee or lessor, enter into operating leases in the ordinary course of business with respect to real or personal property; (b) Capital Expenditures by the Borrower and its Subsidiaries to the extent not in violation of Section 8.9 or the Budget then in effect; (c) the advances, investments and loans permitted pursuant to Section 8.6; (d) each of the Credit Parties may sell assets pursuant to the Sale Proposal and other assets with the prior written consent of the Required Lenders so long as the Net Cash Proceeds therefrom are applied in accordance with Sections 3.3(d) and 4.2(d); (e) the Borrower and its Subsidiaries may sell or discount, in each case without recourse, accounts receivable arising in the ordinary course of business, but only in connection with the compromise or collection thereof; (f) the Borrower and its Subsidiaries may sell or exchange specific items of equipment, so long as the purpose of each such sale or exchange is to acquire (and results within 90 days of such sale or exchange in the acquisition of) replacement items of equipment which are the functional equivalent of the item of equipment so sold or exchanged; (g) the Borrower and its Subsidiaries may, in the ordinary course of business, license, as licensor or licensee, patents, trademarks, copyrights and know-how to third Persons and to one another, so long as any such license by the Borrower or its Subsidiaries in its capacity as licensor is permitted to be assigned pursuant to the Security Agreement (to the extent that a security interest in such patents, trademarks, copyrights and know-how is granted thereunder) and does not otherwise prohibit the granting of a Lien by the Borrower or any of its Subsidiaries pursuant to the Security Agreement in the intellectual property covered by such license; (h) the Borrower and its Domestic Subsidiaries that are Subsidiary Guarantors may sell or otherwise transfer inventory between or among themselves in the ordinary course of business for resale by the Borrower or such Domestic Subsidiaries, as the case may be, so long as the security interest granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Agreement in the inventory so transferred shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such transfer); -76- (i) the Borrower and its Domestic Subsidiaries that are Subsidiary Guarantors may sell or otherwise transfer accounts receivable between or among themselves in the ordinary course of business so long as the security interest granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Agreement in the accounts receivable so transferred shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such transfer); (j) any Domestic Subsidiary of the Borrower that is a Subsidiary Guarantor may transfer assets (other than accounts receivable and inventory) to the Borrower or to any other Domestic Subsidiary of the Borrower that is a Subsidiary Guarantor so long as the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets so transferred shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such transfer); (k) any Domestic Subsidiary of the Borrower may merge with and into, or be dissolved or liquidated into, the Borrower so long as (i) the Borrower is the surviving corporation of any such merger, dissolution or liquidation and (ii) the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of such Domestic Subsidiary shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger, dissolution or liquidation); (l) any Domestic Subsidiary of the Borrower that is a Subsidiary Guarantor may merge with and into, or be dissolved or liquidated into, any Wholly-Owned Domestic Subsidiary of the Borrower that is a Subsidiary Guarantor (other than the Receivables Entity) so long as (i) such Wholly-Owned Domestic Subsidiary is the surviving corporation of any such merger, dissolution or liquidation and (ii) the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of such Domestic Subsidiary shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger, dissolution or liquidation); (m) leases or subleases granted by the Borrower or any of its Subsidiaries to third Persons in the ordinary course or business and not interfering in any material respect with the business of the Borrower or any of its Subsidiaries; and -77- (n) WR Acquisition may merge with and into, or be dissolved or liquidated into, the Borrower so long as (i) the Borrower is the surviving corporation of any such merger, dissolution or liquidation and (ii) the security interests granted to the Collateral Agent for the benefit of the Secured Creditors pursuant to the Security Documents in the assets of WR Acquisition shall remain in full force and effect and perfected (to at least the same extent as in effect immediately prior to such merger, dissolution or liquidation). 8.3 Liens. Holdings will not, and will not permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with respect to any property or assets of any kind (real or personal, tangible or intangible) of Holdings or any of its Subsidiaries, whether now owned or hereafter acquired, or sell any such property or assets subject to an understanding or agreement, contingent or otherwise, to repurchase such property or assets (including sales of accounts receivable or notes with recourse to Holdings or any of its Subsidiaries) or assign any right to receive income, or apply to the Bankruptcy Court for authority to do the foregoing, except for the following (collectively, the "Permitted Liens"): (a) inchoate Liens for taxes, assessments or governmental charges or levies not yet due or Liens for taxes, assessments or governmental charges or levies being contested in good faith and by appropriate proceedings for which adequate reserves have been established in accordance with GAAP; (b) Liens in respect of property or assets of the Borrower or any of its Subsidiaries imposed by law which were incurred in the ordinary course of business and which have not arisen to secure Indebtedness for borrowed money, such as carriers', warehousemen's and mechanics' Liens, statutory landlord's Liens, and other similar Liens arising in the ordinary course of business, and which either (x) do not in the aggregate materially detract from the value of such property or assets or materially impair the use thereof in the operation of the business of the Borrower or any of its Subsidiaries or (y) are being contested in good faith by appropriate proceedings which proceedings have the effect of preventing the forfeiture or sale of the property or asset subject to such Lien; -78- (c) Liens created by or pursuant to this Agreement and the Security Documents; (d) (i) Liens in favor of the Prepetition Agent securing Indebtedness permitted under Section 8.4(i) and (ii) other Liens in existence on the Initial Borrowing Date which are listed, and the property subject thereto described, in Annex IX, without giving effect to any extensions or renewals thereof; (e) Liens arising from judgments, decrees or attachments in circumstances not constituting an Event of Default under Section 9.9; (f) Liens incurred or deposits made (x) in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, government contracts, performance and return-of-money bonds and other similar obligations incurred in the ordinary course of business (exclusive of obligations in respect of the payment for borrowed money); and (y) to secure the performance of leases of Real Property, to the extent incurred or made in the ordinary course of business consistent with past practices; (g) licenses, leases or subleases granted to third Persons not interfering in any material respect with the business of the Borrower or any of its Subsidiaries; (h) easements, rights-of-way, restrictions, minor defects or irregularities in title and other similar charges or encumbrances not interfering in any material respect with the ordinary conduct of the business of the Borrower or any of its Subsidiaries; (i) Liens arising from precautionary UCC financing statements regarding operating leases permitted by this Agreement; (j) any interest or title of a licensor, lessor or sublessor under any license or lease permitted by this Agreement; -79- (k) Liens (i) granted by the Designated Credit Parties in favor of the Receivables Entity consisting of UCC-1 financing statements filed to effect the sale of accounts receivable and related assets pursuant to the Accounts Receivable Facility Documents, (ii) granted by the Receivables Entity on those accounts receivable and related assets acquired by it pursuant to the Accounts Receivable Facility Documents to the extent that such Liens are created by the Accounts Receivable Facility Documents and (iii) consisting of the right of setoff granted to any financial institution acting as a lockbox bank in connection with the Accounts Receivable Facility; provided, that the Liens described in this clause (n) shall only attach to accounts receivable arising before the Accounts Receivable Facility Purchase Agreement was terminated. 8.4 Indebtedness. Holdings will not, and will not permit any of its Subsidiaries to, contract, create, incur, assume or suffer to exist any Indebtedness or apply to the Bankruptcy Court for authority to do so, except: (a) Indebtedness incurred pursuant to this Agreement and the other Credit Documents; (b) Existing Indebtedness outstanding on the Initial Borrowing Date and listed on Annex VII, without giving effect to any subsequent extension, renewal or refinancing thereof; (c) Indebtedness of the Borrower and the Subsidiary Guarantors incurred under the Senior Subordinated Notes and the other Senior Subordinated Note Documents in an aggregate principal amount not to exceed $130,000,000; (d) Indebtedness constituting Intercompany Loans to the extent permitted by Section 8.6(g); (e) Indebtedness of Holdings under the Shareholder Subordinated Notes; (f) Indebtedness consisting of guaranties (x) by the Borrower of Indebtedness, leases and other contractual obligations permitted to be incurred by Domestic Subsidiaries of the Borrower that are Subsidiary Guarantors and (y) by Domestic Subsidiaries of the Borrower (other than the Receivables Entity) of Indebtedness, leases and other contractual obligations permitted to be incurred by the Borrower or other Domestic Subsidiaries of the Borrower that are Subsidiary Guarantors; -80- (g) Indebtedness of the Receivables Entity under the Accounts Receivable Facility Documents that was incurred prior to the termination of the Accounts Receivable Facility Purchase Agreement; (h) Indebtedness consisting of a guaranty by the Borrower of the obligations of the other Designated Credit Parties under the Accounts Receivable Facility Documents that was incurred prior to the termination of the Accounts Receivable Facility Purchase Agreement; and (i) Indebtedness of the Borrower and its Subsidiaries incurred under the Existing Credit Agreement and outstanding on the date hereof. 8.5 Designated Senior Debt. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, designate any Indebtedness (other than the Obligations and the Existing Credit Agreement Debt) as "Designated Senior Debt" for purposes of, and as defined in, the Senior Subordinated Note Indenture. 8.6 Advances, Investments and Loans. Holdings will not, and will not permit any of its Subsidiaries to, lend money or credit or make advances to any Person, or purchase or acquire any stock, obligations or securities of, or any other interest in, or make any capital contribution to, any Person, or purchase or own a futures contract or otherwise become liable for the purchase or sale of currency or other commodities at a future date in the nature of a futures contract, or hold any cash, Cash Equivalents or Foreign Cash Equivalents or apply to the Bankruptcy Court for authority to do any of the foregoing, except: (a) the Borrower and its Subsidiaries may invest in cash and Cash Equivalents, and Foreign Subsidiaries of the Borrower also may invest in Foreign Cash Equivalents ; provided that 100% of all cash and Cash Equivalents held by the Borrower and its Subsidiaries (other than the Receivables Entity) at any time, including without limitation cash and Cash Equivalents pledged or deposited in accordance with Section 8.3(f), must be held in one or more accounts maintained with the Agent or a Lender; (b) the Borrower and its Subsidiaries may acquire and hold receivables owing to it, if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms (including the dating of receivables) of the Borrower or such Subsidiary; -81- (c) the Borrower and its Subsidiaries may acquire and own investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business; (d) advances, loans and investments in existence on the Petition Date and listed on Annex V shall be permitted, without giving effect to any additions thereto or replacements thereof (except those additions or replacements which are existing obligations as of the Petition Date but only to the extent such further obligations are described on such Annex V); (e) Holdings may acquire and hold obligations of one or more officers or other employees of Holdings or its Subsidiaries in connection with such officers' or employees' acquisition of shares of Holdings Common Stock so long as no cash is paid by Holdings or any of its Subsidiaries in connection with the acquisition of any such obligations; (f) deposits made in the ordinary course of business consistent with past practices to secure the performance of leases shall be permitted; (g) the Borrower may make intercompany loans and advances to any of its Domestic Subsidiaries (other than the Receivables Entity) that are Subsidiary Guarantors and any Subsidiary of the Borrower (other than the Receivables Entity) may make intercompany loans and advances to the Borrower or any Domestic Subsidiary of the Borrower (other than the Receivables Entity) that is a Subsidiary Guarantor (collectively, "Intercompany Loans"), provided, that (x) each Intercompany Loan made by a Foreign Subsidiary to the Borrower or a Domestic Subsidiary of the Borrower shall contain the subordination provisions set forth on Exhibit J, (y) each Intercompany Loan shall be evidenced by an Intercompany Note and (z) each such Intercompany Note (other than Intercompany Notes held by Foreign Subsidiaries of the Borrower) shall be pledged to the Collateral Agent pursuant to the Pledge Agreement; (h) the Borrower and its Subsidiaries may acquire and hold promissory notes and/or equity securities issued by the purchaser or purchasers in connection with the sale of assets to the extent permitted under Section 8.2(d); (i) Holdings may make equity contributions to the capital of WR Acquisition, and WR Acquisition may make equity contributions to the capital of the Borrower; -82- (j) the Borrower and its Subsidiaries may make transfers of assets to their respective Subsidiaries in accordance with Sections 8.2(h), (i) and (j); (k) the Borrower and the other Designated Credit Parties may hold one or more Receivables Purchase Money Notes issued by the Receivables Entity in respect of purchases of accounts receivable prior to the termination of the Accounts Receivable Facility Purchase Agreement so long as such Receivables Purchase Money Notes have been duly pledged and delivered to the Collateral Agent pursuant to the Pledge Agreement; (l) the Receivables Entity may invest those accounts receivable purchased from the Designated Credit Parties prior to the termination of the Accounts Receivable Facility Purchase Agreement in the master trust for the Accounts Receivable Facility pursuant to, and in accordance with the terms of, the Accounts Receivable Facility Documents. 8.7 Dividends, etc. Holdings will not, and will not permit any of its Subsidiaries to, declare or pay any dividends (other than dividends payable solely in common stock of Holdings or any such Subsidiary, as the case may be) or return any capital to, its stockholders or authorize or make any other distribution, payment or delivery of property or cash to its stockholders as such, or redeem, retire, purchase or otherwise acquire, directly or indirectly, for a consideration, any shares of any class of its capital stock, now or hereafter outstanding (or any warrants for or options or stock appreciation rights in respect of any of such shares), or set aside any funds for any of the foregoing purposes, and Holdings will not permit any of its Subsidiaries to purchase or otherwise acquire for consideration any shares of any class of the capital stock of Holdings or any other Subsidiary, as the case may be, now or hereafter outstanding (or any options or warrants or stock appreciation rights issued by such Person with respect to its capital stock) (all of the foregoing "Dividends") or apply to the Bankruptcy Court for authority to do so, except that: (i) any Subsidiary of the Borrower may pay Dividends to the Borrower or any Wholly-Owned Subsidiary of the Borrower; (ii) [Intentionally Omitted]; (iii) [Intentionally Omitted]; (iv) the Borrower may pay cash Dividends to WR Acquisition, which in turn shall immediately use such cash proceeds to pay cash Dividends to Holdings so -83- long as the cash proceeds thereof are promptly used by Holdings to pay operating expenses in the ordinary course of business (including, without limitation, professional fees and expenses) and other similar corporate overhead costs and expenses, provided that such costs and expenses shall be as set forth in the Budget and the aggregate amount of cash Dividends paid pursuant to this clause (iv) shall at no time during any fiscal year of the Borrower exceed $100,000; and (v) the Borrower may pay cash Dividends to WR Acquisition, which in turn shall immediately use such cash proceeds to pay cash Dividends to Holdings in the amounts and at the times of any payment by Holdings in respect of taxes, provided that (x) the amount of cash Dividends paid pursuant to this clause (v) to enable Holdings to pay federal income taxes at any time shall not exceed, when added to the amount of payments made pursuant to the Holdings Tax Allocation Agreement for such purposes, the lesser of (A) the amount of such federal income taxes owing by Holdings at such time for the respective period and (B) the amount of such federal income taxes that would be owing by the Borrower and its Subsidiaries on a consolidated basis for such period if determined without regard to Holdings' ownership of the Borrower and (y) any refunds shall promptly be delivered to the Collateral Agent. 8.8 Transactions with Affiliates. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, enter into any transaction or series of transactions with any Affiliate other than in the ordinary course of business and on terms and conditions substantially as favorable to Holdings or such Subsidiary as would be reasonably expected to be obtainable by Holdings or such Subsidiary at the time in a comparable arm's-length transaction with a Person other than an Affiliate; provided, that the following shall in any event be permitted: (i) Holdings and its Domestic Subsidiaries may enter into the Holdings Tax Allocation Agreement and may make payments thereunder (subject to the limitations set forth in Section 8.7(v)); and (ii) transactions between or among the Borrower and its Subsidiaries to the extent that such transactions are otherwise permitted under this Agreement. 8.9 Capital Expenditures. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, make any Capital Expenditures, except for Capital Expenditures contemplated by the Budget then in effect and which are necessary to maintain the assets of the Credit Parties in good working order and repair. -84- 8.10 Minimum Consolidated EBITDA. The Borrower will not permit Consolidated EBITDA for any period set forth below to be less than the amount set forth opposite such period below: Period Minimum ------ Consolidated EBITDA ------------------- 1/1/00-2/29/00 $ (4,802,000) 1/1/00-3/31/00 (6,032,000) 1/1/00-4/30/00 (6,079,000) 1/1/00-5/31/00 (6,635,000) 1/1/00-6/30/00 (5,760,000) 8.11 Maximum Inventory Amount. Holdings will not permit the book value of all Inventory on the last day of any fiscal quarter to be greater than the amount set forth opposite such period below: Fiscal Quarter Ended Maximum -------------------- Inventory Amount ---------------- 1/31/00 $ 115,627,000 2/29/00 112,517,000 3/31/00 101,520,000 4/30/00 99,208,000 5/31/00 100,100,000 6/30/00 97,421,421 8.12 [Intentionally Omitted]. 8.13 Limitation on Voluntary Payments and Modifications of Indebtedness; Modifications of Certificate of Incorporation, By-Laws and Certain Other Agreements; Issuances of Capital Stock; etc. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to: (i) make (or give any notice in respect of) any voluntary or optional payment or prepayment on or redemption or acquisition for value of (including, without limitation, by way of depositing with the trustee with respect thereto or any other Person money or securities before due for the purpose of paying -85- when due) any Senior Subordinated Note or any Permitted Holdings PIK Security; (ii) make (or give any notice in respect of) any prepayment or redemption of any Senior Subordinated Note as a result of any asset sale, change of control or similar event (including, without limitation, by way of depositing with the trustee with respect thereto or any other Person money or securities before due for the purpose of paying when due any Senior Subordinated Note); (iii) make (or give any notice in respect of) any principal or interest payment on, or any redemption or acquisition for value of, any Shareholder Subordinated Note; (iv) amend or modify, or permit the amendment or modification of, any provision of any Senior Subordinated Note Document; (v) amend, modify or change in any way adverse to the interests of the Lenders, any Tax Agreement, its Certificate of Incorporation (including, without limitation, by the filing or modification of any certificate of designation) or By-Laws; (vi) amend or modify, or permit the amendment or modification of, any provision of any Accounts Receivable Facility Document in a manner adverse to the interests of the Lenders; (vii) issue any class of capital stock other than non-redeemable common stock; and (viii) amend or modify, or permit the amendment or modification of, any provision of any Permitted Holdings PIK Security in any manner inconsistent with the definition of Permitted Holdings PIK Security. -86- 8.14 Limitation on Certain Restrictions on Subsidiaries. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any encumbrance or restriction on the ability of any such Subsidiary to (a) pay dividends or make any other distributions on its capital stock or any other interest or participation in its profits owned by Holdings or any Subsidiary of Holdings, or pay any Indebtedness owed to Holdings or a Subsidiary of Holdings, (b) make loans or advances to Holdings or any of Holdings' Subsidiaries or (c) transfer any of its properties or assets to Holdings or any of its Subsidiaries, except for such encumbrances or restrictions existing under or by reason of (i) applicable law, (ii) this Agreement and the other Credit Documents, (iii) customary provisions restricting subletting or assignment of any lease governing a leasehold interest of the Borrower or a Subsidiary of the Borrower, (iv) customary provisions restricting assignment of any licensing agreement entered into by the Borrower or a Subsidiary of the Borrower in the ordinary course of business, (v) the Senior Subordinated Note Documents, (vi) the agreements evidencing the Existing Indebtedness that remain outstanding after the Petition Date, (vii) customary provisions restricting the transfer of assets subject to Liens permitted under Section 8.3(k), and (viii) the Existing Credit Documents. 8.15 Limitation on the Creation of Subsidiaries. Notwithstanding anything to the contrary contained in this Agreement, Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, establish, create or acquire after the Initial Borrowing Date any Subsidiary. 8.16 [Intentionally Omitted]. 8.17 Additional Bank Accounts. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, at any time open, maintain or otherwise have any checking, savings or other accounts at any bank or other financial institution, or any other account where money is or may be deposited or maintained with any Person, other than the accounts listed on Annex III, Securities Accounts that comply with the terms of Section 8.18 or as otherwise agreed to in writing by the Agent. -87- 8.18 Securities Accounts. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, establish or maintain any Securities Account unless the Agent shall have received a Control Agreement in respect of such Securities Account, duly executed by the Credit Party and the securities intermediary parties thereto that is in full force and effect. 8.19 Chapter 11 Claims. Except for the Carve-Out or as otherwise provided in the Security Documents, Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for the authority to, incur, create, assume, suffer to exist or permit any other Super-priority Claim or Lien which is pari passu with or senior to (a) the claims of the Collateral Agent and the Lenders granted pursuant to the Security Documents or (b) other than for claims referenced in clause (a), the claims of the Prepetition Agent and the Existing Lenders granted pursuant to the Security Documents. 8.20 Use of Proceeds. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for the authority to (a) use the proceeds of the Loans or any Letter of Credit for purposes other than those detailed in Section 6.5 and the Budget in effect, or (b) use the proceeds of the Loans, any Letter of Credit, the Existing Lenders' Cash Collateral, or the Carve-Out or the Collateral to investigate, commence or prosecute any action or objection with respect to (i) the claims of the Prepetition Agent or the Existing Lenders against the Borrower or the Guarantors or the Prepetition Agent's or the Existing Lenders' Liens which secure the Prepetition Obligations or (ii) the Super-priority Claim or Liens granted to the Agent and the Lenders pursuant to the Security Documents and the Orders; provided, that Holdings and its Subsidiaries may use up to $75,000 of proceeds of the Loans in the aggregate to investigate any such action or objection. 8.21 Prepetition Payments. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to (a) make any payment in respect of pre-Petition Date Indebtedness including payments to pre-Petition Date vendors (other than as permitted by the Orders), (b) amend, modify or change any agreement or document relating to any pre-Petition Date Indebtedness, and (c) make any payment on any post-Petition Date Indebtedness outside the Borrower's ordinary course of business; provided, however, that the Credit Parties may make the payments specifically contemplated in the first day orders referred to in Section 5.1(b) so long as such payments are consistent with the applicable Budget and the terms of this Agreement. -88- 8.22 Employment Matters. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to (a) make any material adverse change to the severance arrangements currently in effect for their respective employees, and (b) pay, or enter into any agreement to pay, any retention, stay or similar payment to its employees other than payments constituting the Retention Payments in accordance with any agreements or plans approved by the Agent and the Required Lenders. 8.23 Leases. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, enter into any agreements to rent or lease any real property, or assume the obligations under any such agreements entered into prior to the Petition Date, in either case without the prior written consent of the Agent and the Required Lenders (other than the assumption of any existing lease in respect of property described on Annex IV hereto) on material terms no less favorable to such Credit Party, as the case may be, than the terms of such lease on the Effective Date, taken as a whole. 8.24 Reclamation Claims; Bankruptcy Code " 546(g) Agreements. (a) Unless otherwise agreed by the Required Lenders, Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, make any payments or transfer any property on account of claims asserted by any vendors of Holdings or any Subsidiary for reclamation in accordance with UCC Section 2-702 and Section 546(c) of the Bankruptcy Code. (b) Unless otherwise agreed by the Required Lenders, Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, enter into any agreements or file any motion seeking a Bankruptcy Court order for the return of Inventory to any vendor pursuant to Section 546(g) of the Bankruptcy Code. 8.25 Excess Cash. Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to, maintain in the aggregate in all deposit or similar accounts (other than the Blocked Account, the Concentration Account, disbursement accounts and payroll accounts) total cash balances in excess of $1,000,000 at any time during which any Revolving Loans are outstanding, except for amounts which are required to be applied to repay amounts owing under the Accounts Receivable Facility Purchase Agreement provided that such amounts are promptly so applied. -89- 8.26 Refinancing of Revolving Loans. Holdings will not, will not permit any of its Subsidiaries to and will not apply to the Bankruptcy Court for authority to, refinance any or all of the Revolving Loans unless all of the Term Loans are simultaneously refinanced. SECTION 9. Events of Default. Upon the occurrence of any of the following specified events (each an "Event of Default"): 9.1 Payments. The Borrower shall (i) default in the payment when due of any principal of the Loans or (ii) default, and such default shall continue for two or more Business Days, in the payment when due of any Unpaid Drawing, any interest on the Loans or any Fees or any other amounts owing hereunder or under any other Credit Document; 9.2 Representations, etc. Any representation, warranty or statement made by any Credit Party herein or in any other Credit Document or in any statement or certificate delivered pursuant hereto or thereto shall prove to be untrue in any material respect on the date as of which made or deemed made; or 9.3 Covenants. Any Credit Party shall (a) default in the due performance or observance by it of any term, covenant or agreement contained in Sections 7.1(d), (e), (f), (m) or (i), 7.3, 7.11, 7.14, 7.16 or 8, or (b) default in the due performance or observance by it of any term, covenant or agreement (other than those referred to in Section 9.1, 9.2 or clause (a) of this Section 9.3) contained in this Agreement and such default shall continue unremedied for a period of at least 10 days after notice to the defaulting party by the Agent or the Required Lenders; or -90- 9.4 Default Under Other Agreements. (a) Holdings or any of its Subsidiaries shall, after the Petition Date, (i) default in any payment with respect to any Indebtedness (other than the Obligations) beyond the period of grace, if any, provided in the instrument or agreement under which Indebtedness was created or (ii) default in the observance or performance of any agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause any such Indebtedness to become due prior to its stated maturity; or (b) any Indebtedness (other than the Obligations) of Holdings or any of its Subsidiaries shall, other than as a result of the commencement of the Cases, be declared to be due and payable, or shall be required to be prepaid other than by a regularly scheduled required prepayment or as a mandatory prepayment (unless such required prepayment or mandatory prepayment results from a default thereunder or an event of the type that constitutes an Event of Default), prior to the stated maturity thereof; or 9.5 Bankruptcy, etc. (a) (i) Any of the Cases shall be dismissed or converted to a case under Chapter 7 of the Bankruptcy Code or (ii) a trustee under Chapter 11 of the Bankruptcy Code shall be appointed in any of the Cases; (b) (i) An order of the Bankruptcy Court shall be entered granting another Super-priority Claim or Lien pari passu with or senior to that granted (x) to the Collateral Agent and the Lenders pursuant to this Agreement and the Orders, or (y) to the Existing Lenders pursuant to the Interim Order (other than pursuant to clause (x) above), (ii) unless the Agent and the Required Revolving Lenders otherwise agree, an order of a court of competent jurisdiction shall be entered amending, supplementing or otherwise modifying either of the Orders (x) in respect of the Total Revolving Outstandings, the Total Revolving Loan Commitment, the Total Term Loan Commitment or the Term Loans, or (y) in respect of the grant of adequate protection pursuant to Section 1.14(b) or the Interim Order, without the Prepetition Agent's and the Required Lenders' consent, or (iii) the Existing Lenders' Cash Collateral shall be used in a manner inconsistent with either of the Orders; (c) Unless all of the Lenders otherwise agree, an order of a court of competent jurisdiction shall be entered reversing, staying, vacating or rescinding either of the Orders; -91- (d) An order of the Bankruptcy Court shall be entered in any of the Cases appointing an examiner having enlarged powers relating to the operation of the business of Holdings or any of its Subsidiaries (powers beyond those set forth under Sections 1106(a)(3) and (4) of the Bankruptcy Code) under Section 1106(b) of the Bankruptcy Code; (e) Holdings or any of its Subsidiaries shall make any payments of Indebtedness relating to Prepetition Date obligations other than (i) as permitted under the Orders or the orders entered in accordance with Section 5.1(b), (ii) pre-Petition Date wages and benefits which are payable with the approval of the Bankruptcy Court and sales tax and employee withholding taxes which have been collected by the Borrower but not yet paid, (iii) as otherwise permitted under this Agreement or (iv) in connection with the assumption of any contract or lease approved by the Bankruptcy Court; (f) The entry of an order granting relief from the automatic stay so as to allow a third party to proceed against any asset or assets of Holdings or any of its Subsidiaries which have a value in excess of $3,000,000 in the aggregate, but only if concomitantly therewith such relief shall not have also been granted to the Agent and the Lenders; (g) The filing of any pleading by Holdings or any of its Subsidiaries seeking, or otherwise consenting to, any of the matters set forth in paragraphs (a) through (f) of this Section 9.5; (h) Holdings or any of its Subsidiaries shall file a Plan of Reorganization not supported by the Agent and the Required Lenders; (i) The entry of the Final Order shall not have occurred within 30 days after the Petition Date; or (j) Holdings or any of its Subsidiaries shall file any pleading seeking, or otherwise consenting to, (i) the invalidation, subordination or other challenging of the claims asserted by the Existing Agent or the Existing Lenders with respect to the Prepetition Obligations or the Liens granted to secure the Prepetition Obligations or (ii) any relief under Section 506(c) of the Bankruptcy Code with respect to any property which secures the Prepetition Obligations. -92- 9.6 ERISA. (a) Any Plan shall fail to satisfy the minimum funding standard required for any plan year or part thereof or a waiver of such standard or extension of any amortization period is sought or granted under Section 412 of the Code, any Plan shall have had or is likely to have a trustee appointed to administer such Plan, any Plan is, shall have been or is likely to be terminated or the subject of termination proceedings under ERISA, any Plan shall have an Unfunded Current Liability, a contribution required to be made to a Plan or a Foreign Pension Plan has not been timely made, Holdings or any Subsidiary of Holdings or any ERISA Affiliate has incurred or is likely to incur a liability to or on account of a Plan under Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971, 4975 or 4980 of the Code, or Holdings or any Subsidiary of Holdings has incurred or is likely to incur liabilities pursuant to one or more employee welfare benefit plans (as defined in Section 3(1) of ERISA) which provide benefits to retired employees and other former employees (other than as required by Section 601 of ERISA) or employee pension benefit plans (as defined in Section 3(2) of ERISA) or Foreign Pension Plans; (b) there shall result from any such event or events the imposition of a lien, the granting of a security interest, or a liability or a material risk of incurring a liability; and (c) which lien, security interest or liability which arises from such event or events will have a Material Adverse Effect; or 9.7 Security Documents. (a) Except in each case to the extent resulting from the failure of the Collateral Agent to retain possession of the applicable Pledged Securities, any Security Document shall cease to be in full force and effect, or shall cease to give the Collateral Agent the Liens, rights, powers and privileges purported to be created thereby in favor of the Collateral Agent, or (b) any Credit Party shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any such Security Document and such default shall continue beyond any cure or grace period specifically applicable thereto pursuant to the terms of any such Security Document; or 9.8 Guaranties. The Guaranties or any provision thereof shall cease to be in full force and effect, or any Guarantor or any Person acting by or on behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations under any Guaranty or any Guarantor shall default in the due performance or observance of any term, covenant or agreement on its part to be performed or observed pursuant to any Guaranty; or -93- 9.9 Judgments. One or more judgments or decrees shall be entered after the Petition Date against Holdings or any of its Subsidiaries involving a liability (to the extent not paid or not fully covered by insurance) in excess of $2,000,000 for all such judgments and decrees and all such judgments or decrees shall not have been vacated, discharged or stayed or bonded pending appeal within 60 days from the entry thereof; or 9.10 Ownership. A Change of Control Event shall have occurred; or 9.11 Environmental Violations. It shall be determined (whether by the Bankruptcy Court or by any other judicial or administrative forum) that Holdings or any of its Subsidiaries is liable for the payment of claims arising out of any failure to comply (or to have complied) with applicable Environmental Laws or regulations the payment of which could have a Material Adverse Effect; or 9.12 Net Cash Flow Deviation. Holdings and its Subsidiaries (on a consolidated basis) shall have unfavorably deviated, as of any date of determination, by more than 10% (on a cumulative basis) from the projected net cash flow as set forth in the Budget in effect on such date; or 9.13 Disbursements Deviation. Holdings and its Subsidiaries (on a consolidated basis) shall have unfavorably deviated, as of any date of determination, by more than 10% (on a cumulative basis) from the projected disbursements as set forth in the Budget in effect on such date; or -94- 9.14 Material Adverse Effect. There shall have occurred an event or condition that has had a Material Adverse Effect; -95- then, and in any such event, and at any time thereafter, if any Event of Default shall then be continuing, and without further order of or application to the Bankruptcy Court: the Agent shall, upon the written request of the Required Revolving Lenders, by written notice to the Borrower (with a copy to counsel for any statutory committee of unsecured creditors appointed in the Cases and to the United States Trustee), take any or all of the following actions, without prejudice to the rights of the Agent or any Lender to enforce its claims against any Guarantor or the Borrower, except as otherwise specifically provided for in this Agreement (provided, that with respect to clause (vi) below and the enforcement of Liens or other remedies with respect to the Collateral under clause (iii) below, the Agent shall provide the Credit Parties (with a copy to counsel for any statutory committee of unsecured creditors appointed in the Cases and to the United States Trustee) with five Business Days' written notice prior to taking the action contemplated thereby): (i) declare the Total Revolving Loan Commitment terminated, whereupon the Revolving Loan Commitment of each Lender shall forthwith terminate immediately and any Commitment Fees shall forthwith become due and payable without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Revolving Loans and all Obligations in respect of Revolving Loans owing hereunder (including Unpaid Drawings) to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; (iii) enforce, as Collateral Agent (or direct the Collateral Agent to enforce), upon five Business Days' notice to the Borrower (with a copy to counsel for any statutory committee of unsecured creditors appointed in the Cases), any or all of the Liens and security interests created pursuant to the Security Documents and the Orders; (iv) terminate any Letter of Credit which may be terminated in accordance with its terms; and (v) direct the Borrower to pay (and the Borrower hereby agrees upon receipt of such notice, to pay) into the Cash Collateral Account such additional amounts of cash, to be held as security for the Borrower's reimbursement obligations in respect of Letters of Credit then outstanding, equal to 105% of the aggregate Stated Amount of all Letters of Credit then outstanding and, to the extent the Borrower shall fail to furnish such funds as demanded by the Agent, the Agent shall be authorized to debit the accounts of the Credit Parties maintained with the Agent in such amount for the deposit of such amounts in the Cash Collateral Account; and (vi) set-off amounts in the Cash Collateral Account, the Concentration Account or any other accounts of the Credit Parties and apply such amounts to the Obligations of the Credit Parties hereunder and under the other Credit Documents; provided, however, that any proceeds of Collateral or other amounts received by any Lender or the Agent shall be applied in accordance with the Super-priority Claim and the Lien priorities set forth in Section 1.14 and 12.19. -96- On or after the Termination Date (or upon the occurrence of an Event of Default if the Maturity Date occurs before the Termination Date) and without further order of or application to the Bankruptcy Court: the Agent shall, upon the written request of the Required Term Lenders, by written notice to the Borrower (with a copy to counsel for any statutory committee of unsecured creditors appointed in the Cases and to the United States Trustee), take any or all of the following actions, without prejudice to the rights of the Agent or any Lender to enforce its claims against any Guarantor or the Borrower, except as otherwise specifically provided for in this Agreement (provided, that with respect to clause (iv) below and the enforcement of Liens or other remedies with respect to the Collateral under clause (iii) below, the Agent shall provide the Credit Parties (with a copy to counsel for any statutory committee of unsecured creditors appointed in the Cases and to the United States Trustee) with five Business Days' written notice prior to taking the action contemplated thereby): (i) declare the Total Term Loan Commitment terminated, whereupon the Term Loan Commitment of each Lender shall forthwith terminate immediately without any other notice of any kind; (ii) declare the principal of and any accrued interest in respect of all Term Loans and all Obligations in respect of Term Loans and Existing Letters of Credit owing hereunder to be, whereupon the same shall become, forthwith due and payable without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; (iii) enforce, as Collateral Agent (or direct the Collateral Agent to enforce), upon five Business Days' notice to the Borrower (with a copy to counsel for any statutory committee of unsecured creditors appointed in the Cases), any or all of the Liens and security interests created pursuant to the Security Documents and the Orders; (iv) set-off amounts in the Cash Collateral Account, the Concentration Account or any other accounts of the Credit Parties and apply such amounts to the Obligations of the Credit Parties hereunder and under the other Credit Documents; (v) terminate any Existing Letter of Credit which may be terminated in accordance with its terms; and (vi) direct the Borrower to pay (and the Borrower hereby agrees upon receipt of such notice, to pay) into the Cash Collateral Account such additional amounts of cash, to be held as security for the Borrower's reimbursement obligations in respect of Existing Letters of Credit then outstanding, equal to 105% of the aggregate Stated Amount of all Existing Letters of Credit then outstanding and, to the extent the Borrower shall fail to furnish such funds as demanded by the Agent, the Agent shall be authorized to debit the accounts of the Credit Parties maintained with the Agent in such amount for the deposit of such amounts in the Cash Collateral Account; provided, however, that any proceeds of Collateral or other amounts received by any Lender or the Agent shall be applied in accordance with the Super-priority Claim and the Lien priorities set forth in Sections 1.14 and -97- 12.19. SECTION 10. Definitions. As used herein, the following terms shall have the meanings herein specified unless the context otherwise requires. Defined terms in this Agreement shall include in the singular number the plural and in the plural the singular: "Accounts" shall mean, with respect to any Person, all present and future accounts, contract rights and other rights to payment for property sold or leased (whether or not delivered) or for services rendered, whether or not they have been earned by performance, and any letter of credit, guarantee, security interest or other security held by or granted to secure payment by an account debtor. "Accounts Borrowing Base" shall mean, on any day, an amount up to 85% of the outstanding Eligible Accounts Receivable of the Borrower and the Subsidiary Guarantors on such day. "Accounts Receivable Facility" shall mean the Series 1996-1 Supplement to Pooling and Servicing Agreement, dated as of May 24, 1996, among the Receivables Entity, as transferor, the Borrower, as servicer, and Manufacturers and Traders Trust Company, as trustee, as the same may be amended, modified, supplemented, increased, refinanced or replaced from time to time. "Accounts Receivable Facility Documents" shall mean the Accounts Receivable Facility Purchase Agreement, the Certificate Purchase Agreement (Series 1996-1 Class A), the Certificate Purchase Agreement (Series 1996-1 Class B), the Accounts Receivable Facility Pooling and Servicing Agreement and each of the other documents and agreements entered into in connection therewith, including all documents and agreements relating to the issuance, funding and/or purchase of Investor Certificates and Purchased Interests, in each case as such documents and agreements may be amended, modified, supplemented, refinanced or replaced from time to time. "Accounts Receivable Facility Pooling and Servicing Agreement" shall mean the Pooling and Servicing Agreement, dated as of May 24, 1996, among the Receivables Entity, as transferor, the Borrower, as servicer, and Manufacturers and Traders Trust Company, as trustee, as the same may be amended, modified, supplemented, refinanced or replaced from -98- time to time. "Accounts Receivable Facility Purchase Agreement" shall mean the Receivables Purchase Agreement, dated as of May 24, 1996, among the Borrower and the other Designated Credit Parties, as sellers, and the Receivables Entity, as buyer, as the same may be amended, modified, supplemented, refinanced or replaced from time to time. "Additional Security Documents" shall have the meaning provided in Section 7.11. "Additional Subsidiaries" shall mean American Pad & Paper Sales Company, Inc., AP&P Financing Company, Inc., AP&P Manufacturing, Inc. and American Pad and Paper Foreign Sales Corporation. "Adjusted Certificate of Deposit Rate" shall mean, on any day, the sum (rounded to the nearest 1/100 of 1%) of (1) the rate obtained by dividing (x) the most recent weekly average dealer offering rate for negotiable certificates of deposit with a three-month maturity in the secondary market as published in the most recent Federal Reserve System publication entitled "Select Interest Rates," published weekly on Form H.15 as of the date hereof, or if such publication or a substitute containing the foregoing rate information shall not be published by the Federal Reserve System for any week, the weekly average offering rate determined by the Agent on the basis of quotations for such certificates received by it from three certificate of deposit dealers in New York of recognized standing or, if such quotations are unavailable, then on the basis of other sources reasonably selected by the Agent, by (y) a percentage equal to 100% minus the stated maximum rate of all reserve requirements as specified in Regulation D applicable on such day to a three-month certificate of deposit of a member bank of the Federal Reserve System in excess of $100,000 (including, without limitation, any marginal, emergency, supplemental, special or other reserves), plus (2) the then daily net annual assessment rate as estimated by the Agent for determining the current annual assessment payable by BTCo to the Federal Deposit Insurance Corporation for insuring three month certificates of deposit. "Affiliate" shall mean, with respect to any Person, any other Person directly or indirectly controlling (including but not limited to all directors and officers of such Person), controlled by, or under direct or indirect common control with such Person. A Person shall be deemed to control a corporation if such Person possesses, directly or indirectly, the power (i) to vote 10% or more of the securities having ordinary voting power for the election of directors of such corporation or (ii) to direct or cause the direction of the management and policies of such corporation, whether through the ownership of voting securities, by contract or otherwise, it being understood that the Receivables Entity shall not be an Affiliate of Holdings or any of its Subsidiaries until such time as the Borrower and its Subsidiaries own 100% of the capital stock of the Receivables Entity. "Agent" shall have the meaning provided in the first -99- paragraph of this Agreement and shall include any successor to the Agent appointed pursuant to Section 11.10. "Agreement" shall mean this Debtor-in-Possession Credit Agreement, as the same may be from time to time modified, amended and/or supplemented. "Applicable Base Rate Margin" shall mean a percentage per annum equal to (i) 3% with respect to the Term Loans and (ii) 2.50% with respect to all other Loans. "Applicable Commitment Fee Percentage" shall mean a percentage per annum equal to .50%. "Asset Sale" shall mean any sale, transfer or other disposition by Holdings or any of its Subsidiaries to any Person other than the Borrower or any Wholly-Owned Subsidiary of the Borrower of any asset (including, without limitation, any capital stock or other securities of another Person, but excluding the sale by such Person of its own capital stock) of Holdings or such Subsidiary other than (i) sales, transfers or other dispositions of inventory made in the ordinary course of business and (ii) sales of assets pursuant to Sections 8.2 (e), (f), (g) and (i). "Assignment and Assumption Agreement" shall mean the Assignment and Assumption Agreement substantially in the form of Exhibit K (appropriately completed). "Authorized Officer" shall mean the Chief Executive Officer or the Chief Financial Officer of Holdings or the Borrower. "Bain Affiliates" shall mean any Affiliate of Bain Capital, provided that for purposes of the definition of "Change of Control Event", the term Bain Affiliate shall not include (x) any portfolio company of either Bain Capital or any Affiliate of Bain Capital or (y) any officer or director of Holdings or any of its Subsidiaries that is not also a partner or stockholder of Bain Capital on the Effective Date. "Bain Capital" shall mean Bain Capital, Inc., a Delaware corporation. "Bankruptcy Code" shall mean Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor thereto. "Bankruptcy Court" shall mean the United States Bankruptcy Court for the District of Delaware or any other court having jurisdiction over the Cases from time to time. -100- "Base Rate" at any time shall mean the higher of (x) the rate which is 1/2 of 1% in excess of the Adjusted Certificate of Deposit Rate and (y) the Prime Lending Rate. "Base Rate Loan" shall mean each Loan bearing interest at the rates provided in Section 1.8(a). "Blocked Account" shall have the meaning provided in the Blocked Account Agreement. "Blocked Account Agreement" shall mean the Blocked Account Agreement in the form of Exhibit O, as amended, supplemented or otherwise modified from time to time. "Borrower" shall have the meaning provided in the first paragraph of this Agreement. "Borrowing" shall mean and include (i) the borrowing of Swingline Loans from BTCo on a given date, (ii) the borrowing of Revolving Loans from all of the Revolving Lenders on a given date and (iii) the borrowing of Term Loans from all of the Term Lenders on a given date. "Borrowing Base" shall mean, on any day, subject to Section 1.1(d), an amount equal to the sum of (a) the Accounts Borrowing Base on such day and (b) the Inventory Borrowing Base on such day. "Borrowing Base Certificate" shall have the meaning given to such term in Section 7.1(d). "Borrowing Base Parties" shall mean the Borrower and the Subsidiary Guarantors. "BTCo" shall mean Bankers Trust Company, in its individual capacity, and any successor corporation thereto by merger, consolidation or otherwise. "Budget" shall mean the cash flow projections prepared by or under the supervision of the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager) on a consolidated basis, showing (on a line-item basis) weekly anticipated cash receipts and expenditures of Holdings and its Subsidiaries for the four-week period commencing on the date of such projections which shall be itemized in sufficient detail including line items for Post-Petition Date vendor payments, payroll, interest, professional fees, capital expenditures, rationalization costs, retention payments and payments of prepetition and "involuntary gap" liabilities to critical vendors; provided, however that Holdings shall submit an amended Budget for approval by the Agent no later than 5:00 P.M. -101- (New York time) on Tuesday of each week pursuant to Section 7.1(d)(iii). If there is no objection to such amended Budget from the Agent within two Business Days, such amended Budget shall be deemed to be the Budget in effect after such time. If the Agent objects to such amended Budget within two Business Days the previous Budget shall, until there is an agreement between the Borrower and the Agent on an amended Budget, be deemed to be in force and effect as the Budget. "Business Day" shall mean any day excluding Saturday, Sunday and any day which shall be in the City of New York a legal holiday or a day on which banking institutions are authorized by law or other governmental actions to close. "Capital Expenditures" shall mean, with respect to any Person, all expenditures by such Person which should be capitalized in accordance with GAAP, including all such expenditures with respect to fixed or capital assets (including, without limitation, expenditures for maintenance and repairs which should be capitalized in accordance with GAAP) and the amount of all Capitalized Lease Obligations incurred by such Person. "Capital Lease," as applied to any Person, shall mean any lease of any property (whether real, personal or mixed) by that Person as lessee which, in conformity with GAAP, is accounted for as a capital lease on the balance sheet of that Person. "Capitalized Lease Obligations" shall mean all obligations under Capital Leases of the Borrower or any of its Subsidiaries in each case taken at the amount thereof accounted for as liabilities in accordance with GAAP. "Carve-Out" shall have the meaning provided in Section 1.14(a); provided, that the amount of the Carve-Out shall be set forth in the Orders. "Cases" shall have the meaning set forth in the introductory paragraph of this Agreement. "Cash Collateral" shall have the meaning provided in Section 363(a) of the Bankruptcy Code, excluding cash actually applied to repay amounts owing under the Accounts Receivable Facility Purchase Agreement. "Cash Collateral Account" shall mean the account established with Bankers Trust Company which is in the name (and under the sole dominion and control) of the Collateral Agent, and any other cash collateral account maintained with, and under the sole dominion and control of, the Collateral Agent. -102- "Cash Equivalents" shall mean (i) securities issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof (provided, that the full faith and credit of the United States of America is pledged in support thereof) having maturities of not more than twelve months from the date of acquisition, (ii) U.S. dollar denominated time deposits, certificates of deposit and bankers acceptances of (x) any Lender or (y) any bank whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof (any such bank or Lender, an "Approved Lender"), in each case with maturities of not more than twelve months from the date of acquisition, (iii) commercial paper issued by any Approved Lender or by the parent company of any Approved Lender and commercial paper issued by, or guaranteed by, any industrial or financial company with a short-term commercial paper rating of at least A-1 or the equivalent thereof by S&P or at least P-1 or the equivalent thereof by Moody's, or guaranteed by any industrial company with a long term unsecured debt rating of at least A or A2, or the equivalent of each thereof, from S&P or Moody's, as the case may be, and in each case maturing within twelve months after the date of acquisition, (iv) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within twelve months from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either S&P or Moody's and (v) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (i) through (iv) above. "Cash Proceeds" shall mean, with respect to any Asset Sale, the aggregate cash payments (including any cash received by way of deferred payment pursuant to a note receivable issued in connection with such Asset Sale, other than the portion of such deferred payment constituting interest, but only as and when so received) received by Holdings and/or any of its Subsidiaries from such Asset Sale. "Certificate Purchase Agreement (Series 1996-1 Class A)" shall mean the Revolving Certificate Purchase Agreement (Series 1996-1 Class A), dated as of May 24, 1996, among the Receivables Entity, the Borrower, as the initial servicer, the purchasers party thereto, and BTCo, as Agent, as the same may be amended, modified, supplemented, refinanced or replaced from time to time. "Certificate Purchase Agreement (Series 1996-1 Class B)" shall mean the Revolving Certificate Purchase Agreement (Series 1996-1 Class B), dated as of May 24, 1996, among the Receivables Entity, the Borrower, as the initial servicer, the purchasers party thereto, and BTCo, as Agent, as the same may be -103- amended, modified, supplemented, refinanced or replaced from time to time. "Change of Control Event" shall mean (a) Holdings shall cease to own directly 100% on a fully diluted basis of the economic and voting interest in WR Acquisition's capital stock or (b) WR Acquisition shall cease to own directly 100% on a fully diluted basis of the economic and voting interest in the Borrower's capital stock or (c) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, as in effect on the (Effective Date), other than Bain Capital and/or the Bain Affiliates, shall (A) have acquired beneficial ownership of 30% or more on a fully diluted basis of the voting and/or economic interest in Holdings' capital stock or (B) obtained the power (whether or not exercised) to elect a majority of Holdings' directors or (d) the Board of Directors of Holdings shall cease to consist of a majority of Continuing Directors or (e) a "change of control" or similar event shall occur as provided in the Senior Subordinated Note Indenture. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time, and the regulations promulgated and rulings issued thereunder. Section references to the Code are to the Code, as in effect at the date of this Agreement and any subsequent provisions of the Code amendatory thereof, supplemental thereto or substituted therefor. "Collateral" shall mean all property (whether real or personal) with respect to which any security interests have been granted (or purported to be granted) pursuant to any Security Document, including, without limitation, all Pledge Agreement Collateral, all Security Agreement Collateral, the Mortgaged Properties and all cash and Cash Equivalents delivered as collateral. "Collateral Access Agreements" shall mean any landlord waivers, mortgagee waivers, bailee letters or any similar acknowledgment agreements of any warehouseman or processor in possession of Inventory, in each case substantially in the form of Exhibit I with such changes thereto as are acceptable to the Agent. "Collateral Agent" shall mean the Agent acting as collateral agent for the Secured Creditors. "Commitment" shall mean any of the commitments of any Lender, whether a Revolving Loan Commitment or a Term Loan Commitment. "Commitment Fee" shall have the meaning provided in Section 3.1(a). -104- "Concentration Account" shall have the meaning provided in the Concentration Account Agreement. "Concentration Account Agreement" shall mean the Concentration Account Agreement in the form of Exhibit P, as amended, supplemented or otherwise modified from time to time. "Confirmation Order" shall mean an order of the Bankruptcy Court confirming a Reorganization Plan. "Consolidated EBIT" shall mean, for any period, Consolidated Net Income, before total interest expense (inclusive of amortization of deferred financing fees and any original issue discount) of the Borrower and its Subsidiaries determined on a consolidated basis and provisions for taxes based on income, and determined (i) without giving effect to any extraordinary gains or losses from sales of assets sold outside the ordinary course of business but with giving effect to gains or losses from sales of assets sold in the ordinary course of business, (ii) without giving effect to any impact from the LIFO method of inventory accounting, (iii) without giving effect to any noncash charge deducted in determining Consolidated Net Income for such period and related to the issuance by Holdings or any of its Subsidiaries of stock, warrants or options to management (or any exercise of any such warrants or options) and (iv) without giving effect to any charges deducted in determining Consolidated Net Income for such period and related to the employee retention program of Holdings and its Subsidiaries and post-Petition Date professional fees. "Consolidated EBITDA" shall mean, for any period, Consolidated EBIT, adjusted by adding thereto the amount of all depreciation expense and amortization expense that were deducted in determining Consolidated EBIT for such period, it being understood and agreed, however, that Consolidated EBITDA shall be determined without giving effect to any Restructuring Charges otherwise deducted in determining Consolidated EBITDA for such period. "Consolidated Net Income" shall mean, for any period, the net income (or loss), after provision for taxes, of the Borrower and its Subsidiaries (including as a Subsidiary for this purpose the Receivables Entity although the definition of Subsidiary might require otherwise) on a consolidated basis for such period taken as a single accounting period. "Consultants" shall mean Lazard Freres & Co. LLC, the Crisis Manager or such other advisors as the Borrower may select and as may be acceptable to the Agent and the Required Lenders. "Contingent Obligations" shall mean as to any Person any obligation of such Person guaranteeing or intended to -105- guarantee any Indebtedness, leases, dividends or other obligations ("primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including, without limitation, any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds (x) for the purchase or payment of any such primary obligation or (y) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (d) otherwise to assure or hold harmless the owner of such primary obligation against loss in respect thereof; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection or standard contractual indemnities entered into, in each case in the ordinary course of business. The amount of any Contingent Obligation shall be deemed to be an amount equal to the stated or determinable amount of the primary obligation in respect of which such Contingent Obligation is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof (assuming such Person is required to perform thereunder) as determined by such Person in good faith. "Continuing Directors" shall mean the directors of Holdings on the Effective Date and each other director if such director's nomination for the election to the Board of Directors of Holdings is recommended by a majority of the then Continuing Directors. "Control Agreement" shall mean a control agreement, in form and substance satisfactory to the Agent, among Holdings or one of its Subsidiaries, the Agent and the applicable securities intermediary with respect to the applicable Securities Account and the investment property maintained in such Account. "Credit Documents" shall mean this Agreement, the Notes, the Guaranties, each Security Document and all other documents and instruments executed in connection therewith, as such documents and instruments may be amended, supplemented or otherwise modified from time to time. "Credit Event" shall mean the making of a Loan (other than a Revolving Loan made pursuant to a Mandatory Borrowing) or the issuance of a Letter of Credit. "Credit Party" shall mean Holdings, WR Acquisition, the Borrower and each Subsidiary Guarantor. -106- "Crisis Manager" shall have the meaning provided in Section 7.22. "Default" shall mean any event, act or condition which with notice or lapse of time, or both, would constitute an Event of Default. "Defaulting Lender" shall mean any Lender with respect to which a Lender Default is in effect. "Designated Credit Parties" shall mean the Borrower and those Subsidiary Guarantors that are from time to time party to the Accounts Receivable Facility Documents. "Dividends" shall have the meaning provided in Section 8.7. "Documents" shall mean the Credit Documents and the Existing Credit Documents. "Domestic Subsidiary" shall mean each Subsidiary of the Borrower incorporated or organized in the United States or any State or territory thereof. "Effective Date" shall have the meaning provided in Section 12.10. "Eligible Accounts Receivable" shall mean Accounts of the Borrowing Base Parties payable in Dollars and deemed by the Agent in its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, the face amount of such Accounts shall be reduced by the amount of all returns, discounts, claims, credits, charges, chargebacks, or other allowances (including accrued but unapplied customer rebates or other customer offsets) and by the aggregate amount of all reserves, limits and deductions provided for in this definition and elsewhere in this Agreement. Unless otherwise approved in writing by the Agent, no Account shall be deemed to be an Eligible Account Receivable if: (a) it arises out of a sale made by a Borrowing Base Party to an Affiliate; or (b) the Account is unpaid more than 60 days after the original payment due date; or (c) the Account is unpaid more than 90 days after the date of the original invoice, other than an Account with standard terms, consistent with past practice, that permit such Account to be paid beyond 90 days after the date of the original invoice, in which case such Account shall not be deemed to be an Eligible Account Receivable if it is unpaid beyond such longer period -107- after the date of the original invoice; or (d) it is from the same account debtor (or any Affiliate thereof) and 25% or more, in face amount, of all Accounts from such account debtor (or any Affiliate thereof) are ineligible pursuant to (b) or (c) above; or (e) (i) the account debtor has disputed its liability on, or the account debtor has made any claim with respect to, such Account or any other Account due from such account debtor to a Borrowing Base Party, which has not been resolved, to the extent of the amount of such dispute or claim, or (iii) the Account otherwise is or may become subject to any legal right of setoff by the account debtor, to the extent of the amount of such setoff; provided, that up to $1,250,000 of Accounts owing by each of Unisource and XPEDX (each, a "Specified Account Debtor") shall not be deemed to be ineligible under clause (ii) above unless such Specified Account Debtor exercises any setoff or similar rights against a Borrowing Base Party in which case all of the Accounts owing by such Specified Account Debtor shall be deemed to be ineligible; or (f) the account debtor has commenced a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or made an assignment for the benefit of creditors, or if a decree or order for relief has been entered by a court having jurisdiction over the account debtor in an involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or if any other petition or other application for relief under the federal bankruptcy laws has been filed by or against the account debtor, or if the account debtor has filed a certificate of dissolution under applicable state law or shall be liquidated, dissolved or wound-up, or shall authorize or commence any action or proceeding for dissolution, winding-up or liquidation, or if the account debtor has failed, suspended business, declared itself to be insolvent, is generally not paying its debts as they become due or has consented to or suffered a receiver, trustee, liquidator or custodian to be appointed for it or for all or a significant portion of its assets or affairs, unless the payment of Accounts from such account debtor is secured in a manner satisfactory to the Agent or, if the Account from such account debtor arises subsequent to a decree or order for relief with respect to such account debtor under the federal bankruptcy laws, as now or hereafter in effect, the Agent shall have determined that the timely payment and collection of such Account will not be impaired; or (g) the sale is to an account debtor outside of the continental United States, unless either (i) the Account is denominated in United States dollars and the account debtor is an Affiliate of a domestic account debtor of a Borrowing Base Party -108- or (ii) the account debtor thereon has supplied the applicable Borrowing Base Party with an irrevocable letter of credit in form and substance satisfactory to the Agent, issued by a financial institution satisfactory to the Agent and which has been duly pledged to the Agent (together with sufficient documentation to permit direct draws by the Agent); or (h) the sale to the account debtor is on a bill-and-hold, guaranteed sale, sale-and-return, sale on approval or consignment basis or made pursuant to any other written agreement providing for repurchase or return; or (i) the Agent determines in its Permitted Discretion that collection of such Account is insecure or that such Account may not be paid by reason of the account debtor's financial inability to pay; or (j) the account debtor is the United States of America or any department, agency or instrumentality thereof, unless the Borrower duly assigns its rights to payment of such Account to the Agent pursuant to the Assignment of Claims Act of 1940, as amended (31 U.S.C. " 3727 et seq.); or (k) the goods giving rise to such Account have not been shipped and delivered to and accepted by the account debtor or the services giving rise to such Account have not been performed by the applicable Borrowing Base Party and accepted by the account debtor or the Account otherwise does not represent a final sale; or (l) the Account does not comply with all applicable legal requirements, including, where applicable, the Federal Consumer Credit Protection Act, the Federal Truth in Lending Act and Regulation Z of the Board of Governors of the Federal Reserve System, in each case as amended; or (m) the Collateral Agent does not have a valid and perfected first priority security interest in such Account or the Account does not otherwise conform to the representations and warranties contained in this Agreement or the other Credit Documents. "Eligible Inventory" shall mean Inventory of the Borrowing Base Parties (other than Excluded Inventory) deemed by the Agent in its Permitted Discretion to be eligible for inclusion in the calculation of the Borrowing Base. In determining the amount to be so included, the amount of such Inventory shall be valued at the lower of cost or market on a basis consistent with the applicable Borrowing Base Party's current and historical accounting practice, less any goods returned or rejected by such Borrowing Base Party's customers and goods in transit to third parties (other than to such Borrowing -109- Base Party's agents and warehouses that are not excluded pursuant to clause (b) below), less any reserves otherwise required by the Agent pursuant to Section 1.1(d), and less any Inventory that the Agent determines to be ineligible pursuant to Section 1.1(d). Unless otherwise approved in writing by the Agent, no Inventory shall be deemed Eligible Inventory if: (a) the Inventory is not owned solely by a Borrowing Base Party and with respect to which such Borrowing Base Party does not have good, valid and marketable title; or (b) [Intentionally Omitted]; or (c) the Inventory is not subject to a perfected first priority Lien in favor of the Collateral Agent except, with respect to Eligible Inventory stored at sites described in clause (b) above, for Liens for normal and customary warehouseman charges; or (d) the Inventory is not located in the United States; or (e) the Inventory is on consignment, is demonstration inventory, is obsolete or slow moving or the Inventory does not otherwise conform to the representations and warranties contained in this Agreement or the other Credit Documents. "Eligible Transferee" shall mean and include a commercial bank, financial institution or other "accredited investor" (as defined in Regulation D of the Securities Act). "Emergency Order" shall mean an order of the Bankruptcy Court entered in the Cases Authorizing Emergency Borrowing Secured By Liens on Property of the Debtor's Estates Pursuant to Section 364(c) of the Bankruptcy Code dated January 14, 2000. "Environmental Claims" shall mean any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, notices of non-compliance or violation, investigations or proceedings relating in any way to any violation (or alleged violation) by Holdings or any of its Subsidiaries under any Environmental Law (hereafter "Claims") or any permit issued to Holdings or any of its Subsidiaries under any such law, including, without limitation, (a) any and all Claims by governmental or regulatory authorities for enforcement, cleanup, removal, response, remedial or other actions or damages pursuant to any applicable Environmental Law, and (b) any and all Claims by any third party seeking damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to health, safety or the environment. -110- "Environmental Law" shall mean any federal, state or local policy, statute, law, rule, regulation, ordinance, code or rule of common law now or hereafter in effect and in each case as amended, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent, decree or judgment (for purposes of this definition ("collectively, Laws")), relating to the environment, or Hazardous Materials or health and safety to the extent such health and safety issues arise under the Occupational Safety and Health Act of 1970, as amended, or any such similar Laws. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time, and the regulations promulgated and the rulings issued thereunder. Section references to ERISA are to ERISA as in effect at the date of this Agreement and any subsequent provisions of ERISA amendatory thereof, supplemental thereto or substituted therefor. "ERISA Affiliate" shall mean each person (as defined in Section 3(9) of ERISA) which together with Holdings or any Subsidiary of Holdings would be deemed to be a "single employer" within the meaning of Section 414(b), (c), (m) or (o) of the Code. "Event of Default" shall have the meaning provided in Section 9. "Excluded Inventory" shall mean (a) sub-assembly Inventory of the Ampad division, (b) Inventory of the Creative Card division, (c) work-in-process, (d) packaging and supplies, (e) Inventory in-transit, (f) temporary stock keeping items made to customer specifications, (g) discontinued raw materials and finished goods, (h) steel coils, (i) Inventory located at subcontractors and (j) Inventory rejected by customers. "Existing Credit Agreement" shall have the meaning provided in the recitals to this Agreement. "Existing Credit Agreement Debt" shall mean the "Obligations" of the "Credit Parties" under the "Credit Documents" as such terms are defined in the Existing Credit Agreement as in effect on the date hereof. "Existing Credit Documents" shall mean the Existing Credit Agreement and all documents and instruments executed or delivered in connection therewith, as amended, supplemented or otherwise modified from time to time. "Existing Indebtedness" shall have the meaning provided in Section 6.23. "Existing Lender Debt" shall have the meaning provided -111- in the recitals to this Agreement. "Existing Lenders" shall mean the financial institutions party as lenders to the Existing Credit Agreement on the Petition Date. "Existing Letters of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all Existing Letters of Credit and (ii) the aggregate amount of all unpaid obligations in respect of all Existing Letters of Credit. "Existing Letters of Credit" shall mean each of the letters of credit listed on Annex VIII and which were issued under the Existing Credit Agreement and are outstanding on the Effective Date, including any renewals of any of the foregoing. "Facing Fee" shall have the meaning provided in Section 3.1(c). "Federal Funds Rate" shall mean, for any period, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by the Agent from three Federal Funds brokers of recognized standing selected by the Agent. "Fees" shall mean all amounts payable pursuant to, or referred to in, Section 3.1. "Final Maturity Date" shall mean the earliest to occur of (i) the Maturity Date, as the same may be extended in accordance with the terms hereof, (ii) the Termination Date and (iii) the effective date of the Reorganization Plan. "Final Order" shall mean an order of the Bankruptcy Court entered in the Cases after a final hearing under Bankruptcy Rule 4001(c)(2) granting final approval of this Agreement (including, without limitation, Section 1.1(e)) and the other Credit Documents and granting the Liens and Super-priority Claims described in the Security Documents in favor of the Agent and the Lenders, substantially in the form of, and containing substantially similar provisions as, the Interim Order and otherwise in form and substance satisfactory to the Agent and the Required Lenders. "Foreign Cash Equivalents" shall mean certificates of -112- deposit or bankers acceptances of any bank organized under the laws of Canada, Japan or any country that is a member of the European Economic Community whose short-term commercial paper rating from S&P is at least A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent thereof, in each case with maturities of not more than twelve months from the date of acquisition. "Foreign Pension Plan" shall mean any plan, fund (including, without limitation, any superannuation fund) or other similar program established or maintained outside the United States of America by Holdings or any one or more of its Subsidiaries primarily for the benefit of employees of Holdings or such Subsidiaries residing outside the United States of America, which plan, fund or other similar program provides, or results in, retirement income, a deferral of income in contemplation of retirement or payments to be made upon termination of employment, and which plan is not subject to ERISA or the Code. "Foreign Sales" shall mean American Pad and Paper Foreign Sales Corporation, a Barbados corporation. "Foreign Subsidiary" shall mean each Subsidiary of the Borrower other than a Domestic Subsidiary. "GAAP" shall mean generally accepted accounting principles in the United States of America as in effect from time to time. "Guaranteed Creditors" shall mean and include each of the Agent, the Collateral Agent, the Lenders and each Letter of Credit Issuer. "Guaranteed Obligations" shall mean the full and prompt payment when due (whether at the stated maturity, by acceleration or otherwise) of the principal and interest on each Note issued by the Borrower to each Lender, and Loans made under this Agreement and all reimbursement obligations and Unpaid Drawings with respect to Letters of Credit, together with all the other obligations (including obligations which, but for the automatic stay under Section 362(a) of the Bankruptcy Code, would become due) and liabilities (including, without limitation, indemnities, fees and interest thereon) of the Borrower to such Lender, the Agent and the Collateral Agent now existing or hereafter incurred under, arising out of or in connection with this Agreement or any other Credit Document and the due performance and compliance with all the terms, conditions and agreements contained in the Credit Documents by the Borrower. "Guarantor" shall mean each Parent Guarantor and each Subsidiary Guarantor. -113- "Guaranty" shall mean and include each of the Parents Guaranty and the Subsidiary Guaranty. "Hazardous Materials" shall mean (a) any petrochemical or petroleum products, radioactive materials, asbestos in any form that is or could become friable, urea formaldehyde foam insulation, transformers or other equipment that contain dielectric fluid containing levels of polychlorinated biphenyls, and radon gas; and (b) any chemicals, materials or substances defined as or included in the definition of "hazardous substances," "hazardous wastes," "hazardous materials," "restricted hazardous materials," "extremely hazardous wastes," "restrictive hazardous wastes," "toxic substances," "toxic pollutants," "contaminants" or "pollutants," or words of similar meaning and regulatory effect. "Holdings" shall have the meaning provided in the first paragraph of this Agreement. "Holdings Common Stock" shall have the meaning provided in Section 6.15. "Holdings Tax Allocation Agreement" shall mean the Tax Sharing Agreement, dated as of October 31, 1995, among Holdings and its Domestic Subsidiaries. "Indebtedness" of any Person shall mean, without duplication, (i) all indebtedness of such Person for borrowed money, (ii) the deferred purchase price of assets or services payable to the sellers thereof or any of such seller's assignees which in accordance with GAAP would be shown on the liability side of the balance sheet of such Person but excluding deferred rent as determined in accordance with GAAP, (iii) the face amount of all letters of credit issued for the account of such Person and, without duplication, all drafts drawn thereunder, (iv) all Indebtedness of a second Person secured by any Lien on any property owned by such first Person, whether or not such Indebtedness has been assumed, (v) all Capitalized Lease Obligations of such Person, (vi) all obligations of such Person to pay a specified purchase price for goods or services whether or not delivered or accepted, i.e., take-or-pay and similar obligations, and (vii) all Contingent Obligations of such Person, provided, that Indebtedness shall not include trade payables and accrued expenses, in each case arising in the ordinary course of business. "Initial Borrowing Date" shall mean the date upon which the initial Borrowing of Loans occurs. "Intercompany Loan" shall have the meaning provided in Section 8.6(g). -114- "Intercompany Notes" shall mean promissory notes, in the form of Exhibit L, evidencing Intercompany Loans. "Interim Order" shall mean an order of the Bankruptcy Court entered in the Cases after the conclusion of the preliminary hearing under Bankruptcy Rule 4001(c) (I) Authorizing Secured Postpetition Financing on a Superpriority Basis Pursuant to 11 U.S.C. " 364, (II) Authorizing Use of Cash Collateral Pursuant to 11 U.S.C. " 3636, (III) Granting Adequate Protection Pursuant to 11 U.S.C. "" 363 and 364, and (IV) Scheduling a Final Hearing Pursuant to Bankruptcy Rule 4001(c) and otherwise in form and substance satisfactory to the Agent and the Required Lenders. "Inventory" shall mean all of the Borrowing Base Parties', inventory, including without limitation: (i) all raw materials, work in process, parts, components, assemblies, supplies and materials used or consumed in the businesses of the Borrowing Base Parties; (ii) all goods, wares and merchandise, finished or unfinished, held for sale or lease or leased or furnished or to be furnished under contracts of service; and (iii) all goods returned or repossessed by the Borrowing Base Parties. "Inventory Borrowing Base" shall mean, on any day, an amount up to 50% of the amount of the Eligible Inventory on such day. "Investor Certificate" shall have the meaning provided in the Accounts Receivable Pooling and Servicing Agreement. "L/C Supportable Indebtedness" shall mean (i) obligations of the Borrower or its Subsidiaries incurred in the ordinary course of business with respect to insurance obligations and workers' compensation, surety bonds and other similar statutory obligations and (ii) such other obligations of the Borrower or any of its Subsidiaries as are reasonably acceptable to the Agent and the Letter of Credit Issuer and otherwise permitted to exist pursuant to the terms of this Agreement. "Leasehold" of any Person shall mean all of the right, title and interest of such Person as lessee or licensee in, to and under leases or licenses of land, improvements and/or fixtures. "Lender" shall have the meaning provided in the first paragraph of this Agreement. "Lender Default" shall mean (i) the refusal (which has not been retracted) of a Lender to make available its portion of -115- any Borrowing (including any Mandatory Borrowing) or to fund its portion of any unreimbursed payment under Section 2.4(c) or (ii) a Lender having notified the Agent and/or the Borrower that it does not intend to comply with the obligations under Section 1.1(a), 1.1(c) or 2.4(c), whether or not as a result of the appointment of a receiver or conservator with respect to such Lender at the direction or request of any regulatory agency or authority. "Letter of Credit" shall have the meaning provided in Section 2.1(a). "Letter of Credit Fees" shall have the meaning provided in Section 3.1(b). "Letter of Credit Issuer" shall mean BTCo and any other Lender which, at the request of the Borrower and with the consent of the Agent, agrees in such Lender's sole discretion to become a Letter of Credit Issuer for purposes of issuing Letters of Credit pursuant to Section 2. "Letter of Credit Outstandings" shall mean, at any time, the sum of, without duplication, (i) the aggregate Stated Amount of all outstanding Letters of Credit and (ii) the aggregate amount of all Unpaid Drawings in respect of all Letters of Credit. "Letter of Credit Request" shall have the meaning provided in Section 2.2(a). "Letter of Credit Sublimit" shall mean $2,000,000. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, lien or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any financing or similar statement or notice filed under the UCC or any similar recording or notice statute, and any lease having substantially the same effect as the foregoing). "Loan" shall mean each Revolving Loan, each Term Loan and each Swingline Loan. "Mandatory Borrowing" shall have the meaning provided in Section 1.1(c). "Margin Stock" shall have the meaning provided in Regulation U. "Material Adverse Effect" shall mean a material adverse effect on the business, properties, assets, liabilities, condition (financial or otherwise) or prospects of Holdings, -116- WR Acquisition, the Borrower, Holdings and its Subsidiaries taken as a whole or the Borrower and its Subsidiaries taken as a whole. "Maturity Date" shall mean July 17, 2000; provided that the Borrower shall have the option to extend the Maturity Date for one three-month period if (A) at least 30 days prior to the then effective Maturity Date, the Borrower delivers to the Agent, with a copy for each Lender, a revised budget covering the three-month period commencing on the then effective Maturity Date, in form and substance reasonably satisfactory to the Agent and the Required Revolving Lenders, (B) on the then effective Maturity Date, no Default or Event of Default shall have occurred and be continuing, (C) the Borrower shall have filed a motion in the Cases pursuant to Section 363 of the Bankruptcy Code seeking approval of the process for the Williamhouse Sale, which motion shall be in form and substance reasonably satisfactory to the Agent and the Required Revolving Lenders and (D) at least five days prior to the then effective Maturity Date, Sections 8.10 and 8.11 of this Agreement shall have been amended in a manner reasonably satisfactory to the Agent and the Required Revolving Lenders; provided, further that the Borrower shall have the option to extend the Maturity date for one additional three-month period if (A) at least 30 days prior to the then effective Maturity Date, the Borrower delivers to the Agent, with a copy for each Lender, a revised budget covering the three-month period commencing on the then effective Maturity Date, in form and substance reasonably satisfactory to the Agent and the Required Revolving Lenders, (B) on or before the then effective Maturity Date, either (i) the Borrower delivers to the Agent, with a copy for each Lender, a disclosure statement and a Reorganization Plan for the Credit Parties which has been filed with the Bankruptcy Court, reflects the agreement of the Credit Parties with their creditors and is in form and substance reasonably satisfactory to the Agent and the Required Revolving Lenders or (ii) the Agent and the Required Revolving Lenders shall be satisfied, in their sole discretion, with the progress of the Borrower's efforts to consummate the Williamhouse Sale, (C) on or before the then effective Maturity Date, the Agent and the Required Revolving Lenders are satisfied with the progress of the Cases, (D) on the then effective Maturity Date, no Default or Event of Default shall have occurred and be continuing and (E) at least five days prior to the then effective Maturity Date, Sections 8.10 and 8.11 of this Agreement shall have been amended in a manner reasonably satisfactory to the Agent and the Required Revolving Lenders. If the Borrower notifies the Agent in writing that it desires to extend the Maturity Date for a second three-month period as provided above, the Agent shall, not later than ten days prior to the then effective Maturity Date, notify the Borrower if such additional three month extension will be granted. "Maximum Swingline Amount" shall mean (i) $20,000,000 from the Effective Date through and including January 29, 2000 -117- and (ii) $5,000,000 thereafter. "Minimum Borrowing Amount" shall mean (i) for Revolving Loans, $1,000,000 and (ii) for Swingline Loans, $250,000. "Moody's" shall mean Moody's Investors Service, Inc. "Mortgage" shall mean each mortgage, deed to secure debt or deed of trust pursuant to which any Credit Party shall have granted to the Collateral Agent a mortgage lien on such Credit Party's Mortgaged Property, each as amended, supplemented or otherwise modified from time to time. "Mortgaged Property" shall mean each parcel of Real Property owned or leased by any Credit Party which is encumbered by a Mortgage. "Mortgage Policies" shall have the meaning provided in the Existing Credit Agreement as in effect on the date hereof. "Mortgaged Properties" shall have the meaning provided in the Existing Credit Agreement as in effect on the date hereof. "Net Cash Proceeds" shall mean, with respect to any Asset Sale, the Cash Proceeds resulting therefrom net of (a) cash expenses of sale (including brokerage fees, if any, transfer taxes and payment of principal, premium and interest of Indebtedness other than the Loans and the Existing Credit Agreement Debt required to be repaid as a result of such Asset Sale) and (b) incremental income taxes paid or payable as a result thereof. "Non-Defaulting Lender" shall mean each Lender other than a Defaulting Lender. "Note" shall mean each Revolving Note, each Term Note and the Swingline Note. "Notice of Borrowing" shall have the meaning provided in Section 1.3(a). "Notice Office" shall mean the office of the Agent located at 130 Liberty Street, New York, New York 10006 or such other office as the Agent may designate to Holdings, the Borrower and the Lenders from time to time. "Obligations" shall mean all amounts, direct or indirect, contingent or absolute, of every type or description, and at any time existing, owing to the Agent, the Collateral Agent or any Lender pursuant to the terms of the Existing Credit Agreement, this Agreement or any other Credit Document and all obligations and liabilities of the Credit Parties to BTCo in -118- connection with the bank accounts and cash management system of the Credit Parties. "Orders" shall mean the Interim Order and the Final Order. "Other Revolving Exposure" shall mean all Swingline Loans then outstanding and the Letter of Credit Outstandings (exclusive of Unpaid Drawings relating to Letters of Credit or Swingline Loans which are repaid with the proceeds of, and simultaneously with the incurrence of, the respective incurrence of Revolving Loans) at such time. "Parent Guarantor" shall mean and include each of Holdings and WR Acquisition. "Parents Guaranty" shall mean the guaranty of the Parent Guarantors pursuant to Section 13. "Participant" shall have the meaning provided in Section 2.4(a). "Payment Office" shall mean the office of the Agent located at One Bankers Trust Plaza, New York, New York 10006 or such other office as the Agent may designate to Holdings, the Borrower and the Lenders from time to time. "PBGC" shall mean the Pension Benefit Guaranty Corporation established pursuant to Section 4002 of ERISA, or any successor thereto. "Percentage" shall mean, at any time for each Lender, the percentage obtained by dividing such Lender's Revolving Loan Commitment at such time by the Total Revolving Loan Commitment then in effect, provided, that if the Total Revolving Loan Commitment has been terminated, the Percentage of each Lender shall be determined by dividing such Lender's Revolving Loan Commitment as in effect immediately prior to such termination by the Total Revolving Loan Commitment as in effect immediately prior to such termination. "Permitted Covenant" shall mean (i) any periodic reporting covenant, (ii) any covenant restricting payments by Holdings with respect to any securities of Holdings which are junior to the Permitted Holdings PIK Securities, (iii) any covenant the default of which can only result in an increase in the amount of any redemption price, repayment amount, dividend rate or interest rate, (iv) any covenant the default of which gives rise only to rights or remedies which are subject to subordination terms reasonably acceptable to the Agent, (v) any covenant providing board observance rights with respect to Holdings' board of directors and (vi) any other covenant that -119- does not adversely affect the interests of the Lenders (as reasonably determined by the Agent). "Permitted Discretion" shall mean the Agent's judgment exercised in good faith based upon its consideration of any factor which the Agent believes in good faith: (i) will or could adversely affect the value of any Collateral, the enforceability or priority of the Collateral Agent's Liens thereon or the amount which the Agent and the Lenders would be likely to receive (after giving consideration to delays in payment and costs of enforcement) in the liquidation of such Collateral; (ii) suggests that any collateral report or financial information delivered to the Agent or the Collateral Agent by any Person on behalf of the Credit Parties is incomplete, inaccurate or misleading in any material respect; or (iii) creates or reasonably could be expected to create a Default or Event of Default. In exercising such judgment, the Agent may rely on independent advisors and professionals retained by the Agent to verify whether the assumptions made prior to the Effective Date relating to the value of Accounts and Inventory are supported by the current information and data. In exercising such judgment, the Agent may consider such factors already included in or tested by the definition of Eligible Accounts Receivable or Eligible Inventory, as well as any of the following: (i) the financial and business climate of the Credit Parties' industry and general macroeconomic conditions, (ii) changes in collection history and dilution with respect to the Accounts, (iii) changes in demand for, and pricing of, Inventory, (iv) changes in any concentration of risk with respect to Accounts and Inventory, and (v) any other factors that change the credit risk of lending to the Credit Parties on the security of the Accounts and Inventory. The burden of establishing lack of good faith hereunder shall be on the Credit Parties. "Permitted Encumbrances" shall mean (i) those liens, encumbrances and other matters affecting title to any Mortgaged Property listed in the Mortgage Policies in respect thereof and found reasonably acceptable by the Agent, (ii) as to any particular Mortgaged Property at any time, such easements, encroachments, covenants, rights of way, minor defects, irregularities or encumbrances on title which do not, in the reasonable opinion of the Agent, materially impair such Mortgaged Property for the purpose for which it is held by the mortgagor thereof, or the lien held by the Collateral Agent, (iii) zoning and other municipal ordinances which are not violated in any material respect by the existing improvements and the present use made by the mortgagor thereof of the Premises (as defined in the respective Mortgage), (iv) general real estate taxes and assessments not yet delinquent, and (v) such other similar items as the Agent may consent to (such consent not to be unreasonably withheld). -120- "Permitted Holdings PIK Securities" shall mean any preferred stock or subordinated promissory note of Holdings (or any security of Holdings that is convertible or exchangeable into any preferred stock or subordinated promissory note of Holdings), so long as the terms of any such preferred stock, subordinated promissory note or security of Holdings (i) do not provide any collateral security, (ii) do not provide any guaranty or other support by any Subsidiary of Holdings, (iii) do not contain any mandatory put, redemption, repayment, sinking fund or other similar provision occurring before the sixth anniversary of the Initial Borrowing Date, (iv) do not require the cash payment of dividends or interest before the sixth anniversary of the Initial Borrowing Date, (v) do not contain any covenants other than any Permitted Covenant, (vi) do not grant the holders thereof any voting rights except for (x) voting rights required to be granted to such holders under applicable law and (y) limited customary voting rights on fundamental matters such as mergers, consolidations, sales of substantial assets, or liquidations involving Holdings and (vii) are otherwise reasonably satisfactory to the Agent. "Permitted Liens" shall have the meaning provided in Section 8.3. "Person" shall mean any individual, partnership, joint venture, firm, corporation, limited liability company, association, trust or other enterprise or any government or political subdivision or any agency, department or instrumentality thereof. "Petition Date" shall mean January 10, 2000. "Plan" shall mean any multiemployer or single-employer plan as defined in Section 4001 of ERISA, which is maintained or contributed to by (or to which there is an obligation to contribute of) Holdings, any of its Subsidiaries or any ERISA Affiliate and each such plan for the five calendar year period immediately following the latest date on which Holdings, any of its Subsidiaries or any ERISA Affiliate maintained, contributed to or had an obligation to contribute to such plan. "Pledge Agreement" shall have the meaning provided in Section 5.1(j). "Pledge Agreement Collateral" shall mean all "Collateral" as defined in the Pledge Agreement. "Pledged Securities" shall mean all the Pledged Securities as defined the Pledge Agreement. "Postpetition Obligations" shall mean all Obligations other than the Prepetition Obligations. -121- "Prepetition Agent" shall mean Bankers Trust Company in its capacity as agent under the Existing Credit Agreement. "Prepetition Collateral" shall mean all property and assets of the Credit Parties securing the Prepetition Obligations. "Prepetition Obligations" shall have the meaning provided in the recitals hereto. "Prime Lending Rate" shall mean the rate which BTCo announces from time to time as its prime lending rate, the Prime Lending Rate to change when and as such prime lending rate changes. The Prime Lending Rate is a reference rate and does not necessarily represent the lowest or best rate actually charged to any customer. BTCo may make commercial loans or other loans at rates of interest at, above or below the Prime Lending Rate. "Projections" shall have the meaning provided in Section 5.1(i). "Real Property" of any Person shall mean all of the right, title and interest of such Person in and to land, improvements and fixtures, including Leaseholds. "Receivables Entity" shall mean Notepad Funding Corporation, a Delaware corporation. "Receivables Purchase Money Note" shall mean those purchase money notes issued by the Receivables Entity to the Designated Credit Parties pursuant to the terms of the Accounts Receivable Facility Documents. "Recovery Event" shall mean the receipt by Holdings or any of its Subsidiaries of any insurance or condemnation proceeds payable (i) by reason of theft, physical destruction or damage or any other similar event with respect to any properties or assets of Holdings or any of its Subsidiaries, (ii) by reason any condemnation, taking, seizing or similar event with respect to any properties or assets of Holdings or any of its Subsidiaries and (iii) under any policy of insurance required to be maintained under Section 7.3. "Register" shall have the meaning provided in Section 7.12. "Regulation D" shall mean Regulation D of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof establishing reserve requirements. -122- "Regulation T" shall mean Regulation T of the Board of Governors of the Federal Reserve System as from to time in effect and any successor to all or any portion thereof. "Regulation U" shall mean Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or a portion thereof. "Regulation X" shall mean Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor to all or any portion thereof. "Release" means disposing, discharging, injecting, spilling, pumping, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing, pouring and the like, into or upon any land or water or air, or otherwise entering into the environment. "Reorganization Plan" shall mean a plan of reorganization in the Cases. "Reportable Event" shall mean an event described in Section 4043(c) of ERISA with respect to a Plan as to which the 30-day notice requirement has not been waived by the PBGC. "Required Lenders" shall mean collectively (and not individually) Non-Defaulting Lenders the sum of whose Revolving Loan Commitments and Term Loan Commitments (or, if after the Total Revolving Loan Commitment and the Total Term Loan Commitment have been terminated, outstanding Revolving Loans, Term Loans, Term Loan Percentages of Existing Letter of Credit Outstandings and Percentages of outstanding Swingline Loans and Letter of Credit Outstandings) constitute greater than 50% of the Total Revolving Loan Commitment and the Total Term Loan Commitment less the aggregate Revolving Loan Commitments and Term Loan Commitments of Defaulting Lenders (or, if after the Total Revolving Loan Commitment and the Total Term Loan Commitment have been terminated, the total outstanding Revolving Loans and Term Loans of Non-Defaulting Lenders, the aggregate Term Loan Percentages of all Non-Defaulting Lenders of the Existing Letter of Credit Outstandings at such time and the aggregate Percentages of all Non-Defaulting Lenders of the total outstanding Swingline Loans and Letter of Credit Outstandings at such time). Prior to the Term Loan Effective Date, the determination of Required Lenders shall include each Lender's interest in the Prepetition Indebtedness instead of each Lender's interest in the Term Loan Commitments, Term Loans and Existing Letters of Credit. "Required Revolving Lenders" shall mean collectively (and not individually) Non-Defaulting Lenders the sum of whose Revolving Loan Commitments (or, if after the Total Revolving Loan Commitment has been terminated, outstanding Revolving Loans and -123- Percentages of outstanding Swingline Loans and Letter of Credit Outstandings) constitute greater than 50% of the Total Revolving Loan Commitment less the aggregate Revolving Loan Commitments of Defaulting Lenders (or, if after the Total Revolving Loan Commitment has been terminated, the total outstanding Revolving Loans of Non-Defaulting Lenders and the aggregate Percentages of all Non-Defaulting Lenders of the total outstanding Swingline Loans and Letter of Credit Outstandings at such time). "Required Term Lenders" shall mean collectively (and not individually) Non-Defaulting Lenders the sum of whose Term Loan Commitments (or, if after the Total Term Loan Commitment has been terminated, outstanding Term Loans and Term Loan Percentages of Existing Letter of Credit Outstandings) constitute greater than 50% of the Total Term Loan Commitment less the aggregate Term Loan Commitments of Defaulting Lenders (or, if after the Total Term Loan Commitment has been terminated, the total outstanding Term Loans of Non-Defaulting Lenders and the aggregate Term Loan Percentages of all Non-Defaulting Lenders of the Existing Letter of Credit Outstandings at such time). "Restructuring Charges" shall mean restructuring charges taken by Holdings and its Subsidiaries relating to plant rationalization, provided that such restructuring charges shall only constitute Restructuring Charges hereunder if taken on or after January 15, 2000 and on or before June 30, 2000, and the aggregate amount of Restructuring Charges shall not exceed $8,000,000. "Retention Payments" shall have the meaning provided in Section 4.2(d). "Returns" shall have the meaning provided in Section 6.22. "Revolving Lender" shall mean a Lender that has a Revolving Loan Commitment or has made Revolving Loans. "Revolving Loan" shall have the meaning provided in Section 1.1(a). "Revolving Loan Commitment" shall mean, with respect to each Lender, the amount set forth opposite such Lender's name in Annex I directly below the column entitled "Revolving Loan Commitment," as the same may be reduced from time to time pursuant to Section 3.2, Section 3.3 and/or Section 9. "Revolving Note" shall have the meaning provided in Section 1.5(a). "Revolving Obligations" shall mean all Obligations in respect of the Revolving Loans and the Letters of Credit. -124- "Sale Proposal" shall have the meaning provided in Section 5.1(w). "SEC" shall mean the Securities and Exchange Commission or any successor thereto. "Section 4.4(b)(ii) Certificate" shall have the meaning provided in Section 4.4(b)(ii). "Secured Creditors" shall have the meaning provided in the Security Documents. "Securities Account" shall have the meaning provided in Section 8-501 of the New York UCC. "Security Agreement" shall have the meaning provided in Section 5.1(k). "Security Agreement Collateral" shall mean all "Collateral" as defined in the Security Agreement. "Security Documents" shall mean and include the Security Agreement, the Pledge Agreement, the Blocked Account Agreement, the Concentration Account Agreement, each Mortgage and each Additional Security Document, if any. "Senior Subordinated Note Documents" shall mean and include the Senior Subordinated Note Indenture, the Senior Subordinated Notes and the Senior Subordinated Note Guarantees, as in effect on the Initial Borrowing Date, and as the same may be modified, supplemented or amended from time to time pursuant to the terms hereof and thereof. "Senior Subordinated Note Guarantees" shall mean the guarantees issued by the Subsidiaries of the Borrower pursuant to (or contained in) the Senior Subordinated Note Indenture. "Senior Subordinated Note Indenture" shall mean the Indenture, dated as of December 1, 1995, by and between the Borrower and IBJ Schroder Bank & Trust Company, as trustee thereunder, as in effect on the Initial Borrowing Date, and as the same may be modified, amended or supplemented from time to time in accordance with the terms hereof and thereof. "Senior Subordinated Notes" shall mean the Borrower's 13% Senior Subordinated Notes due 2005, as in effect on the Initial Borrowing Date, and as the same may be modified, supplemented or amended from time to time pursuant to the terms hereof and thereof (it being understood that all references herein to the Senior Subordinated Notes shall be a reference to the Senior Subordinated Notes issued under the Senior -125- Subordinated Note Indenture and outstanding on the Initial Borrowing Date as the same may be exchanged into the Series B Senior Subordinated Notes pursuant to, and in accordance with the provisions of, the Senior Subordinated Note Indenture). "Shareholder Subordinated Note" shall mean an unsecured junior subordinated note issued by Holdings (and not guaranteed or supported in any way by WR Acquisition or any of its Subsidiaries) in the form of Exhibit M. "S&P" shall mean Standard & Poor's Ratings Services, a division of McGraw Hill, Inc. "Stated Amount" of each Letter of Credit and Existing Letter of Credit shall mean the maximum amount available to be drawn thereunder (regardless of whether any conditions for drawing could then be met). "Subsidiary" of any Person shall mean and include (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person directly or indirectly through Subsidiaries and (ii) any partnership, association, joint venture or other entity (other than a corporation) in which such Person directly or indirectly through Subsidiaries, has more than a 50% equity interest at the time. "Subsidiary Guarantor" shall mean each Subsidiary of the Borrower listed on Annex VI, including without limitation, the Additional Subsidiaries. "Subsidiary Guaranty" shall have the meaning provided in Section 5.1(l). "Super-priority Claim" shall mean a claim against the Borrower or any Guarantor in any of the Cases which is an administrative expense having priority over any and all administrative expenses of the kind specified in Sections 503(b) or 507(b) of the Bankruptcy Code. "Swingline Expiry Date" shall mean the date which is five Business Days prior to the Final Maturity Date. "Swingline Loan" shall have the meaning provided in Section 1.1(b). "Swingline Note" shall have the meaning provided in Section 1.5(a). -126- "Tax Agreements" shall have the meaning provided in Section 5.1(f). "Taxes" shall have the meaning provided in Section 4.4. "Termination Date" shall mean the earliest to occur of (i) the Maturity Date, (ii) the effective date of a Reorganization Plan confirmed by the Bankruptcy Court pursuant to the Confirmation Order, or (iii) the termination of the Total Revolving Loan Commitment upon the occurrence of an Event of Default or otherwise in accordance with the terms hereof. "Term Lender" shall mean a Lender that has a Term Loan Commitment or has made Term Loans. Prior to the Term Loan Effective Date, there shall be deemed to be no Term Lenders. "Term Loan" shall have the meaning provided in Section 1.1(e). "Term Loan Commitment" shall mean, on and after the Term Loan Effective Date, with respect to each Lender, the amount set forth opposite such Lender's name in Annex I directly below the column entitled "Term Loan Commitment." Prior to the Term Loan Effective Date, no Lender shall have a Term Loan Commitment. "Term Loan Effective Date" shall mean the date on which the conditions precedent in Section 5.3 are satisfied. "Term Loan Interest Payment Date" shall mean the earliest to occur of (i) the effective date of a Reorganization Plan confirmed by the Bankruptcy Court pursuant to the Confirmation Order, (ii) the consummation of the Williamhouse Sale and (iii) the Maturity Date. "Term Loan Percentage" shall mean, at any time for each Lender, the percentage obtained by dividing such Lender's Term Loan Commitment at such time by the Total Term Loan Commitment then in effect, provided, that if the Total Term Loan Commitment has been terminated, the Term Loan Percentage of each Lender shall be determined by dividing such Lender's Term Loan Commitment as in effect immediately prior to such termination by the Total Term Loan Commitment as in effect immediately prior to such termination. "Term Note" shall have the meaning provided in Section 1.5(a). "Termination Date" shall mean the earliest to occur of (i) the Maturity Date, (ii) the effective date of a Reorganization Plan confirmed by the Bankruptcy Court pursuant to the Confirmation Order, or (iii) the termination of the Total -127- Revolving Loan Commitment upon the occurrence of an Event of Default or otherwise in accordance with the terms hereof. "Total Commitment" shall mean, at any time, the sum of the Total Revolving Loan Commitment and the Total Term Loan Commitment at such time. "Total Revolving Loan Commitment" shall mean the sum of the Revolving Loan Commitments of each of the Lenders. "Total Revolving Outstandings" shall mean, at any time, the sum of (i) the aggregate principal amount of all Revolving Loans outstanding at such time, (ii) the aggregate principal amount of all Swingline Loans outstanding at such time and (iii) the aggregate amount of all Letter of Credit Outstandings at such time. "Total Term Loan Commitment" shall mean, on and after the Term Loan Effective Date, the sum of the Term Loan Commitments of each of the Lenders. Prior to the Term Loan Effective Date, the Total Term Loan Commitment shall be zero. "Total Unutilized Revolving Loan Commitment" shall mean, at any time, (i) the Total Revolving Loan Commitment at such time less (ii) the sum of the aggregate principal amount of all Revolving Loans and Swingline Loans outstanding at such time plus the Letter of Credit Outstandings at such time. "UCC" shall mean the Uniform Commercial Code as in effect from time to time in the relevant jurisdiction. "Unfunded Current Liability" of any Plan shall mean the amount, if any, by which the actuarial present value of the accumulated plan benefits under the Plan as of the close of its most recent plan year exceeds the fair market value of the assets allocable thereto, each determined in accordance with Statement of Financial Accounting Standards No. 35, based upon the actuarial assumptions used by the Plan's actuary in the most recent annual valuation of the Plan. "Unpaid Drawing" shall have the meaning provided in Section 2.3(a). "Unutilized Revolving Loan Commitment" with respect to any Lender at any time shall mean such Lender's Revolving Loan Commitment at such time less the sum of (i) the aggregate outstanding principal amount of all Revolving Loans made by such Lender and (ii) such Lender's Percentage of the Letter of Credit Outstandings at such time. "U.S. Dollars" and the sign "$" shall each mean freely transferable lawful money of the United States of America. -128- "Variance Report" shall mean the report to be delivered by Holdings to the Agent on a weekly basis (commencing one week after the Effective Date) reflecting the actual cash receipts and disbursements (on a line item basis) for the preceding week (and on a cumulative basis since the Effective Date) and the percentage variance of such amounts from those set forth on the Budget for the preceding week (and cumulatively). "Wholly-Owned Domestic Subsidiary" shall mean, as to any Person, any Wholly-Owned Subsidiary of such Person which is a Domestic Subsidiary. "Wholly-Owned Foreign Subsidiary" shall mean, as to any Person, any Wholly-Owned Subsidiary of such Person which is a Foreign Subsidiary. "Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any corporation 100% of whose capital stock (other than director's qualifying shares and/or other nominal amounts of shares required to be held other than by such Person under applicable law) is at the time owned by such Person and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in which such Person and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such time. "Williamhouse Sale" shall mean the sale of all or substantially all of the assets of the Williamhouse division of the Credit Parties. "WR Acquisition" shall have the meaning provided in the first paragraph of this Agreement. "Written" (whether lower or upper case) or "in writing" shall mean any form of written communication or a communication by means of telex, facsimile device, telegraph or cable. "Y2K Compliance Plan" shall mean the Y2K compliance plan of the Borrower delivered to the Agent pursuant to Section 5.1(r). -129- SECTION 11. The Agent. 11.1 Appointment. Each Lender hereby irrevocably designates and appoints BTCo as Agent of such Lender (such term to include for purposes of this Section 11, BTCo acting as Collateral Agent) to act as specified herein, in the other Credit Documents and in the Orders, and each such Lender hereby irrevocably authorizes BTCo as the Agent to take such action on its behalf under the provisions of this Agreement, the other Credit Documents and the Orders and to exercise such powers and perform such duties as are expressly delegated to the Agent by the terms of this Agreement, the other Credit Documents and the Orders, together with such other powers as are reasonably incidental thereto. The Agent agrees to act as such upon the express conditions contained in this Section 11. Notwithstanding any provision to the contrary elsewhere in this Agreement, in any other Credit Document or in the Orders, the Agent shall not have any duties or responsibilities, except those expressly set forth herein, in the other Credit Documents, or in the Orders or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement, the other Credit Documents or the Orders or otherwise exist against the Agent. The provisions of this Section 11 are solely for the benefit of the Agent and the Lenders, and none of Holdings nor any of its Subsidiaries shall have any rights as a third party beneficiary of any of the provisions hereof. In performing its functions and duties under this Agreement, the Agent shall act solely as agent of the Lenders and the Agent does not assume and shall not be deemed to have assumed any obligation or relationship of agency or trust with or for Holdings or any of its Subsidiaries. 11.2 Delegation of Duties. The Agent may execute any of its duties under this Agreement, any other Credit Document or the Orders by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Agent shall not be responsible for the negligence or misconduct of any agents or attorneys-in-fact selected by it with reasonable care except to the extent otherwise required by Section 11.3. -130- 11.3 Exculpatory Provisions. Neither the Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person in its capacity as Agent under or in connection with this Agreement, the other Credit Documents or the Orders (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by Holdings, any of its Subsidiaries or any of their respective officers contained in this Agreement or the other Credit Documents, any other Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Agent under or in connection with, this Agreement or any other Document or for any failure of Holdings or any of its Subsidiaries or any of their respective officers to perform its obligations hereunder or thereunder. The Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or the other Documents, or to inspect the properties, books or records of Holdings or any of its Subsidiaries. The Agent shall not be responsible to any Lender for the effectiveness, genuineness, validity, enforceability, collectability or sufficiency of this Agreement or any other Document or for any representations, warranties, recitals or statements made herein or therein or made in any written or oral statement or in any financial or other statements, instruments, reports, certificates or any other documents in connection herewith or therewith furnished or made by the Agent to the Lenders or by or on behalf of Holdings or any of its Subsidiaries to the Agent or any Lender or be required to ascertain or inquire as to the performance or observance of any of the terms, conditions, provisions, covenants or agreements contained herein or therein or as to the use of the proceeds of the Loans or of the existence or possible existence of any Default or Event of Default. -131- 11.4 Reliance by Agent. The Agent shall be entitled to rely, and shall be fully protected in relying, upon any note, writing, resolution, notice, consent, certificate, affidavit, letter, cablegram, telegram, facsimile, telex or teletype message, statement, order or other document or conversation reasonably believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to Holdings or any of its Subsidiaries), independent accountants and other experts selected by the Agent. The Agent shall be fully justified in failing or refusing to take any action under this Agreement, any other Credit Document or the Orders unless it shall first receive such advice or concurrence of the Required Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement, the other Credit Documents and the Orders in accordance with a request of the Required Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders. 11.5 Notice of Default. The Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default unless the Agent has actually received notice from a Lender, Holdings, WR Acquisition or the Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default." In the event that the Agent receives such a notice, the Agent shall give prompt notice thereof to the Lenders. The Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Required Lenders; provided, that, unless and until the Agent shall have received such directions, the Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. -132- 11.6 Nonreliance on Agent and Other Lenders. Each Lender expressly acknowledges that neither the Agent nor any of its respective officers, directors, employees, agents, attorneys-in-fact or affiliates have made any representations or warranties to it and that no act by the Agent hereinafter taken, including any review of the affairs of Holdings or any of its Subsidiaries, shall be deemed to constitute any representation or warranty by the Agent to any Lender. Each Lender represents to the Agent that it has, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Holdings and its Subsidiaries and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement, and to make such investigation as it deems necessary to inform itself as to the business, assets, operations, property, financial and other condition, prospects and creditworthiness of Holdings and its Subsidiaries. The Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, assets, property, financial and other condition, prospects or creditworthiness of Holdings or any of its Subsidiaries which may come into the possession of the Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. -133- 11.7 Indemnification. The Lenders agree to indemnify the Agent in its capacity as such ratably according to their respective "percentages" as used in determining the Required Lenders at such time (with such "percentages" to be determined as if there are no Defaulting Lenders), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, reasonable expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Obligations) be imposed on, incurred by or asserted against the Agent in its capacity as such in any way relating to or arising out of this Agreement, any other Credit Document, the Orders, or any documents contemplated by or referred to herein or the transactions contemplated hereby or any action taken or omitted to be taken by the Agent under or in connection with any of the foregoing, but only to the extent that any of the foregoing is not paid by Holdings or any of its Subsidiaries; provided, that no Lender shall be liable to the Agent for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting solely from the gross negligence or willful misconduct of the Agent. To the extent any Lender would be required to indemnify the Agent pursuant to the immediately preceding sentence but for the fact that it is a Defaulting Lender, such Defaulting Lender shall not be entitled to receive any portion of any payment or other distribution hereunder until each other Lender shall have been reimbursed for the excess, if any, of the aggregate amount paid by such Lender under this Section 11.7 over the aggregate amount such Lender would have been obligated to pay had such first Lender not been a Defaulting Lender. If any indemnity furnished to the Agent for any purpose shall, in the opinion of the Agent be insufficient or become impaired, the Agent may call for additional indemnity and cease, or not commence, to do the acts indemnified against until such additional indemnity is furnished. The agreements in this Section 11.7 shall survive the payment of all Obligations. 11.8 Agent in its Individual Capacity. The Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with Holdings and its Subsidiaries as though the Agent were not the Agent hereunder. With respect to the Loans made by it and all Obligations owing to it, the Agent shall have the same rights and powers under this Agreement as any Lender and may exercise the same as though it were not the Agent and the terms "Lender" and "Lenders" shall include the Agent in its individual capacity. The parties hereto acknowledge that BTCo is the agent under the Existing Credit Agreement. In acting under this Agreement and the other Credit Documents, the Agent may consider the interests of the Existing Lenders with respect to the Existing Credit Agreement. -134- 11.9 Holders. The Agent may deem and treat the payee of any Note as the owner thereof for all purposes hereof unless and until a written notice of the assignment, transfer or endorsement thereof, as the case may be, shall have been filed with the Agent. Any request, authority or consent of any Person or entity who, at the time of making such request or giving such authority or consent, is the holder of any Note shall be conclusive and binding on any subsequent holder, transferee, assignee or indorsee, as the case may be, of such Note or of any Note or Notes issued in exchange therefor. 11.10 Resignation of the Agent; Successor Agent. The Agent may resign as the Agent upon 30 days' notice to the Lenders. Upon the resignation of the Agent, the Required Lenders shall appoint from among the Lenders a successor Agent which is a bank or a trust company for the Lenders subject to prior approval by the Borrower (such approval not to be unreasonably withheld, provided that such approval shall not be required if an Event of Default then exists), whereupon such successor agent shall succeed to the rights, powers and duties of the Agent, and the term "Agent" shall include such successor agent effective upon its appointment, and the resigning Agent's rights, powers and duties as the Agent shall be terminated, without any other or further act or deed on the part of such former Agent or any of the parties to this Agreement. After the resignation of the Agent hereunder, the provisions of this Section 11 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Agent under this Agreement. -135- 11.11 No Duties of Arranger or Syndication Agent. Neither the Arranger nor the Syndication Agent shall have any duties, obligations or liabilities hereunder or under any other Credit Document. SECTION 12. Miscellaneous. -136- 12.1 Payment of Expenses, etc. The Borrower agrees to: (i) whether or not the transactions herein contemplated are consummated, pay all reasonable out-of-pocket costs and expenses of the Agent and the Lenders (including, without limitation, the reasonable fees and disbursements of counsel to the Agent and each Lender and professionals engaged by the Agent and the Lenders) in connection with the negotiation, preparation, execution and delivery of the Credit Documents and the documents and instruments referred to therein, the consummation and administration of the transactions contemplated hereby and thereby and any amendment, waiver or consent relating thereto and in connection with the Agent's syndication efforts with respect to this Agreement; (ii) pay all reasonable out-of-pocket costs and expenses of the Agent, each Letter of Credit Issuer and each of the Lenders in connection with the enforcement of the Credit Documents and the documents and instruments referred to therein and, after an Event of Default shall have occurred and be continuing, the protection of the rights of the Agent, each Letter of Credit Issuer and each of the Lenders thereunder (including, without limitation, the reasonable fees and disbursements of counsel (including in-house counsel) for the Agent, for each Letter of Credit Issuer and for each of the Lenders); (iii) pay and hold each of the Lenders harmless from and against any and all present and future stamp and other similar taxes with respect to the foregoing matters and save each of the Lenders harmless from and against any and all liabilities with respect to or resulting from any delay or omission (other than to the extent attributable to such Lender) to pay such taxes; (iv) pay all reasonable expenses of the Agent and each Lender related to this Agreement and the other Credit Documents in connection with the Cases (including, without limitation, the ongoing monitoring by the Agent and each Lender of the Cases, including attendance by the Agent, each Lender and their respective counsel at hearings or other proceedings and the ongoing review of documents filed with the Bankruptcy Court); and (v) indemnify the Agent, the Collateral Agent, each Letter of Credit Issuer and each Lender, their respective officers, directors, employees, representatives and agents from and hold each of them harmless against any and all losses, liabilities, claims, damages or expenses incurred by any of them as a result of, or arising out of, or in any way related to, or by reason of, (a) any investigation, litigation or other proceeding (whether or not the Agent, the Collateral Agent, any Letter of Credit Issuer or any Lender is a party thereto and whether or not any such investigation, litigation or other proceeding is between or among the Agent, the Collateral Agent, any Letter of Credit Issuer, any Lender, any Credit Party or any third Person or otherwise) related to the entering into and/or performance of this Agreement or any other Document or the use of the proceeds of any Loans hereunder or the consummation of any transactions contemplated in any Document (but excluding any such losses, liabilities, claims, damages or expenses to the extent incurred by reason of the gross -137- negligence or willful misconduct of the Person to be indemnified), or (b) the actual or alleged presence of Hazardous Materials in the air, surface water or groundwater or on the surface or subsurface of any Real Property or any Environmental Claim, in each case, including, without limitation, the reasonable fees and disbursements of counsel and independent consultants incurred in connection with any such investigation, litigation or other proceeding. 12.2 Right of Setoff. In addition to any rights now or hereafter granted under applicable law or otherwise, and not by way of limitation of any such rights, upon the occurrence of an Event of Default, the Agent, each Letter of Credit Issuer and each Lender is hereby authorized at any time or from time to time, without presentment, demand, protest or other notice of any kind to Holdings or any of its Subsidiaries or to any other Person, any such notice being hereby expressly waived, and without further order of or application to the Bankruptcy Court, to set off and to appropriate and apply any and all deposits (general or special) and any other Indebtedness at any time held or owing by the Agent, such Letter of Credit Issuer or such Lender (including, without limitation, by branches and agencies of the Agent, such Letter of Credit Issuer and such Lender wherever located) to or for the credit or the account of Holdings or any of its Subsidiaries against and on account of the Obligations of Holdings or any of its Subsidiaries to the Agent, such Letter of Credit Issuer or such Lender under this Agreement or under any of the other Credit Documents, including, without limitation, all interests in Obligations of Holdings or any of its Subsidiaries purchased by such Lender pursuant to Section 12.6(b), and all other claims of any nature or description arising out of or connected with this Agreement or any other Credit Document, irrespective of whether or not the Agent, such Letter of Credit Issuer or such Lender shall have made any demand hereunder and although said Obligations shall be contingent or unmatured; provided, however, that in accordance with the terms of the Orders, the Agent and the Lenders may exercise the rights described in this Section 12.2 only after providing three Business Days' prior written notice to the Borrower, the United States Trustee and any statutory committee appointed in the Cases. Notwithstanding anything to the contrary contained in this Section 12.2, no Lender shall exercise any such right of set-off without the prior consent of the Agent or the Required Lenders so long as the Obligations shall be secured by any Real Property located in the State of California, it being understood and agreed, however, that this sentence is for the sole benefit of the Letter of Credit Issuers and the Lenders and may be amended, modified or waived in any respect by the Required Lenders without the requirement of prior notice to or consent by any Credit Party and does not constitute a waiver of any rights against any Credit Party or against any Collateral. -138- 12.3 Notices. Except as otherwise expressly provided herein, all notices and other communications provided for hereunder shall be in writing (including telegraphic, telex, facsimile or cable communication) and mailed, telegraphed, telexed, telecopied, cabled or delivered, if to any Credit Party, at the address specified opposite its signature below or in the other relevant Credit Documents, as the case may be; if to the Agent or any Lender, at its address specified for the Agent or such Lender on Annex II; or, at such other address as shall be designated by any party in a written notice to the other parties hereto. All such notices and communications shall be mailed, telegraphed, telexed, telecopied or cabled or sent by overnight courier, and shall be effective when received. -139- 12.4 Benefit of Agreement. -140- (a) This Agreement shall be binding upon and inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto; provided, however, the Borrower may not assign or transfer any of its rights, obligations or interest hereunder or under any other Credit Document without the prior written consent of the Lenders and, provided further, that, although any Lender may transfer, assign or grant participations in its rights hereunder, such Lender shall remain a "Lender" for all purposes hereunder (and may not transfer or assign all or any portion of its Revolving Loan Commitment hereunder except as provided in Section 12.4(b)) and the transferee, assignee or participant, as the case may be, shall not constitute a "Lender" hereunder and, provided further, that no Lender shall transfer or grant any participation under which the participant shall have rights to approve any amendment to or waiver of this Agreement or any other Credit Document except to the extent such amendment or waiver would (i) extend the final scheduled maturity of any Loan, Note or Letter of Credit (unless such Letter of Credit is not extended beyond the Final Maturity Date) in which such participant is participating, or reduce the rate or extend the time of payment of interest or Fees thereon (except in connection with a waiver of applicability of any post-default increase in interest rates) or reduce the principal amount thereof, or increase the amount of the participant's participation over the amount thereof then in effect (it being understood that a waiver of any Default or Event of Default or of a mandatory reduction in the Total Revolving Loan Commitment or the Total Term Loan Commitment shall not constitute a change in the terms of such participation, and that an increase in any Commitment or Loan shall be permitted without the consent of any participant if the participant's participation is not increased as a result thereof), (ii) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement or (iii) release all or substantially all of the Collateral under all of the Security Documents (except as expressly provided in the Credit Documents) supporting the Loans hereunder in which such participant is participating and, provided further, that no Lender shall transfer, assign or grant participations in any interest in such Lender's Revolving Loans or Revolving Loan Commitment to any Person without a simultaneous transfer, assignment or grant of a participation in a pro rata amount of such Lender's Term Loans and Term Loan Commitment to such Person. In the case of any such participation, the participant shall not have any rights under this Agreement, any of the other Credit Documents, the Interim Order or the Final Order (the participant's rights against such Lender in respect of such participation to be those set forth in the agreement executed by such Lender in favor of the participant relating thereto) and all amounts payable by the Borrower hereunder shall be determined as if such Lender had not sold such participation. -141- -142- (b) Notwithstanding the foregoing, any Lender (or any Lender together with one or more other Lenders) may (x) assign all or a portion of its Commitments (and related outstanding Obligations hereunder) to its parent company and/or any affiliate of such Lender which is at least 50% owned by such Lender or its parent company or to one or more Lenders or (y) assign all, or if less than all, a portion equal to at least $2,500,000 in the aggregate for the assigning Lender or assigning Lenders, of such Commitments (and related outstanding Obligations hereunder) to one or more Eligible Transferees, each of which assignees shall become a party to this Agreement as a Lender by execution of an Assignment and Assumption Agreement, provided that (i) at such time Annex I shall be deemed modified to reflect the Commitments of such new Lender and of the existing Lenders, (ii) the assigning Lender shall advise the assignee that the Borrower shall not be obligated to execute replacement Notes and shall add a legend to any of its Notes which evidence all or any part of the Loans assigned to the effect that rights thereunder have been assigned, (iii) the consent of the Agent shall be required in connection with any such assignment pursuant to clause (y) of this Section 12.4(b) (which consent shall not be unreasonably withheld), (iv) at the time of any assignment of Revolving Loan Commitments (or related Obligations) pursuant to clause (y) of this Section 12.4(b), the assigning Lender shall either (A) simultaneously assign a pro rata share of the Prepetition Obligations (or, as appropriate, the Term Loans) to the same assignee or (B) the assigning Lender shall give all Lenders which have both Revolving Loans and Prepetition Obligations (or, as appropriate, Term Loans) an opportunity to purchase its Revolving Loan Commitments (and related Obligations) on the same terms as the proposed assignment and (v) the Agent shall receive at the time of each such assignment, from the assigning or assignee Lender, the payment of a non-refundable assignment fee of $3,500 and, provided further, that such transfer or assignment will not be effective until recorded by the Agent on the Register pursuant to Section 7.12 and, provided further, that after giving effect to such assignment, the sum of the Commitments and the outstanding Loans of such assigning Lender shall not be less than $2,500,000. The Agent will give the Borrower notice of each such assignment after it is consummated. To the extent of any assignment pursuant to this Section 12.4(b), the assigning Lender shall be relieved of its obligations hereunder with respect to its assigned Commitment. At the time of each assignment pursuant to this Section 12.4(b) to a Person which is not already a Lender hereunder and which is not a United States person (as such term is defined in Section 7701(a)(30) of the Code) for Federal income tax purposes, the respective assignee Lender shall provide to the Borrower and the Agent the appropriate Internal Revenue Service Forms (and, if applicable a Section 4.4(b)(ii) Certificate) described in Section 4.4(b). To the extent that an assignment of all or any portion of a Lender's Revolving Loan Commitment and related outstanding -143- Obligations pursuant to Section 1.13 or this Section 12.4(b) would, at the time of such assignment, result in increased costs under Section 1.10, 2.5 or 4.4 from those being charged by the respective assigning Lender prior to such assignment, then the Borrower shall not be obligated to pay such increased costs (although the Borrower shall be obligated to pay any other increased costs of the type described above resulting from changes after the date of the respective assignment). (c) Nothing in this Agreement shall prevent or prohibit any Lender from pledging its Loans and Notes hereunder to a Federal Reserve Bank in support of borrowings made by such Lender from such Federal Reserve Bank. 12.5 No Waiver; Remedies Cumulative. No failure or delay on the part of the Agent or any Lender in exercising any right, power or privilege hereunder or under any other Credit Document and no course of dealing between any Credit Party and the Agent or any Lender shall operate as a waiver thereof; nor shall any single or partial exercise of any right, power or privilege hereunder or under any other Credit Document preclude any other or further exercise thereof or the exercise of any other right, power or privilege hereunder or thereunder. The rights and remedies herein expressly provided are cumulative and not exclusive of any rights or remedies which the Agent or any Lender would otherwise have. No notice to or demand on any Credit Party in any case shall entitle any Credit Party to any other or further notice or demand in similar or other circumstances or constitute a waiver of the rights of the Agent or the Lenders to any other or further action in any circumstances without notice or demand. 12.6 Payments Pro Rata. (a) The Agent agrees that promptly after its receipt of each payment from or on behalf of any Credit Party in respect of any Obligations of such Credit Party, it shall, except as otherwise provided in this Agreement, distribute such payment to the Lenders (other than any Lender that has consented in writing to waive its pro rata share of such payment) pro rata based upon their respective shares, if any, of the Obligations with respect to which such payment was received. -144- (b) Each of the Lenders agrees that, if it should receive any amount hereunder (whether by voluntary payment, by realization upon security, by the exercise of the right of setoff or banker's lien, by counterclaim or cross action, by the enforcement of any right under the Credit Documents, or otherwise) which is applicable to the payment of the principal of, or interest on, the Loans, Unpaid Drawings or Fees, of a sum which with respect to the related sum or sums received by other Lenders is in a greater proportion than the total of such Obligation then owed and due to such Lender bears to the total of such Obligation then owed and due to all of the Lenders immediately prior to such receipt, then such Lender receiving such excess payment shall purchase for cash without recourse or warranty from the other Lenders an interest in the Obligations of the respective Credit Party to such Lenders in such amount as shall result in a proportional participation by all of the Lenders in such amount; provided, that if all or any portion of such excess amount is thereafter recovered from such Lender, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, but without interest. 12.7 Calculations; Computations. (a) The financial statements to be furnished to the Lenders pursuant hereto shall be made and prepared in accordance with GAAP consistently applied throughout the periods involved (except as set forth in the notes thereto or as otherwise disclosed in writing by Holdings or the Borrower to the Lenders); provided, that except as otherwise specifically provided herein, all computations determining compliance with Sections 3.3 and 8, including definitions used therein, shall, in each case, utilize accounting principles and policies in effect at the time of the preparation of, and in conformity with those used to prepare, the December 31, 1998 financial statements delivered to the Lenders pursuant to Section 6.10(a). (b) All computations of interest and Fees hereunder shall be made on the actual number of days elapsed over a year of 360 days. -145- 12.8 Governing Law; Submission to Jurisdiction; Venue. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND, TO THE EXTENT APPLICABLE, THE BANKRUPTCY CODE. Any legal action or proceeding with respect to this Agreement or any other Credit Document may be brought in the Bankruptcy Court and, if the Bankruptcy Court does not have (or abstains from) jurisdiction, in the courts of the State of New York or of the United States for the Southern District of New York, and, by execution and delivery of this Agreement, each Credit Party hereby irrevocably accepts for itself and in respect of its property, generally and unconditionally, the jurisdiction of the aforesaid courts. Each Credit Party hereby further irrevocably waives any claim that any such courts lack jurisdiction over such Credit Party, and agrees not to plead or claim, in any legal action or proceeding with respect to this Agreement or any other Credit Document brought in any of the aforesaid courts, that any such court lacks jurisdiction over such Credit Party. Each Credit Party irrevocably consents to the service of process in any such action or proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such Credit Party, at its address for notices pursuant to Section 12.3, such service to become effective 30 days after such mailing. Each Credit Party hereby irrevocably waives any objection to such service of process and further irrevocably waives and agrees not to plead or claim in any action or proceeding commenced hereunder or under any other Credit Document that service of process was in any way invalid or ineffective. Nothing herein shall affect the right of the Agent, any Lender or the holder of any Note to serve process in any other manner permitted by law or to commence legal proceedings or otherwise proceed against any Credit Party in any other jurisdiction. (b) Each Credit Party hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any of the aforesaid actions or proceedings arising out of or in connection with this Agreement or any other Credit Document brought in the courts referred to in clause (a) above and hereby further irrevocably waives and agrees not to plead or claim in any such court that any such action or proceeding brought in any such court has been brought in an inconvenient forum. -146- 12.9 Counterparts, etc. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. A complete set of counterparts executed by all the parties hereto shall be lodged with the Borrower and the Agent. This Agreement may be executed and delivered by telecopier with the same force and effect as if the same were manually executed and delivered. 12.10 Effectiveness. This Agreement shall become effective on the date (the "Effective Date") on which (i) Holdings, WR Acquisition, the Borrower, the Agent and each of the Revolving Lenders shall have signed a counterpart hereof (whether the same or different counterparts) and shall have delivered the same to the Agent at the Notice Office or, in the case of the Revolving Lenders, shall have given to the Agent telephonic (confirmed in writing), written, telex or facsimile notice (actually received) at such office that the same has been signed and mailed to it and (ii) the Interim Order shall have been entered and shall be in full force and effect. The Agent will give Holdings, WR Acquisition, the Borrower and each Revolving Lender prompt written notice of the occurrence of the Effective Date. -147- 12.11 Headings Descriptive. The headings of the several sections and subsections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement. -148- 12.12 Amendment or Waiver; etc. Neither this Agreement nor any other Credit Document nor any terms hereof or thereof may be changed, waived, discharged or terminated unless such change, waiver, discharge or termination is in writing signed by the respective Credit Parties party thereto and the Required Revolving Lenders, provided that no such change, waiver, discharge or termination shall, without the consent of each Lender (other than a Defaulting Lender) (with Obligations being directly affected thereby in the case of the following clause (i)), (i) extend the final scheduled maturity of any Loan or Note or extend the stated maturity of any Letter of Credit or Existing Letter of Credit beyond the Final Maturity Date, or reduce the rate or extend the time of payment of interest or Fees thereon, or reduce the principal amount thereof (it being understood that any amendment or modification to the financial definitions in this Agreement shall not constitute a reduction in any rate of interest or fees for purposes of this clause (i)), (ii) release all or substantially all of the Collateral (except as expressly provided in the Security Documents) under all the Security Documents, (iii) amend, modify or waive any provision of Section 9.5(j) or this Section 12.12, (iv) reduce the percentage specified in the definition of Required Lenders (it being understood that, with the consent of the Required Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Lenders on substantially the same basis as the extensions of Commitments are included on the Effective Date), (v) consent to the assignment or transfer by the Borrower of any of its rights and obligations under this Agreement, (vi) modify the provisions of the Orders with respect to the priority of claims thereunder or modify the Super-priority Claim status of the Lenders in respect of any Lender's Loans, extensions of credit hereunder, Existing Letters of Credit or Letters of Credit or (vii) amend, waive or modify any provision of the Credit Documents that expressly provides for the consent of all Lenders; provided further, that no such change, waiver, discharge or termination shall, without the consent of all Revolving Lenders (other than a Defaulting Lender) (i) amend, modify or waive any provision of this Agreement that expressly provides for the consent of all of the Revolving Lenders, (ii) amend the definition of "Required Revolving Lenders", (iii) extend the time for repayment (including final maturity) of any principal amount of the Revolving Loans or increase the Total Revolving Loan Commitment, (iv) increase the advance rate from that set forth in the definition of "Accounts Borrowing Base" or "Inventory Borrowing Base," or (v) amend, modify or waive any provision that expressly provides for the consent of all Revolving Lenders, provided further that no such change, waiver, discharge or termination shall increase the Commitments of any Lender over the amount thereof then in effect without the consent of such Lender (it being understood that waivers or modifications of conditions precedent, covenants, Defaults or Events of Default or of a mandatory reduction in the -149- Total Revolving Loan Commitment or the Total Term Loan Commitment shall not constitute an increase of the Commitment of any Lender, and that an increase in the available portion of any Commitment of any Lender shall not constitute an increase in the Commitment of such Lender), provided further, that no such change, waiver, discharge or termination shall, without the consent of the Required Lenders, modify the second sentence of Section 4.2(d) or any provision of Section 8.26, provided further, that no such change, waiver, discharge or termination shall, without the consent of all Term Lenders (other than a Defaulting Lender), modify any provision of Section 5.3, provided further that no such change, waiver, discharge or termination shall (x) without the consent of each Letter of Credit Issuer, amend, modify or waive any provision of Section 2 or alter its rights or obligations with respect to Letters of Credit or Swingline Loans, (y) without the consent of the Agent, amend, modify or waive any provision of Section 11 as same applies to the Agent or any other provision as same relates to the rights or obligations of the Agent and (z) without the consent of the Collateral Agent, amend, modify or waive any provision relating to the rights or obligations of the Collateral Agent. 12.13 Survival. All indemnities set forth herein including, without limitation, in Section 1.10, 2.5, 4.4, 11.7 or 12.1, shall survive the execution and delivery of this Agreement and the making and repayment of the Loans. 12.14 Domicile of Loans. Each Lender may transfer and carry its Loans at, to or for the account of any branch office, subsidiary or affiliate of such Lender; provided, that the Borrower shall not be responsible for costs arising under Section 1.10, 2.5 or 4.4 resulting from any such transfer (other than a transfer pursuant to Section 1.12) to the extent such costs would not otherwise be applicable to such Lender in the absence of such transfer. -150- 12.15 Confidentiality. (a) Each of the Lenders agrees that it will use its reasonable efforts not to disclose without the prior consent of the Borrower (other than to its directors, employees, auditors, counsel or other professional advisors, to affiliates or to another Lender if the Lender or such Lender's holding or parent company in its sole discretion determines that any such party should have access to such information) any information with respect to Holdings, WR Acquisition, the Borrower or any of its Subsidiaries which is furnished pursuant to this Agreement; provided, that any Lender may disclose any such information (a) as has become generally available to the public, (b) as may be required or appropriate (x) in any report, statement or testimony submitted to any municipal, state or Federal regulatory body having or claiming to have jurisdiction over such Lender or to the Federal Reserve Board or the Federal Deposit Insurance Corporation or similar organizations (whether in the United States or elsewhere) or their successors (y) in connection with any request or requirement of any such regulatory body or (z) in connection with the Cases, (c) as may be required or appropriate in response to any summons or subpoena or in connection with any litigation, (d) to comply with any law, order, regulation or ruling applicable to such Lender, and (e) to any prospective transferee in connection with any contemplated transfer of any of the Notes or any interest therein by such Lender; provided, that such prospective transferee agrees to be bound by this Section 12.15 to the same extent as such Lender. (b) Each of Holdings, WR Acquisition and the Borrower hereby acknowledges and agrees that each Lender may share with any of its affiliates any information related to Holdings or any of its Subsidiaries (including, without limitation, any nonpublic customer information regarding the creditworthiness of Holdings and its Subsidiaries), provided that such Persons shall be subject to the provisions of this Section 12.15 to the same extent as such Lender. 12.16 Waiver of Jury Trial. EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY. -151- 12.17 Absence of Prejudice to the Existing Lenders with Respect to Matters Before the Bankruptcy Court. Each of the Credit Parties acknowledges that the Bankruptcy Code and Bankruptcy Rules require it to seek Bankruptcy Court authorization for certain matters that may also be addressed in this Agreement. None of the Credit Parties will (a) mention in any pleading or argument before the Bankruptcy Court in support of, or in any way relating to, a position that Bankruptcy Court authorization should be granted on the ground that such authorization is permitted by this Agreement (unless a Person opposing any such pleading or argument relies on this Agreement to assert or question the propriety of such) or (b) in any way attempt to support a position before the Bankruptcy Court based on the provisions of this Agreement. The Agent or any Lender, in its capacity as the Prepetition Agent or an Existing Lender, respectively, shall be free to bring, oppose or support any matter before the Bankruptcy Court no matter how treated in this Agreement, and the fact that the Agent is also the Prepetition Agent and any Lender is also an Existing Lender shall in no way prejudice the rights of the Agent or any Existing Lender under the Existing Credit Agreement or hereunder. -152- 12.18 [Intentionally Omitted]. 12.19 Application of Proceeds; Priority of Revolving Loans and Letter of Credit Outstandings. (a) Notwithstanding anything to the contrary contained in this Agreement or any other Credit Document, (i) if the Agent takes action under Section 9 upon the occurrence and during the continuance of an Event of Default, any payment by the Borrower or any Guarantor on account of principal of and interest on the Loans and any proceeds arising out of any realization (including after foreclosure) upon the Collateral shall be applied as follows: first, to the payment in full of all costs and expenses (including without limitation, reasonable attorneys' fees and disbursements) paid or incurred by the Agent or any of the Lenders in connection with any such realization upon the Collateral, second, as a permanent reduction of the Revolving Loan Commitments, pro rata to the payment in full of the Revolving Loans (including any accrued and unpaid interest thereon, and any fees and other Obligations in respect thereof), third, as a permanent reduction of the Revolving Loan Commitments, to the payments in full of Letter of Credit Outstandings constituting unreimbursed drawings under any Letter of Credit, fourth, as a permanent reduction of the Revolving Loan Commitments, to cash collateralize Letters of Credit in an amount equal to 105% of the aggregate amount of all Letter of Credit Outstandings constituting undrawn Letters of Credit, fifth, if the Term Loan Effective Date has occurred, to the payment in full of the principal of and interest on the Term Loans (including any accrued and unpaid interest thereon and any fees and other Obligations in respect thereof), sixth, if the Term Loan Effective Date has occurred, to pay unreimbursed drawings under any Existing Letter of Credit, seventh, if the Term Loan Effective Date has occurred, to cash collateralize Existing Letters of Credit in an amount equal to 105% of the aggregate undrawn face amount of Existing Letters of Credit, eighth, to the payment in full of any remaining Obligations, provided that if any payments or distributions are received prior to the Term Loan Effective Date, then such payments or distribution shall be applied pursuant to this clause eighth to the payment in full of the Prepetition Obligations after application of such payments or distributions to the remaining Postpetition Obligations, and (ii) any payments or distributions of any kind or character, whether in cash, property or securities, made by the Borrower or any Guarantor or otherwise in a manner inconsistent with clause (i) of this Section 12.19(a) shall be held in trust and paid over or delivered to the Agent so that the priorities and requirements set forth in such clause (i) are satisfied. -153- (b) It is understood that the Borrower and the Guarantors shall remain liable to the extent of any deficiency between the amount of the proceeds of the Collateral and the amount of the Obligations. 12.20 Remedies Cumulative. Each and every right, power and remedy hereby specifically given to the Agent shall be in addition to every other right, power and remedy specifically given under this Agreement, the Orders or the other Credit Documents or now or hereafter existing at law or in equity, or by statute and each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by the Agent. All such rights, powers and remedies shall be cumulative and the exercise or the beginning of exercise of one shall not be deemed a waiver of the right to exercise of any other or others. No delay or omission of the Agent in the exercise of any such right, power or remedy and no renewal or extension of any of the Obligations shall impair any such right, power or remedy or shall be construed to be a waiver of any Default or Event of Default or an acquiescence therein. In the event that the Agent shall bring any suit to enforce any of its rights hereunder and shall be entitled to judgment, then in such suit the Agent may recover reasonable expenses, including attorney's fees, and the amounts thereof shall be included in such judgment. 12.21 Discontinuance of Proceedings. In case the Agent shall have instituted any proceeding to enforce any right, power or remedy under this Agreement by foreclosure, sale, entry or otherwise, and such proceeding shall have been discontinued or abandoned for any reason or shall have determined adversely to the Agent, then and in every such case the Borrower, the Agent and each holder of any of the Obligations shall be restored to their former positions and rights hereunder with respect to the Collateral subject to the security interest created under this Agreement, and all rights, remedies and powers of the Agent and the Lenders shall continue as if no such proceeding had been instituted. 12.22 Existing Credit Agreement. The Credit Parties hereby acknowledge that (a) they are truly and justly indebted to the Existing Lenders for the Existing Lender Debt in the aggregate principal amount of $264,473,176.27 (including $11,823,176.23 in undrawn Existing Letters of Credit) plus accrued and unpaid interest, fees and expenses, without defense, counterclaim or offset of any kind and (b) the Existing Lender Debt is secured by valid, perfected and enforceable Liens on substantially all of the assets of the Credit Parties. -154- 12.23 Addition of Term Lenders. The parties hereto acknowledge that no Term Lender shall be a party to this Agreement as of the Effective Date. The parties hereto agree that, on the Term Loan Effective Date and without the need to obtain the consent of any party hereto, the Term Lenders will become parties hereto by executing and delivering a counterpart of this Agreement with Term Loan Commitments in the amounts set forth on Annex I and the Agent may amend Annex I to reflect the Term Loan Commitments of the Term Lenders as of the Term Loan Effective Date (it being understood that the Total Term Loan Commitment shall be equal to the Existing Lender Debt). Notwithstanding anything to the contrary set forth herein, no Term Lender shall be deemed to be a Lender unless and until the conditions set forth in Section 5.3 have been satisfied. -155- SECTION 13. Parent's Guaranty. 13.1 The Guaranty. In order to induce the Lenders to enter into this Agreement and to extend credit hereunder and in recognition of the direct benefits to be received by each Parent Guarantor from the proceeds of the Loans and the issuance of the Letters of Credit, each Parent Guarantor hereby agrees with the Lenders as follows: Each Parent Guarantor hereby unconditionally and irrevocably, jointly and severally, guarantees, as primary obligor and not merely as surety, the full and prompt payment when due, whether upon maturity, acceleration or otherwise, of any and all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors. If any or all of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors becomes due and payable hereunder, each Parent Guarantor, jointly and severally, and unconditionally promises to pay such Guaranteed Obligations to the Guaranteed Creditors, or order, on demand, together with any and all expenses (including reasonable legal fees and expenses) which may be incurred by the Guaranteed Creditors in collecting or enforcing any of the Guaranteed Obligations. If claim is ever made upon any Guaranteed Creditor for repayment or recovery of any amount or amounts received in payment or on account of any of the Guaranteed Obligations and any of the aforesaid payees repays all or part of said amount by reason of (i) any judgment, decree or order of any court or administrative body having jurisdiction over such payee or any of its property or (ii) any settlement or compromise of any such claim effected by such payee with any such claimant (including the Borrower), then and in such event each Parent Guarantor agrees that any such judgment, decree, order, settlement or compromise shall be binding upon such Parent Guarantor, notwithstanding any revocation of this Guaranty or any other instrument evidencing any liability of the Borrower, and each Parent Guarantor shall be and remain jointly and severally liable to the aforesaid payees hereunder for the amount so repaid or recovered to the same extent as if such amount had never originally been received by any such payee. This is a guaranty of payment and not of collection. -156- 13.2 Nature of Liability. (a) The liability of each Parent Guarantor hereunder is joint and several and exclusive and independent of any security for or other guaranty of the Guaranteed Obligations of the Borrower whether executed by such Parent Guarantor, any other Parent Guarantor, any other guarantor or by any other party, and the liability of each Parent Guarantor hereunder is not affected or impaired by (a) any direction as to application of payment by the Borrower or by any other party, or (b) any other continuing or other guaranty, undertaking or maximum liability of a guarantor or of any other party as to the Guaranteed Obligations of the Borrower, or (c) any payment on or in reduction of any such other guaranty or undertaking, or (d) any dissolution, termination or increase, decrease or change in personnel by the Borrower, or (e) any payment made to the Guaranteed Creditors on the Guaranteed Obligations which any such Guaranteed Creditor repays to the Borrower pursuant to court order in any bankruptcy, reorganization, arrangement, moratorium or other debtor relief proceeding, and each Parent Guarantor waives any right to the deferral or modification of its obligations hereunder by reason of any such proceeding. (b) It is the desire and intent of each Parent Guarantor and the Guaranteed Creditors that this Guaranty shall be enforced against each Parent Guarantor to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. If, however, and to the extent that, the obligations of any Parent Guarantor under this Guaranty shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable state or federal law relating to fraudulent conveyances or transfers), then the amount of the Guaranteed Obligations of such Parent Guarantor shall be deemed to be reduced and such Parent Guarantor shall pay the maximum amount of the Guaranteed Obligations which would be permissible under applicable law. -157- 13.3 Independent Obligation. The obligations of each Parent Guarantor hereunder are independent of the obligations of any other Parent Guarantor, any other guarantor, any other party or the Borrower, and a separate action or actions may be brought and prosecuted against each Parent Guarantor whether or not action is brought against any other Parent Guarantor, any other guarantor, any other party or the Borrower and whether or not any other guarantor, any other party or the Borrower be joined in any such action or actions. Each Parent Guarantor waives, to the full extent permitted by law, the benefit of any statute of limitations affecting its liability hereunder or the enforcement thereof. Any payment by the Borrower or other circumstance which operates to toll any statute of limitations as to the Borrower shall operate to toll the statute of limitations as to any Parent Guarantor. 13.4 Authorization. Each Parent Guarantor authorizes the Guaranteed Creditors without notice or demand (except as shall be required by applicable statute and cannot be waived), and without affecting or impairing its liability hereunder, from time to time to: (a) change the manner, place or terms of payment of, and/or change or extend the time of payment of, renew, increase, accelerate or alter, any of the Guaranteed Obligations (including any increase or decrease in the rate of interest thereon), any security therefor, or any liability incurred directly or indirectly in respect thereof, and the Guaranty herein made shall apply to the Guaranteed Obligations as so changed, extended, renewed or altered; (b) take and hold security for the payment of the Guaranteed Obligations and sell, exchange, release, surrender, realize upon or otherwise deal with in any manner and in any order any property by whomsoever at any time pledged or mortgaged to secure, or howsoever securing, the Guaranteed Obligations or any liabilities (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and/or any offset thereagainst; (c) exercise or refrain from exercising any rights against the Borrower or others or otherwise act or refrain from acting; -158- (d) release or substitute any one or more endorsers, guarantors, the Borrower or other obligors; (e) settle or compromise any of the Guaranteed Obligations, any security therefor or any liability (including any of those hereunder) incurred directly or indirectly in respect thereof or hereof, and may subordinate the payment of all or any part thereof to the payment of any liability (whether due or not) of the Borrower to its creditors other than the Guaranteed Creditors; (f) apply any sums by whomsoever paid or howsoever realized to any liability or liabilities of the Borrower to the Guaranteed Creditors regardless of what liability or liabilities of the Borrower remain unpaid; (g) consent to or waive any breach of, or any act, omission or default under, this Agreement, any other Credit Document or any of the instruments or agreements referred to herein or therein, or otherwise amend, modify or supplement this Agreement, any other Credit Document or any of such other instruments or agreements; and/or (h) take any other action which would, under otherwise applicable principles of common law, give rise to a legal or equitable discharge of any Parent Guarantor from its liabilities under this Guaranty. 13.5 Reliance. It is not necessary for the Guaranteed Creditors to inquire into the capacity or powers of the Borrower or the officers, directors, partners or agents acting or purporting to act on their behalf, and any Guaranteed Obligations made or created in reliance upon the professed exercise of such powers shall be guaranteed hereunder. -159- 13.6 Subordination. Any of the indebtedness of the Borrower now or hereafter owing to any Parent Guarantor is hereby subordinated to the Guaranteed Obligations of the Borrower owing to the Guaranteed Creditors; and if the Agent so requests at a time when an Event of Default exists, all such indebtedness of the Borrower to any Parent Guarantor shall be collected, enforced and received by such Parent Guarantor for the benefit of the Guaranteed Creditors and be paid over to the Agent on behalf of the Guaranteed Creditors on account of the Guaranteed Obligations of the Borrower to the Guaranteed Creditors, but without affecting or impairing in any manner the liability of any Parent Guarantor under the other provisions of this Guaranty. Prior to the transfer by any Parent Guarantor of any note or negotiable instrument evidencing any of the indebtedness of the Borrower to such Parent Guarantor, such Parent Guarantor shall mark such note or negotiable instrument with a legend that the same is subject to this subordination. Without limiting the generality of the foregoing, each Parent Guarantor hereby agrees with the Guaranteed Creditors that it will not exercise any right of subrogation which it may at any time otherwise have as a result of this Guaranty (whether contractual, under Section 509 of the Bankruptcy Code or otherwise) until all Guaranteed Obligations have been irrevocably paid in full in cash. -160- 13.7 Waiver. (a) Each Parent Guarantor waives any right (except as shall be required by applicable statute and cannot be waived) to require any Guaranteed Creditor to (i) proceed against the Borrower, any other Parent Guarantor, any other guarantor or any other party, (ii) proceed against or exhaust any security held from the Borrower, any other Parent Guarantor, any other guarantor or any other party or (iii) pursue any other remedy in any Guaranteed Creditor's power whatsoever. Each Parent Guarantor waives any defense based on or arising out of any defense of the Borrower, any other Parent Guarantor, any other guarantor or any other party, other than payment in full of the Guaranteed Obligations, based on or arising out of the disability of the Borrower, any other Parent Guarantor, any other guarantor or any other party, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrower other than payment in full of the Guaranteed Obligations. The Guaranteed Creditors may, at their election, foreclose on any security held by the Agent, the Collateral Agent or any other Guaranteed Creditor by one or more judicial or nonjudicial sales, whether or not every aspect of any such sale is commercially reasonable (to the extent such sale is permitted by applicable law), or exercise any other right or remedy the Guaranteed Creditors may have against the Borrower or any other party, or any security, without affecting or impairing in any way the liability of any Parent Guarantor hereunder except to the extent the Guaranteed Obligations have been paid. Each Parent Guarantor waives any defense arising out of any such election by the Guaranteed Creditors, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Parent Guarantor against the Borrower or any other party or any security. (b) Each Parent Guarantor waives all presentments, demands for performance, protests and notices, including, without limitation, notices of nonperformance, notices of protest, notices of dishonor, notices of acceptance of this Guaranty, and notices of the existence, creation or incurring of new or additional Guaranteed Obligations. Each Parent Guarantor assumes all responsibility for being and keeping itself informed of the Borrower's financial condition and assets, and of all other circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations and the nature, scope and extent of the risks which each Parent Guarantor assumes and incurs hereunder, and agrees that the Guaranteed Creditors shall have no duty to advise any Parent Guarantor of information known to them regarding such circumstances or risks. -161- (c) Each Parent Guarantor understands, is aware and hereby acknowledges that to the extent the Guaranteed Obligations are secured by real property located in the State of California, such Parent Guarantor shall be liable for the full amount of its liability hereunder notwithstanding foreclosure on such real property by trustee sale or any other reason impairing such Parent Guarantor's or any Guaranteed Creditor's right to proceed against any Credit Party. Each Parent Guarantor hereby waives, to the fullest extent permitted by law, all rights and benefits under Section 2809 of the California Civil Code purporting to reduce a guarantor's obligation in proportion to the principal obligation. Each Parent Guarantor hereby waives all rights and benefits under Section 580a of the California Code of Civil Procedure purporting to limit the amount of any deficiency judgment which might be recoverable following the occurrence of a trustee's sale under a deed of trust and all rights and benefits under Section 580b of the California Code of Civil Procedure stating that no deficiency may be recovered on a real property purchase money obligation. Each Parent Guarantor further understands, is aware and hereby acknowledges that if the Guaranteed Creditors elect to nonjudicially foreclose on any real property security located in the State of California any right of subrogation of such Parent Guarantor against the Guaranteed Creditors may be impaired or extinguished and that as a result of such impairment or extinguishment of subrogation rights, such Parent Guarantor may have a defense to a deficiency judgment arising out of the operation of (i) Section 580d of the California Code of Civil Procedure which states that no deficiency may be recovered on a note secured by a deed of trust on real property in case such real property is sold under the power of sale contained in such deed of trust, and (ii) related principles of estoppel. To the fullest extent permitted by law, each Parent Guarantor waives all rights and benefits and any defense arising out of the operation of Section 580d of the California Code of Civil Procedure and related principles of estoppel, even though such election operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of such Parent Guarantor against any Credit Party or any other party or any security. In addition, each Parent Guarantor hereby waives, to the fullest extent permitted by applicable law, without limiting the generality of the foregoing or any other provision hereof, all rights and benefits which might otherwise be available to such Parent Guarantor under Section 726 of the California Code of Civil Procedure and all rights and benefits which might otherwise be available to such Parent Guarantor under California Civil Code Sections 2809, 2810, 2815, 2819, 2821, 2839, 2845, 2848, 2849, 2850, 2899 and 3433. (d) Each Parent Guarantor hereby further waives (to the fullest extent permitted by applicable law): (1) all rights and defenses arising out of an election of remedies by the -162- Guaranteed Creditors, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a Guaranteed Obligation, has destroyed such Parent Guarantor's rights of subrogation and reimbursement against the principal by the operation of Section 580d of the California Code of Civil Procedure or otherwise; (2) such Parent Guarantor's rights of subrogation and reimbursement and any other rights and defenses available to such Parent Guarantor by reason of the California Civil Code Sections 2787 to 2855, inclusive, including, without limitation, (i) any defenses such Parent Guarantor may have to the Guaranteed Obligations by reason of an election of remedies by the Guaranteed Creditors and (ii) any rights or defenses such Parent Guarantor may have by reason of protection afforded to the principal borrower with respect to the obligation so guaranteed pursuant to the antideficiency or other laws of the State of California limiting or discharging the borrower's indebtedness, including, without limitation, California Code of Civil Procedure Sections 580a, 580b, 580d or 726. -163- IN WITNESS WHEREOF, the parties hereto have caused their duly authorized officers to execute and deliver this Agreement as of the date first above written. AMERICAN PAD & PAPER COMPANY, as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer WR ACQUISITION, INC., as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC., as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer AP&P MANUFACTURING, INC., as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer AMERICAN PAD & PAPER SALES COMPANY, INC., as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer AMERICAN PAD AND PAPER FOREIGN SALES CORPORATION, as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer AP&P FINANCING COMPANY, INC., as Debtor and Debtor-in-Possession By: /s/ James W. Swent III -------------------------------- Name: James W. Swent III Title: Chief Executive Officer BANKERS TRUST COMPANY, as Agent By: /s/ Robert P. Tinari -------------------------------- Name: Robert P. Tinari Title: Managing Director BANKERS TRUST COMPANY By: /s/ Robert P. Tinari -------------------------------- Name: Robert P. Tinari Title: Managing Director BANK OF AMERICA, N.A. By: /s/ Edward Harmon -------------------------------- Name: Edward Harmon Title: Assistant Vice President BANK OF SCOTLAND By: /s/ Annie Glynn -------------------------------- Name: Annie Glynn Title: Senior Vice President BANK ONE TEXAS, N.A. By: /s/ Randall B. Durant -------------------------------- Name: Randall B. Durant Title: First Vice President CARL MARKS MANAGEMENT COMPANY, L.P. By: /s/ Andrew M. Boas -------------------------------- Name: Andrew M. Boas Title: General Partner CIBC INC. By: /s/ Ronald Spitzer -------------------------------- Name: Ronald Spitzer Title: Agent CITIBANK, N.A. By: /s/ Carlton B. Klein -------------------------------- Name: Carlton B. Klein Title: Managing Director ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG By: /s/ Anca Trifan -------------------------------- Name: Anca Trifan Title: Vice President By: /s/ John S. Runion -------------------------------- Name: John S. Runion Title: First Vice President FIRST UNION NATIONAL BANK, as Syndication Agent and a Lender By: /s/ Jill W. Akre -------------------------------- Name: Jill W. Akre Title: Vice President and Director GUARANTY BUSINESS CREDIT CORPORATION, dba Fidelity Funding By: /s/ Michael D. Haddad -------------------------------- Name: Michael D. Haddad Title: President and Chief Executive Officer HCM OFFSHORE TRUST By: /s/ Michael E. Lewitt -------------------------------- Name: Michael E. Lewitt Title: Authorized Signatory LEHMAN COMMERCIAL PAPER INC. By: /s/ Jeffrey D. Tuck -------------------------------- Name: Jeffrey D. Tuck Title: Authorized Signatory PAM CAPITAL FUNDING, L.P. By: Highland Capital Management, L.P., as Collateral Manager By: /s/ Mark K. Okada -------------------------------- Name: Mark K. Okada Title: Executive Vice President TRI-LINKS INVESTMENT TRUST By: Wilmington Trust Company, solely in its capacity as Owner Trustee By: /s/ David A. Vanaskey, Jr. -------------------------------- Name: David A. Vanaskey, Jr. Title: Vice President ANNEX I LIST OF LENDERS AND COMMITMENTS Lender Revolving Term Loan - ------ Loan Commitment Commitment (after the Term ---------- Loan Effective Date) --------------- Bankers Trust Company $6,500,000 $26,549,723.52 Bank of America, N.A. 3,000,000 4,439,843.19 Bank of Scotland 3,250,000 13,223,658.81 Bank One Texas, N.A. 6,500,000 26,447,317.63 Carl Marks Management 4,000,000 16,238,148.28 Co., L.P. CIBC, Inc. 3,250,000 10,899,500.59 Citibank, N.A. 4,000,000 16,954,778.71 Erste Bank Der 1,000,000 4,407,885.27 Oesterreichischen Sparkassen AG First Union National Bank 15,000,000 18,883,695.39 Guaranty Business 9,500,000 Credit Corporation Guaranty Federal Bank, 17,631,546.08 F.S.B. HCM Offshore Trust 1,000,000 4,007,169.33 Lehman Commercial Paper 3,000,000 4,897,651.41 Pam Capital Funding, L.P. 3,000,000 12,422,224.95 Tri-Links Investment Trust 2,000,000 4,808,603.20 BankBoston, N.A. 18,432,078.86 Chase Securities, Inc. 12,430,239.28 Christiania Bank og 8,816,772.55 Kreditkasse Franklin Mutual Advisers, 7,693,785.14 LLC ING Barings (U.S.) Capital 1,745,344.85 LLC Contrarian Capital 6,732,044.49 Management LLC Resurgence Asset 4,407,888.27 Management, L.L.C. Societe Generale 17,631,545.08 Tribeca Distressed 5,823,762.79 Securities, LLC ----------- --------------- Total: $65,000,000 $264,473,176.27 ANNEX II -------- LENDER ADDRESSES ---------------- ANNEX III --------- BANK ACCOUNTS ------------- ANNEX IV -------- REAL PROPERTIES --------------- ANNEX V ------- EXISTING INVESTMENTS -------------------- ANNEX VI -------- SUBSIDIARIES ------------ ANNEX VII --------- EXISTING INDEBTEDNESS --------------------- ANNEX VIII ---------- EXISTING LETTERS OF CREDIT -------------------------- ANNEX IX -------- EXISTING LIENS Filing Debtor Secured Party File Original Description Location ------ ------------- Number File Date of Collateral - -------- ------ --------- ------------- ANNEX X ------- EXISTING LITIGATION ------------------- EX-4.24 3 EXHIBIT 4.24 Exhibit 4.24 FIRST AMENDMENT TO DEBTOR-IN-POSSESSION CREDIT AGREEMENT FIRST AMENDMENT (this "Amendment") dated as of January 25, 2000 to the Debtor-in-Possession Credit Agreement, dated as of January 18, 2000 (as amended from time to time, the "Credit Agreement"), among American Pad & Paper Company of Delaware, Inc. (the "Borrower"), American Pad & Paper Company, WR Acquisition, Inc., the subsidiary guarantors party thereto, each a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as Agent (in such capacity, the "Agent") for the Lenders, First Union National Bank, as Syndication Agent, and Deutsche Bank Securities Inc., as Arranger. Capitalized terms used herein and not otherwise defined herein have the meanings set forth in the Credit Agreement. R E C I T A L S WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement as set forth herein; and WHEREAS, the undersigned Lenders are agreeable to such request, but only on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: SECTION .1. Amendments. Effective as of the date hereof but subject to the satisfaction of the conditions set forth in Section 2 hereof, the Credit Agreement is hereby amended as follows: (a) The last "WHEREAS" clause on Page 2 is amended and restated as follows: "WHEREAS, on January 18, 2000, the Bankruptcy Court approved an interim order authorizing the Borrower to borrow up to $20,000,000 of Loans from the Lenders (the "First Interim Order") and on January 25, 2000 the Bankruptcy Court approved a revised interim order authorizing the Borrower to borrow up to an additional $15,000,000 of Loans from the Lenders (the "Revised Interim Order"), in each case on an interim basis pending entry of the Final Order and on the terms and conditions set forth in the First Interim Order, the Revised Interim Order, the Credit Documents and this Agreement." (b) Section 1.1(a)(vi)(A) is amended by deleting "$20,000,000" and substituting therefor "$35,000,000." (c) Section 3.1(a) is amended by deleting "the date of the entry of the Interim Order" and substituting therefor "January 18, 2000." (d) Section 7.16 is amended by deleting the phrase "10 days after the entry of the Interim Order" and substituting therefor "January 28, 2000." (e) Section 7.19 is amended by deleting the phrase "Within 45 days after the entry of the Interim Order" and substituting therefor "On or prior to March 3, 2000." (f) Section 7.20 is amended by deleting the phrase "Within 45 days after the entry of the Interim Order" and substituting therefor "On or prior to March 3, 2000." (g) Section 7.21 is amended by deleting the phrase "Within twenty-one days after the entry of the Interim Order" and substituting therefor "On or prior to February 8, 2000." (h) Section 7.22 is amended by deleting the phrase "Within 10 days after the entry of the Interim Order" and substituting therefor "On or prior to January 28, 2000." (i) The definition of "Interim Order" in Section 10 is amended and restated as follows: "'Interim Order' shall mean, as applicable, (a) the First Interim Order and (b) the Revised Interim Order, both in form and substance satisfactory to the Agent and the Required Lenders." SECTION .2. Conditions to Effectiveness. This Amendment shall become effective when, and only when (i) the Agent shall have received counterparts of this Amendment, duly executed by each Credit Party and the Required Revolving Lenders and (ii) the Revised Interim Order shall have been approved by the Bankruptcy Court. -2- SECTION .3. Representations and Warranties. Each Credit Party represents and warrants as follows: (a) Subject to the approval by the Bankruptcy Court of the Revised Interim Order, the execution, delivery and performance by such Credit Party of this Amendment and the consummation of the transactions contemplated hereby are within such Credit Party's corporate powers, have been duly authorized by all necessary corporate action on the part of such Credit Party, and do not (i) violate such Credit Party's Certificate of Incorporation or By-Laws, (ii) contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, injunction or decree of any court or governmental instrumentality or (iii) conflict or be inconsistent with, or result in the breach of, or constitute a default under, any provision of any loan agreement, indenture, mortgage, deed of trust or any other material agreement to which such Credit Party is a party or by which it or any of its assets are bound or to which it may be subject. (b) Except for the approval by the Bankruptcy Court of the Revised Interim Order, no order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance by such Credit Party of this Amendment or (ii) the legality, validity, binding effect or enforceability of this Amendment. (c) This Amendment has been duly executed and delivered by such Credit Party and constitutes the legal, valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms. (d) No Default or an Event of Default has occurred and is continuing. (e) All representations and warranties contained in the Credit Agreement and the other Credit Documents are true and correct in all material respects with the same effect as though made on the date hereof (except for any representation or warranty which by its terms is made as of a specified date, in which case such representation or warranty was true and correct as of such specified date). -3- SECTION .4. Reference to and Effect on the Credit Documents. (a) Upon the effectiveness hereof, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the Credit Agreement, "thereunder," "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended hereby. (b) Except as specifically provided herein, each Credit Document is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as an amendment to or a waiver of any right, power or remedy of the Agent or any Lender under any of the Credit Documents, nor constitute an amendment to or a waiver of any provision of any of the Credit Documents. (d) This Amendment shall constitute a Credit Document. SECTION .5. Costs and Expenses. The Borrower agrees to pay promptly all reasonable out-of-pocket costs and expenses of the Agent and each Lender in connection with the preparation, execution and delivery of this Amendment and any other instrument or document delivered in connection herewith (including, without limitation, the reasonable fees and expenses of counsel for the Agent and each Lender). SECTION .6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York and, to the extent applicable, the Bankruptcy Code. SECTION .7. Execution in Counterparts; etc. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be as effective as delivery of a manually executed counterpart of this Amendment. -4- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written. AMERICAN PAD & PAPER COMPANY, as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: WR ACQUISITION, INC., as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC., as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: AP&P MANUFACTURING, INC., as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: -5- AMERICAN PAD & PAPER SALES COMPANY, INC., as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: AMERICAN PAD AND PAPER FOREIGN SALES CORPORATION, as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: AP&P FINANCING COMPANY, INC., as Debtor and Debtor-in-Possession By: ---------------------------------------- Name: Title: BANKERS TRUST COMPANY, as Agent and a Lender By: ---------------------------------------- Name: Title: BANK OF AMERICA, N.A. By: ---------------------------------------- Name: Title: -6- BANK OF SCOTLAND By: ---------------------------------------- Name: Title: BANK ONE TEXAS, N.A. By: ---------------------------------------- Name: Title: CARL MARKS MANAGEMENT COMPANY, L.P. By: ---------------------------------------- Name: Title: CIBC INC. By: ---------------------------------------- Name: Title: CITIBANK, N.A. By: ---------------------------------------- Name: Title: -7- ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title: FIRST UNION NATIONAL BANK, as Syndication Agent and a Lender By: ---------------------------------------- Name: Title: GUARANTY BUSINESS CREDIT CORPORATION, dba Fidelity Funding By: ---------------------------------------- Name: Title: HCM OFFSHORE TRUST By: ---------------------------------------- Name: Title: LEHMAN COMMERCIAL PAPER INC. By: ---------------------------------------- Name: Title: -8- PAM CAPITAL FUNDING, L.P. By: Highland Capital Management, L.P., as Collateral Manager By: ---------------------------------------- Name: Title: TRI-LINKS INVESTMENT TRUST By: Wilmington Trust Company, solely in its capacity as Owner Trustee By: ---------------------------------------- Name: Title: -9- EX-4.25 4 EXHIBIT 4.25 Exhibit 4.25 SECOND AMENDMENT TO DEBTOR-IN-POSSESSION CREDIT AGREEMENT SECOND AMENDMENT (this "Amendment") dated as of February 8, 2000 to the Debtor-in-Possession Credit Agreement, dated as of January 18, 2000 (as amended by the First Amendment dated as of January 25, 2000 and as the same may be further amended from time to time, the "Credit Agreement"), among American Pad & Paper Company of Delaware, Inc. (the "Borrower"), American Pad & Paper Company, WR Acquisition, Inc., the subsidiary guarantors party thereto, each a debtor and debtor-in-possession in a case pending under Chapter 11 of the Bankruptcy Code, the lenders from time to time party thereto (the "Lenders"), Bankers Trust Company, as Agent (in such capacity, the "Agent") for the Lenders, First Union National Bank, as Syndication Agent, and Deutsche Bank Securities Inc., as Arranger. Capitalized terms used herein and not otherwise defined herein have the meanings set forth in the Credit Agreement. R E C I T A L S WHEREAS, on January 18, 2000, the Bankruptcy Court approved the First Interim Order authorizing the Borrower to borrow up to $20,000,000 of Loans on an interim basis pursuant to the terms set forth in the First Interim Order and the Credit Agreement; WHEREAS, on January 28, 2000, the Bankruptcy Court approved the Revised Interim Order authorizing the Borrower to borrow up to an additional $15,000,000 of Loans on an interim basis pursuant to the terms set forth in the Revised Interim Order and the Credit Agreement as amended by the First Amendment dated as of January 25, 2000; WHEREAS, the Official Committee of Unsecured Creditors (the "Creditors' Committee") filed an objection (the "Objection") to the approval of the Final Order; WHEREAS, the parties conducted negotiations concerning the Objection following which (i) the Credit Parties withdrew their request for approval of the Term Loans and (ii) the Creditors' Committee withdrew the Objection; WHEREAS, the Credit Parties and the undersigned Lenders have agreed to amend the Credit Agreement to, among other things, eliminate any requirement that the Final Order approve Section 1.1(e) of the Credit Agreement and authorize the Term Loans; WHEREAS, the Credit Parties and the undersigned Lenders acknowledge that the Term Loan Effective Date has not and will not occur and that there will be no Term Loans under the Credit Agreement; WHEREAS, the Borrower has requested that the Lenders amend the Credit Agreement as set forth herein; and WHEREAS, the undersigned Lenders are agreeable to the Borrower's request, but only on the terms and subject to the conditions set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the parties hereto agree as follows: SECTION .1. Amendments. Effective as of the date hereof but subject to the satisfaction of the conditions set forth in Section 2 hereof, the Credit Agreement is hereby amended as follows: (a) Section 1.5 is amended by adding at the end thereof a new clause (f) as follows: "(f) If any Lender assigns any of its rights under this Agreement in accordance with Section 12.4(b), the Borrower shall not be obligated to issue replacement Notes unless requested by the applicable Lender." (b) Section 1.8(d) is amended by deleting "Termination Date" from each place it appears and substituting therefor "Final Maturity Date." (c) Section 1.14(a) is amended by: (i) inserting "and subject to the provisions thereof" in the third line immediately after "upon entry of the Interim Order (and the Final Order, as applicable)"; and (ii) deleting "Termination Date" from the proviso and substituting therefor "Final Maturity Date." (d) Section 1.14(c) is amended by deleting "The Liens" at the beginning of such Section and substituting therefor "Pursuant to the Orders, the Liens." -2- (e) Section 1.16 is amended by inserting the following immediately before the period at the end of such Section: "; provided, however, that this Section 1.16(ii) shall not apply to any portion of the Obligations that is treated as a prepetition unsecured claim as a result of a successful challenge by any Person (other than a Credit Party) to the priority of the Liens securing the Prepetition Obligations in accordance with paragraph 16 of the Interim Order." (f) Section 2.1(a)(x) is amended by inserting "or to assure performance of contracts and similar obligations" immediately before "as the case may be." (g) Section 2 is amended by adding at the end thereof a new Section 2.6 as follows: "2.6 Existing Letters of Credit. If a drawing is made under any Existing Letter of Credit and the beneficiary thereunder returns any amount of such drawing to the Borrower, the Borrower shall promptly pay such amount to the Prepetition Agent in reduction of the Borrower's reimbursement obligation with respect to such Existing Letter of Credit." (h) Section 3.3(g) is amended by deleting "Termination Date" and substituting therefor "Final Maturity Date." (i) Section 4.2(d) is amended by: (i) inserting "pursuant to the Orders" immediately after "shall be applied" in each place it appears; and (ii) inserting the following immediately before the period at the end of the second sentence of such Section: "; provided, that the Total Revolving Loan Commitment shall not be reduced pursuant to this clause (d) below the lesser of (i) an amount reasonably necessary to preserve the value of the Credit Parties' assets remaining after such Asset Sale, as reflected in a revised Budget approved by the Agent, the Required Lenders and the Required Revolving Lenders, which revised Budget shall be consistent with the plans furnished by the Borrower pursuant to Sections 7.19, 7.20 and 7.21 and (ii) the Borrowing Base as adjusted by the Agent in accordance with Section 1.1(d) after such Asset Sale." (j) Section 5.1(i) is amended by deleting "(following the Borrower's retention of the Crisis Manager) or an Authorized Officer (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor (when the Crisis Manager is in place) or an Authorized Officer (when the Crisis Manager is not in place)." -3- (k) Section 5.1(s) is amended and restated as follows: "(s) Consultants. The Credit Parties shall have engaged Lazard Freres & Co. LLC pursuant to an engagement letter which shall be subject to Bankruptcy Court approval and subject to the right of the Agent and any Lender to object thereto." (l) Section 5.1(w) is amended by adding "in accordance with the terms of this Agreement" immediately after "during the pendency of the Cases." (m) Section 5.2(d) is amended and restated as follows: "(d) Borrowing Certificate. The Agent shall have received a certificate, in form and substance satisfactory to the Agent and executed by the Crisis Manager (when the Crisis Manager is in place) or an Authorized Officer (when the Crisis Manager is not in place) of the Borrower, certifying that (i) the requested Loan or Letter of Credit and the intended use of proceeds thereof are consistent with the terms of this Agreement and will be used solely for expenditures, and in the approximate amounts, set forth in the then applicable Budget, (ii) the proceeds thereof are necessary, after utilization and application of the Borrower's and the Guarantors' available Cash Collateral, in order for the Borrower and the Guarantors to satisfy their obligations with respect to the items set forth in the then applicable Budget, (iii) all of the representations and warranties contained in Section 6 are true and correct in all material respects (except for those that expressly relate to a specific date, in which case they shall be true and correct in all material respects as of such date), (iv) the Borrower and the Guarantors have observed and performed all applicable covenants and agreements contained herein, in the other Credit Documents and the Interim Order or the Final Order (as applicable) and satisfied in all material respects each condition to the making of such Loan or the issuance of such Letter of Credit contained herein, in the other Credit Documents or in the Interim Order or the Final Order (as applicable) to be observed, performed or satisfied by the Credit Parties, (v) the making of any requested Revolving Loan or the issuance of any requested Letter of Credit would not cause the -4- aggregate principal amount of all Revolving Loans, when added to all Other Revolving Exposure, to exceed the lesser of (y) the Total Revolving Loan Commitment and (z) the Borrowing Base then in effect, (vi) such officer or the Crisis Manager, as the case may be, has no knowledge of the existence of any Default or Event of Default, (vii) the information provided in the then applicable Budget continues to be true and correct in all material respects, (viii) the requested Loan or Letter of Credit will not result in the Credit Parties exceeding any amounts in the then applicable Budget by more than 10%, (ix) the Credit Parties are keeping separate records of post-Petition Date Accounts and payments thereon, (x) the Credit Parties are not applying payments on post-Petition Date Accounts to pre-Petition Date Accounts, (xi) the Credit Parties are not allowing offsets against post-Petition Date Accounts on account of pre-Petition Date rebates, allowances or offsets (excluding certain pre-Petition Date and post-Petition Date rebates and volume discounts which are payable to customers after the Petition Date and which are described in such certificate) and (xii) the Credit Parties are not remitting any payments on post-Petition Date Accounts in payment of the Accounts Receivable Facility." (n) Section 6.3 is amended by inserting "and subject to the provisions thereof" in the third line immediately after "the Interim Order or the Final Order (when applicable)." (o) Section 6.16 is amended by deleting "and the Borrower has no Foreign Subsidiaries other than Foreign Sales." (p) Section 6.24 is amended by deleting "The subordination provisions" and substituting therefor "Subject to the reservation of rights provisions in the Orders in favor of any Person (other than a Credit Party), the subordination provisions." (q) Section 7.1(a) is amended by: -5- (i) deleting "of cash flows" in the fifth line and substituting therefor "and cash flows"; (ii) deleting "December 30, 1999" in the tenth line and substituting therefor "January 17, 2000"; and (iii) deleting "certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor "reviewed by the Crisis Manager as evidenced by the Crisis Manager's signature thereon (when the Crisis Manager is in place) or certified by an Authorized Officer of Holdings (when the Crisis Manager is not in place)." (r) Section 7.1(b)(i) is amended by deleting "certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor "reviewed by the Crisis Manager as evidenced by the Crisis Manager's signature thereon (when the Crisis Manager is in place) or certified by an Authorized Officer of Holdings (when the Crisis Manager is not in place)." (s) Section 7.1(b)(ii) is amended by deleting "certified by the Crisis Manager (following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor "reviewed by the Crisis Manager as evidenced by the Crisis Manager's signature thereon (when the Crisis Manager is in place) or certified by an Authorized Officer of Holdings (when the Crisis Manager is not in place)." (t) Section 7.1(d)(i) is amended by deleting "15" and substituting therefor "20." (u) Section 7.1(d)(ii) is amended by: -6- (i) deleting "15 days after the end of each month" and substituting therefor "30 days after the end of each month other than for January 2000"; and (ii) adding the following immediately before the semicolon at the end of such Section: "(it being understood that Holdings shall be permitted to furnish one comparison that satisfies the requirements of Section 7.1(a) and this Section 7.1(d)(ii) for each such month)." (v) Section 7.1(d)(iv) is amended and restated as follows: "Weekly, before 5:00 p.m. (New York time) on the second Business Day of each week, and at any other time requested by the Agent during the continuance of a Default or Event of Default, a borrowing base certificate, substantially in the form of Exhibit N (the "Borrowing Base Certificate"), which shall: (A) detail the Credit Parties' Eligible Accounts Receivable and the Credit Parties' Eligible Inventory as of each Saturday of the immediately preceding week (or as of such other date as the Agent may request); (B) prepared under the direction of the Crisis Manager (when the Crisis Manager is in place) or an Authorized Officer of the Borrower (when the Crisis Manager is not in place) and reviewed by the Crisis Manager as evidenced by his signature thereon or certified by such officer subject only to adjustment upon completion of the normal year-end audit of physical inventory; and (C) attach thereto such additional schedules and other information as the Agent may reasonably request (including, without limitation, a monthly aging of Accounts);" (w) Sections 7.1(d)(v) and (vi) are amended and restated as follows: "(v) On or before 5:00 p.m. (New York time) on Tuesday of each week, an oral report or, if reasonably requested by the Agent (but in no event more than once per month), a written report describing the then current status of the Credit Parties' relationship with their vendors, which (in the case of the twenty largest vendors of the Credit Parties) shall be on a vendor-by-vendor basis; and (vi) [Intentionally Omitted]." -7- (x) Section 7.1(e) is amended by deleting "(following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor "(when the Crisis Manager is in place) or an Authorized Officer (when the Crisis Manager is not in place)." (y) Section 7.1(i) is amended and restated as follows: "(i) On or before 5:00 p.m. (New York time) on Tuesday of each week, a report from the Consultants summarizing the status of the Borrower's efforts to consummate the Sale Proposal. In addition, if requested by the Agent, the Borrower shall conduct bi-weekly conference calls with the Lenders to report on the status of the Sale Proposal." (z) Section 7.1(j) is amended by adding "Holdings shall make available" immediately before "copies of any filings and registrations." (aa) Section 7.1(m) is amended and restated as follows: "(m) Accounts Collection Report. Within three Business Days of the receipt of any remittance in an amount in excess of $100,000 received by any Credit Party during the preceding week, such Credit Party shall deliver to the Agent a report describing whether such remittance is in respect of the payment of Accounts arising before the Petition Date or arising on or after the Petition Date." (bb) Section 7.8 is amended by deleting "(following the Borrower's retention of the Crisis Manager) or an Authorized Officer of Holdings (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor "(when the Crisis Manager is in place) or an Authorized Officer of Holdings (when the Crisis Manager is not in place)." (cc) Section 7.13 is amended and restated as follows: "7.13 Reorganization Plan. Prior to filing any proposed Reorganization Plan, Holdings will, and will cause each of its Subsidiaries to, discuss in good faith any proposed Reorganization Plan with the Agent and the Required Lenders and use reasonable efforts to obtain the support of the Agent and the Required Lenders to any Reorganization Plan." (dd) Section 7.14 is amended by inserting "Subject to the provisions of the Bankruptcy Code," immediately before -8- Holdings will contribute." (ee) Section 7.19 is amended by deleting "After the Borrower's retention of the Crisis Manager" and substituting therefor "While the Crisis Manager is in place." (ff) Section 7.20 is amended by deleting "After the Borrower's retention of the Crisis Manager" and substituting therefor "While the Crisis Manager is in place." (gg) Section 7.21 is amended by: (i) deleting "Cards" from each place is appears and substituting therefor "Card"; and (ii) deleting "After the Borrower's retention of the Crisis Manager" and substituting therefor "While the Crisis Manager is in place." (hh) Section 7.22 is amended by adding the following sentence at the end thereof: "The Crisis Manager may be removed at the reasonable discretion of the Borrower after the Borrower notifies the Agent of the Borrower's reason for such removal; provided, that within 10 days after such removal, the Borrower shall retain a replacement Crisis Manager acceptable to the Agent and the Required Revolving Lenders pursuant to an engagement letter satisfactory to the Agent and the Required Revolving Lenders." (ii) Section 7.23 is amended by deleting "such reports and give" and substituting therefor "such reports with the Agent and Arthur Andersen and to give." (jj) Section 8.2 is amended by deleting "Holdings will not, will not permit any of its Subsidiaries to, and will not apply to the Bankruptcy Court for authority to "and substituting therefor "Except as authorized by the Bankruptcy Court after notice and a hearing and after providing a proposal to the Agent and discussing such proposal with the Agent, Holdings will not, and will not permit any of its Subsidiaries to." (kk) Clause (d) of Section 8.2 is amended and restated as follows: "(d) each Credit Party may sell (i) assets if the sales price for such sale or group of related sales does not exceed $1,000,000 and such sale or sales are for fair value and at arm's length and (ii) other assets (including assets pursuant to the Sales Proposal) with the prior written consent of the Required Lenders, in any case so long as the Net Cash -9- Proceeds therefrom are applied in accordance with Sections 3.3(d) and 4.2(d);". (ll) Clause (f) of Section 8.2 is amended and restated as follows: "(f) the Borrower and its Subsidiaries may, in the ordinary course of business, sell by-products (such as paper scraps) in an aggregate amount not to exceed $100,000;" (mm) Section 8.3 is amended by: (i) deleting the period at the end of clause (k) and substituting therefor "; and"; and (ii) adding at the end thereof a new clause (l) as follows: "(l) Liens upon assets of any Credit Party subject to Capitalized Lease Obligations to the extent such Capitalized Lease Obligations are permitted under Section 8.4(j); provided, that (x) such Liens only secure the payment of Indebtedness arising under such Capitalized Lease Obligation and (y) the Lien encumbering the asset giving rise to the Capitalized Lease Obligation does not encumber any other asset of any Credit Party." (nn) Section 8.4 is amended by: (i) deleting "and" at the end of clause (h); (ii) deleting the period at the end of clause (i) and substituting therefor "; and"; and (iii) adding at the end thereof a new clause (j) as follows: "(j) Indebtedness of the Credit Parties evidenced by Capitalized Lease Obligations to the extent permitted under Section 8.9, provided that the aggregate principal amount of Capitalized Lease Obligations permitted by this clause (j) shall not exceed the amount permitted in the then applicable Budget." (oo) Section 8.6 is amended by: -10- (i) deleting "one or more accounts maintained with the Agent or a Lender" from clause (a) and substituting therefor "accordance with Sections 8.17 and 8.25"; (ii) deleting clause (f) and substituting therefor the following: "(f) deposits made in the ordinary course of business shall be permitted, excluding deposits of advanced payments in favor of vendors in excess of $250,000 in the aggregate;" (iii) deleting the period at the end of clause (l) and substituting therefor ";and"; and (iv) adding at the end thereof a new clause (m) as follows: "(m) The Borrower and its Subsidiaries may make travel advances to employees in the ordinary course of business and consistent with past practice; provided that the aggregate outstanding amount of advances permitted by this clause (m) shall not exceed $50,000 at any time." (pp) Section 8.15 is amended by adding the following immediately before the period at the end thereof: ", except that, with the prior written consent of the Agent and the Required Revolving Lenders, the Credit Parties may create a Subsidiary to facilitate the Sale Proposal or any other sale of an operating division permitted under this Agreement; provided, that if such Subsidiary is not sold within a reasonable period of time pursuant to the Sale Proposal or such other sale, such Subsidiary shall, promptly upon the request of the Agent, comply with Section 7.11." (qq) Section 8.21 is amended by inserting "or any other order of the Bankruptcy Court" immediately after "permitted by the Orders." (rr) Section 8.22 is amended by: (i) inserting "outside the ordinary course of business" immediately after "any agreement to pay"; and (ii) deleting "in accordance with any agreements or plans approved by the Agent and the Required Lenders." (ss) Section 8.24(a) is amended by inserting "or -11- ordered by the Bankruptcy Court" immediately after "the Required Lenders." (tt) Section 9.5(f) is amended by adding ", unless such relief is granted with respect to litigation of a claim which is covered by insurance" immediately before the semicolon at the end of such Section. (uu) Section 9.5(h) is amended and restated as follows: "(h) [Intentionally Omitted];" (vv) Section 9.5(j) is amended by deleting the period at the end of such Section and substituting therefor the following: "; provided, however, that in no event shall an Event of Default occur solely as a result of a successful challenge by any Person (other than a Credit Party) to the priority of the Liens securing the Prepetition Obligations in accordance with paragraph 16 of the Interim Order; or" (ww) Section 9.9 is amended by adding the following immediately before the semicolon at the end of such Section: "; provided, however, that in no event shall an Event of Default occur solely as a result of the assertion of claims against Holding or any of its Subsidiaries pursuant to any provision of the Bankruptcy Code." (xx) The definition of "Authorized Officer" in Section 10 is amended by adding "or the Crisis Manager (when the Crisis Manager is in place)" immediately before the period at the end of such definition. (yy) The definition of "Budget" in Section 10 is amended by deleting "(following the Borrower's retention of the Crisis Manager) or an Authorized Officer (prior to the Borrower's retention of the Crisis Manager)" and substituting therefor "(when the Crisis Manager is in place) or an Authorized Officer (when the Crisis Manager is not in place)." (zz) Clause (i) in the definition of "Consolidated EBIT" in Section 10 is amended and restated as follows: "(i) without giving effect to any extraordinary gains or losses from sales or disposals of assets sold outside the ordinary course of business or to gains or losses from the sale of assets (other than inventory) sold in the ordinary course of business". (aaa) The definition of "Consolidated EBITDA" in Section 10 is amended by deleting "Consolidated EBITDA" from the last place it appears and substituting therefor "Consolidated EBIT." -12- (bbb) Clause (e) of the definition of "Eligible Accounts Receivable" in Section 10 is amended by: (i) deleting "(iii)" and substituting therefor "(ii); and (ii) deleting the proviso and substituting therefor the following: "provided, that Accounts owing by each of Nationwide, Unisource and xpedx (each, a "Specified Account Debtor") shall not be deemed ineligible under clause (ii) unless (A) a Specified Account Debtor has a legally enforceable right of setoff against a Borrowing Base Party in which case the Account owing by such Specified Account Debtor shall be deemed to be ineligible, to the extent of the amount of such setoff, or (B) a Specified Account Debtor exercises any setoff or similar rights against a Borrowing Base Party in which case all Accounts owing by such Specified Account Debtor shall be deemed to be ineligible, to the extent of the amounts owed by the Borrowing Base Parties to such Specified Account Debtor or its affiliates; or" (ccc) Clause (h) of the definition of "Eligible Accounts Receivable" in Section 10 is amended by deleting "sale-and-return,". (ddd) The definition of "Final Order" in Section 10 is amended by deleting "(including, without limitation, Section 1.1(e))". (eee) The definition of "Inventory" in Section 10 is amended by deleting the comma immediately after "the Borrowing Base Parties'." (fff) The definition of "Letter of Credit" in Section 10 is amended by adding the following at the end thereof: "An Existing Letter of Credit or a renewal of an Existing Letter of Credit shall not be considered a Letter of Credit as defined in Section 2.1(a)." (ggg) The definition of "Maximum Swingline Amount" in Section 10 is amended by deleting "January 29, 2000" and substituting therefor "the date on which the Final Order is entered." (hhh) The definition of "Required Lenders" in Section 10 is amended by deleting "Prepetition Indebtedness" and substituting therefor "Prepetition Obligations." (iii) Section 10 is amended by deleting the -13- definition of "Termination Date" from the first place it appears. (jjj) The definition of "Termination Date" in Section 10 is amended and restated as follows: "'Termination Date' shall mean the date of the termination of the Total Revolving Loan Commitment upon the occurrence of an Event of Default or otherwise in accordance with the terms hereof." (kkk) Section 12.1 is amended by: (i) deleting "and" immediately before "(v)"; and (ii) adding the following immediately before the period at the end of such Section: "; and (vi) to pay to the Prepetition Agent, for the benefit of itself, the Existing Lenders and the issuer of the Existing Letters of Credit, all accrued and unpaid fees, costs and charges from time to time owing to the Prepetition Agent, such issuer and the Existing Lenders under the Existing Credit Agreement. The Borrower shall not be obligated to pay or reimburse any Person for any out-of-pocket costs and expenses pursuant to this Section 12.1 unless the Borrower receives an invoice in reasonable detail for such costs and expenses." (lll) Section 12.4(b) is amended by: (i) inserting "unless requested by the Lender pursuant to Section 1.5(f)," immediately after "replacement Notes" in clause (ii) of the first proviso to such Section; and (ii) inserting "either such assigning Lender shall have no Commitments and outstanding Loans or" immediately before "the sum of the Commitments" in the third proviso to such Section. (mmm) The second proviso in Section 12.12 is amended by: (i) inserting "or" immediately before "(iv)"; and (ii) deleting "or (v) amend, modify or waive any provision that expressly provides for the consent of all Revolving Lenders,". -14- (nnn) Section 12.19(a)(i) is amended by: (i) inserting ", subject to the provisions of the Bankruptcy Code and pursuant to the Orders," immediately before "be applied as follows"; (ii) inserting the following immediately after clause first: "second, to the Credit Parties to fund amounts owing under the Carve-Out,"; (iii) renumbering (A) clause second as clause third, (B) clause third as clause fourth, (C) clause fourth as clause fifth, (D) clause fifth as clause sixth, (E) clause sixth as clause seventh, (F) clause seventh as clause eighth and (G) clause eighth as clause ninth; and (iv) deleting "this clause eighth" and substituting therefor "this clause ninth." SECTION .2. Conditions to Effectiveness. This Amendment shall become effective when, and only when (a) the Agent shall have received counterparts of this Amendment, duly executed by each Credit Party and the Required Lenders and (b) the Final Order shall have been entered. SECTION .3. No Addition of Term Lenders to Credit Agreement, etc. Notwithstanding anything to the contrary contained in this Amendment, the Credit Agreement or the other Credit Documents, the parties hereto agree that (a) the Term Loan Effective Date shall be deemed to have not occurred, (b) no Lender shall be a Term Lender, (c) no Lender shall have a Term Loan Commitment, (d) no Term Loans shall be made or deemed to be made, (e) the Total Term Loan Commitment shall be zero at all times and (f) any reference in the Credit Agreement to the phrase "prior to the Term Loan Effective Date" shall be deemed to mean during the term of the Credit Agreement. -15- SECTION .4. Representations and Warranties. Each Credit Party represents and warrants as follows: (a) Subject to the approval by the Bankruptcy Court of the Final Order, the execution, delivery and performance by such Credit Party of this Amendment and the consummation of the transactions contemplated hereby are within such Credit Party's corporate powers, have been duly authorized by all necessary corporate action on the part of such Credit Party, and do not (i) violate such Credit Party's Certificate of Incorporation or By-Laws, (ii) contravene any applicable provision of any law, statute, rule or regulation, or any order, writ, injunction or decree of any court or governmental instrumentality or (iii) conflict or result in any inconsistency with, or result in the breach of, or constitute a default under, any provision of any loan agreement, indenture, mortgage, deed of trust or any other material agreement to which such Credit Party is a party or by which it or any of its assets are bound or to which it may be subject. (b) Except for the approval by the Bankruptcy Court of the Final Order, no order, consent, approval, license, authorization or validation of, or filing, recording or registration with, or exemption by, any foreign or domestic governmental or public body or authority, or any subdivision thereof, is required to authorize or is required in connection with (i) the execution, delivery and performance by such Credit Party of this Amendment or (ii) the legality, validity, binding effect or enforceability of this Amendment. (c) This Amendment has been duly executed and delivered by such Credit Party and constitutes the legal, valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms. (d) No Default or an Event of Default has occurred and is continuing. (e) All representations and warranties contained in the Credit Agreement and the other Credit Documents are true and correct in all material respects with the same effect as though made on the date hereof (except for any representation or warranty which by its terms is made as of a specified date, in which case such representation or warranty was true and correct as of such specified date). -16- SECTION .5. Reference to and Effect on the Credit Documents. (a) Upon the effectiveness hereof, each reference in the Credit Agreement to "this Agreement," "hereunder," "hereof" or words of like import referring to the Credit Agreement, and each reference in the other Credit Documents to the Credit Agreement, "thereunder," "thereof" or words of like import referring to the Credit Agreement, shall mean and be a reference to the Credit Agreement, as amended hereby. (b) Except as specifically provided herein, each Credit Document is and shall continue to be in full force and effect and is hereby ratified and confirmed in all respects. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as an amendment to or a waiver of any right, power or remedy of the Agent or any Lender under any of the Credit Documents, nor constitute an amendment to or a waiver of any provision of any of the Credit Documents. (d) This Amendment shall constitute a Credit Document. SECTION .6. Costs and Expenses. The Borrower shall pay promptly all reasonable out-of-pocket costs and expenses of the Agent and each Lender in connection with the preparation, execution and delivery of this Amendment and any other instrument or document delivered in connection herewith (including, without limitation, the reasonable fees and expenses of counsel for the Agent and each Lender). SECTION .7. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York and, to the extent applicable, the Bankruptcy Code. SECTION .8. Execution in Counterparts; etc. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Delivery of an executed counterpart of a signature page to this Amendment by telecopier shall be as effective as delivery of a manually executed counterpart of this Amendment. -17- IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective duly authorized officers as of the date first above written. AMERICAN PAD & PAPER COMPANY, as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer WR ACQUISITION, INC., as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer AMERICAN PAD & PAPER COMPANY OF DELAWARE, INC., as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer AP&P MANUFACTURING, INC., as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer (Signature Page to Second Amendment) AMERICAN PAD & PAPER SALES COMPANY, INC., as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer AMERICAN PAD AND PAPER FOREIGN SALES CORPORATION, as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer AP&P FINANCING COMPANY, INC., as Debtor and Debtor-in-Possession By: -------------------------------------- Name: James W. Swent III Title: Chief Executive Officer [Signature Page to Second Amendment] BANKERS TRUST COMPANY, as Agent, a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] BANK OF AMERICA, N.A., as a Revolving Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] BANK OF SCOTLAND, as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] BANK ONE TEXAS, N.A., as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] CARL MARKS MANAGEMENT COMPANY, L.P., as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] CIBC INC., as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] CITIBANK, N.A., as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] ERSTE BANK DER OESTERREICHISCHEN SPARKASSEN AG, as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] FIRST UNION NATIONAL BANK, as Syndication Agent, a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] GUARANTY BUSINESS CREDIT CORPORATION, dba Fidelity Funding, as a Revolving Lender By: -------------------------------------- Name: Title: HCM OFFSHORE TRUST, as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] LEHMAN COMMERCIAL PAPER INC., as a Revolving Lender and a Term Lender By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] PAM CAPITAL FUNDING, L.P., as a Revolving Lender and a Term Lender By: Highland Capital Management, L.P., as Collateral Manager By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] TRI-LINKS INVESTMENT TRUST, as a Revolving Lender and a Term Lender By: Wilmington Trust Company, solely in its capacity as Owner Trustee By: -------------------------------------- Name: Title: [Signature Page to Second Amendment] EX-10.36 5 EXHIBIT 10.36 Exhibit 10.36 AMERICAN PAD & PAPER COMPANY 1999 KEY EMPLOYEES STOCK INCENTIVE PLAN SECTION 1. Purpose The purpose of the American Pad & Paper Company 1999 Key Employees Stock Incentive Plan (the "Plan") is to enable American Pad & Paper Company, a Delaware corporation (the "Company") and its subsidiaries to attract, retain and motivate their employees by providing for or increasing the proprietary interests of such employees in the Company. SECTION 2. Persons Eligible Any person employed by the Company or any of its subsidiaries including any director who is so employed (an "Employee"), shall be eligible to be considered for the grant of Awards (as defined below) under the Plan. SECTION 3. Awards (a) The Committee (as defined below), on behalf of the Company, is authorized under the Plan to enter into any type of arrangement with an Employee that is consistent with the provisions of the Plan and that by its terms involves the issuance or potential issuance of (i) shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") or (ii) a Derivative Security (as such term is defined in Rule 16a-1 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as such Rule may be amended from time to time) with an exercise or conversion right at a price related to Common Stock or with a value derived from the value of the shares of Common Stock. The entering into of any such arrangement is referred to herein as the grant of an "Award." (b) Awards are not restricted to any specified form or structure and may include, without limitation, sales or bonuses of stock, restricted stock, restricted stock unit, stock options, reload stock options, stock purchase warrants, other rights to acquire stock, securities convertible into or redeemable for stock, stock appreciation rights, limited stock appreciation rights, phantom stock, dividend equivalents, performance units or performance shares, and an Award may consist of one or more such security or benefit. (c) Common Stock may be issued pursuant to an Award for any lawful consideration as determined by the Committee, including, without limitation, services rendered by the recipient of such Award. -1- (d) Subject to the provisions of the Plan, the Committee, in its sole and absolute discretion, shall determine all of the terms and conditions of each Award granted under the Plan, which terms and conditions may include without limitation: (i) a provision permitting the recipient of such Award, including a director or officer of the Company, to pay the purchase price of the Common Stock or other property issuable pursuant to such Award, or such recipient's tax withholding obligation with respect to such Award, in whole or in part, by any one or more of the following: (A) the delivery of previously owned shares of Common Stock or other property, (B) a reduction in the amount of Common Stock or other property otherwise issuable pursuant to such Award, or (C) the delivery of a promissory note, the terms and conditions of which shall be determined by the Committee; (ii) a provision conditioning or accelerating the receipt of benefits pursuant to such Award, either automatically or in the discretion of the Committee, upon the occurrence of specified events, including a change of control of the Company, an acquisition of a specified percentage of the voting power of the Company, the dissolution or liquidation of the Company, a sale of substantially all of the property and assets of the Company or an event of the type described in Section 7 hereof; or (iii) a provision required in order for such Award to qualify as an incentive stock option under Section 422 of the Internal Revenue Code (an "Incentive Stock Option"). (e) Notwithstanding any other provision of the Plan, no one Employee shall be granted options or other Awards with respect to more than 100,000 shares of Common Stock in any one calendar year; provided, however, that this limitation shall not apply if it is not required in order for the compensation attributable to Awards hereunder to qualify as performance-based compensation described in Section 162(m) of the Internal Revenue Code ("Performance-Based Compensation"). The limitation set forth in this Section 3(e) shall be subject to adjustment as provided in Section 7 hereof, but only to the extent such adjustment would not affect the status of compensation attributable to Awards hereunder as Performance-Based Compensation. SECTION 4. Stock Subject to Plan (a) At any time, the aggregate number of shares of Common Stock issued and issuable pursuant to all Awards granted under the Plan shall not exceed 1,500,000, subject to adjustment as provided in Section 7 hereof. Shares of Common Stock issued pursuant to the Plan may be authorized but unissued shares, treasury shares, reacquired shares or any combination thereof. (b) For purposes of Section 4(a) hereof, the aggregate number of shares of Common Stock issued and issuable pursuant to Awards granted under the Plan shall at any time be deemed to be equal to the sum of the number of shares of Common Stock which have been issued -2- pursuant to Awards and which have not been repurchased by the Company and the number of shares which are or may be issuable at or after such time pursuant to Awards granted prior to such time. SECTION 5. Duration No Awards shall be granted under the Plan after April 27, 2009. Shares of Common Stock may be issued after April 27, 2009 pursuant to Awards granted prior to such date, however, no shares of Common Stock shall be issued under the Plan after April 27, 2019. SECTION 6. Administration (a) The Plan shall be administered by a committee (the "Committee") of the Board of Directors of the Company (the "Board") consisting of two or more directors, each of whom is a "Non-Employee Director" (as such term is defined in Rule 16b-3 under the Exchange Act, as such Rule may be amended from time to time) and an "outside director" as defined in Section 162(m) of the Internal Revenue Code; provided that to the extent permitted at any time under Rule 16b-3 or any successor rule and under Section 162(m) of the Internal Revenue Code or any successor statutory provision, and any implementing regulations, without adversely affecting the ability of the Plan to comply with the conditions for exemption from Section 16 of the Exchange Act provided by Rule 16b-3 and the exemption from the limitations on the deductibility of certain executive compensation provided by Section 162(m), the Committee may delegate the administration of the Plan in whole or in part, on such terms and conditions, to such other person or persons as it may determine in its discretion, which persons may be officers or employees of the Company or third parties (each such person, an "Authorized Delegate"). (b) Subject to the provisions of the Plan, the Committee (or its Authorized Delegate) shall be authorized and empowered to do all things necessary or desirable in connection with the administration of the Plan, including the following: (i) adopt, amend and rescind rules and regulations relating to the Plan; (ii) determine which persons meet the requirements of Section 2 hereof for eligibility under the Plan and to which of such eligible persons, if any, Awards shall be granted hereunder; (iii) determine whether, and the extent to which adjustments are required pursuant to Section 7 hereof; (iv) interpret and construe the Plan and the terms and conditions of any Award granted hereunder; and (v) correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any Award in the manner and to the extent the Committee deems necessary or desirable to carry it into effect. (c) Any decision of the Committee (or any Authorized Delegate) in the interpretation and administration of the Plan shall lie within its sole and absolute discretion and shall -3- be final, conclusive and binding on all parties concerned. The Committee may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their members or any Authorized Delegate to execute and deliver documents or to take any other ministerial action on behalf of the Committee with respect to Awards made or to be made to Plan participants. No member of the Committee or Authorized Delegate shall be liable for anything done or omitted to be done by such member or Authorized Delegate, by any other member of the Committee or by any other Authorized Delegate in connection with the performance of duties under the Plan, except for his or her own willful misconduct or as expressly provided by statute. Determinations to be made by the Committee under the Plan may be made by Authorized Delegates. SECTION 7. Adjustments If the outstanding securities of the class then subject to the Plan are increased, decreased or exchanged for or converted into cash, property or a different number or kind of securities, or if cash, property or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, restructuring, reclassification, dividend (other than a regular, quarterly cash dividend) or other distribution, stock split, reverse stock split or the like, or if substantially all of the property and assets of the Company are sold, then, unless the terms of such transaction shall provide otherwise, the Committee shall make appropriate and proportionate adjustments in (a) the number and type of shares or other securities or cash or other property that may be acquired pursuant to Awards theretofore granted under the Plan, (b) the maximum number and type of shares or other securities that may be issued pursuant to Awards thereafter granted under the Plan and (c) to the extent permitted under Section 3(e) hereof, the maximum number of shares of Common Stock with respect to which Awards may be granted to any Employee during any calendar year; provided, however, that no adjustment shall be made to the number of shares of Common Stock that may be acquired pursuant to outstanding Incentive Stock Options or the maximum number of shares of Common Stock with respect to which Incentive Stock Options may be granted under the Plan to the extent such adjustment would result in such options being treated as other than Incentive Stock Options; provided further that no such adjustment shall be made to the extent the Committee determines that such adjustment would result in the disallowance of a federal income tax deduction for compensation attributable to Awards hereunder by causing such compensation to be other than Performance-Based Compensation. SECTION 8. Amendment and Termination The Board may amend or terminate the Plan at any time and in any manner; provided however, that no such amendment or termination shall deprive the recipient of an Award previously granted under the Plan of any of his or her rights thereunder, without the consent of such recipient and provided further that no amendment shall become effective without stockholder approval if such stockholder approval is required by law. SECTION 9. Effectiveness The Plan shall be submitted to the stockholders of the Company for their approval and adoption in accordance with Section 162(m) under the Internal Revenue Code. The Plan shall -4- not be effective and no Award shall be made hereunder unless and until the Plan has been so approved and adopted. SECTION 10. Miscellaneous Provisions (a) Neither the Plan nor any action taken hereunder shall be construed as giving any Employee or other person any right to continue to be employed by the Company or any of its subsidiaries. (b) Except as may be set forth in an Award or otherwise approved by the Committee an Employee's rights and interest under the Plan may not be assigned or transferred, hypothecated or encumbered in whole or in part either directly or by operation of law or otherwise (except in the event of an Employee's death) including, but not by way of limitation, execution, levy, garnishment, attachment, pledge, bankruptcy or in any other manner. (c) It is the intent of the Company that the Plan comply in all respects with Rule 16b-3 under the Exchange Act and Section 162(m) of the Internal Revenue Code, that any ambiguities or inconsistencies in construction of the Plan be interpreted to give effect to such intention and that if any provision of the Plan is found not to be in compliance with Rule 16b-3 or Section 162(m), such provision shall be deemed null and void to the extent required to permit the Plan to comply with Rule 16b-3 or Section 162(m), as the case may be. (d) The Company shall have the right to deduct from any payment made under the Plan any federal, state, local or foreign income or other taxes required by law to be withheld with respect to such payment. It shall be a condition to the obligation of the Company to issue shares of Common Stock, other securities or property or any combination thereof, upon exercise, settlement or payment of any Award under the Plan, that the recipient of an Award (or any beneficiary or person entitled to act) pay to the Company, upon its demand, such amount as may be required by the Company for the purpose of satisfying any liability to withhold such taxes. (e) By accepting any Award or other benefit under the Plan, each recipient of an Award and each person claiming under or through him or her shall be conclusively deemed to have indicated his or her acceptance and ratification of, and consent to, any action taken under the Plan by the Company, the Board or the Committee or its delegates. (f) The validity, construction, interpretation, administration and effect of the Plan, and of its rules and regulations, and rights relating to the Plan and to Awards granted under the Plan, shall be governed by the substantive laws, but not the choice of law rules, of the State of Delaware. -5- EX-23.1 6 EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (no. 333-17617) of American Pad & Paper Company of our report dated April 13, 2000 appearing on page 44 of this Form 10-K. PricewaterhouseCoopers LLP Dallas, Texas April 13, 2000 EX-27.1 7 EXHIBIT 27.1
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE HISTORICAL FINANCIAL STATEMENTS OF AMERICAN PAD & PAPER COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 19,976 0 35,385 0 93,083 3,521 145,982 0 472,228 495,143 0 0 0 285 (61,064) 472,228 0 574,621 (531,085) 0 (56,139) 0 (44,865) (57,468) (23,270) (80,738) 0 0 (726) (81,464) (2.92) (2.92)
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